Credit risk

Credit Risk Coverage in Ocean Freight Policy – Court of Appeals Ruling in ABN Amro Case

ABN Amro Bank NV v. Royal & Sun Alliance Insurance Plc & Ors [2021] EWCA Civ 1789

The plaintiff in these proceedings (the Bank) entered into commodity finance transactions, colloquially known as “repo” contracts, under which it provided working capital to commercial customers by purchasing their commodities. for a defined period, at the end of which the customers are obliged to buy them back.

Following the bankruptcy of two of these customers, Transmar and Euromar, no buyouts were made and the bank was forced to sell to third parties with a loss of over £ 31 million.

The subject goods, in this case cocoa products, were insured under a sea freight and storage policy. In many ways, the policy was standard freight insurance, although it contained some unconventional ‘add-ons’, one of which was titled the Transaction premium clause (TPC). Under the TPC, the underwriters agreed to cover the transaction premium that the Bank would otherwise have received or earned in the absence of a default on the part of its client, where “default” meant failure, rejection or failure. non-exercise of an option to buy back the object at the agreed price. The policy also included a “Non-avoidance clause”(NAC), preventing cancellation of the policy for anything other than fraudulent non-disclosure or misrepresentation.

All 14 underwriters denied any responsibility for the Bank’s claim under the policy, saying TPC never intended to convert the freight policy into a form of credit insurance, and that a claim on the policy always presupposed that there had been physical loss or damage to the subject. They argued that the PTC was only concerned with the Evaluation the compensable loss in the event that such loss or physical damage has occurred.

Alternatively, the Underwriters have asserted in various ways non-disclosures or misrepresentations on the part of the Bank or its brokers at the time of placing the risk, including the failure of the Bank to explain its objective by including the TPC, and did not draw attention to the presence of the NAC in the policy, which they said was itself a non-disclosure. Given the nature of the underwriters’ defenses, the Bank also brought an alternative action against its broker, Edge.

In a judgment rendered in February 2021, the commercial court rejected the insurers’ argument that the insured had a certain obligation to tell his insurers why he had included certain clauses in the policy, or to explain the purpose and the effect of these clauses. Likewise, with regard to the NAC, the court ruled that a party who signs a document is usually bound by its terms, and it is not a defense that he has not read it. In any event, the judge concluded that if the insurers had ever had the right to avoid, they had lost this right by assertion, after having made contractual arguments in their initial defense, as well as by seeking rectification. of the contract, all this being based on the existence of a binding agreement. The annulment case had only been introduced by way of amendment to the Defense some 15 months later, then far too late. In addition, insurers had not previously offered a refund of premium, an omission that is generally viewed as inconsistent with a choice to be avoided.

In the case of two of the 14 insurers, however, the trial judge ruled in favor, albeit on a different basis. It was noted that a number of follower market underwriters had argued that the wording of the policy was “as expiring” which (unbeknownst to them) was not. While the policy for the previous year had been amended by endorsement to include TPC and NAC, this endorsement had not been released in the following market. The judge accepted the alternative argument of subsequent market underwriters, Ark and Advent, that the Bank was thus foreclosed from asserting that the policy was on different terms from the previous year. The advantage of the estoppel argument was that it circumvented objections to an annulment case, more specifically the effect of NAC and the question of assertion.

The unsuccessful underwriters appealed the judgment regarding the interpretation of the TPC, while Edge appealed the estoppel decision regarding Ark and Advent. As to the latter question, Edge noted the broad wording of the NAC, which provided that “[t]Subscribers will not seek to reject a claim for loss on the basis of … [a non-fraudulent] false declaration”. Notwithstanding the title of the clause, they argued that its scope was not limited to nullification, but rather that it prohibited any dismissal of a claim based on a non-fraudulent misrepresentation. A case based on estoppel by convention was precisely such a case, because it was based on a false declaration made by the Bank or its brokers. In a judgment rendered on December 2, 2021, the Court of Appeal gave its consent, ruling that the CNA prohibited any defense of this type, including that based on estoppel.

With regard to the interpretation of the CPR, it is understood that the dispute was in fact settled soon after the appeal hearing but before the judgment. Nonetheless, the Court of Appeal went on to give its point of view, upholding the decision of the trial judge. Sir Geoffrey Vos MR, endorsed as a “starting point” the assumption that the policy only covers physical loss and damage to cargo, being a marine cargo policy. In light of the factual matrix, “clear words” would be needed to provide something broader. However, in the present case, the tribunal considered that the CPT was indeed clear and unambiguous and that it should therefore be implemented. There was no suggestion, the judge said, that there was anything illegal about combining two very different types of coverage, namely ocean freight and credit insurance, into one policy.

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