Cargo theft – considerations for insurers seeking recovery against third parties

In recent years, cargo theft in ports and warehouses has been reported to be on the increase, causing much concern amongst cargo interests and their insurers. More recently, the supply chain disruptions caused by the Covid-19 pandemic have resulted in non-essential cargo accumulating in many ports and warehouses worldwide, including in China, the Philippines, and Malaysia. The resulting cargo congestion is most likely to lead to an increased risk of cargo theft – 49% of cargo theft in Asia occurred in warehouses.

Cargo Theft Claims – Payable by insurers?

Typically, cargo thieves cannot be traced and, if they are apprehended, they usually possess no valuable assets. As such, insureds often claim for their losses under their cargo insurance policy.

Cargo insurers will naturally check if the claim is covered under the insured's policy: for example, cargo theft claims are covered under the Institute Cargo Clauses (“ICC”) (A) but not included as one of the specified risks under ICC (B) and (C).

That said, for cargo insured under ICC (B) and (C), additional cover may have been purchased under the Institute Theft, Pilferage and Non-Delivery Clause, which states:-

"In consideration of an additional premium, it is hereby agreed that this insurance covers loss of or damage to the subject-matter insured caused by theft or pilferage, or by non-delivery of an entire package, subject always to the exclusions contained in this insurance."

It is important to note that the Institute Theft, Pilferage and Non-Delivery Clause is generally used for the theft of cargo during transit. For insurance clauses focused on cover during the storage of cargo, the Misappropriation Inclusion or Misappropriation Exclusion Clauses (2017) would be more appropriate.

Recovery – Factual basis

In order to maximise their chances of recovery from third parties following payment of an insured claim, time is often of the essence for insurers, especially as cargo claims arising from sea shipment incidents often come with a one year time bar for commencing proceedings. As such, cargo insurers seeking to pursue a recovery are advised to gather the following evidence to maximise their recovery prospects:

1. Notices of Claim: Freight forwarders may offer short notice periods for notifying a claim, after which the freight forwarder may attempt to reject the claim. As such, an early Notice of Claim is often advisable where a party intends to pursue a claim at a later stage, particularly if a pre-litigation settlement is desired. Police reports should also be filed, where appropriate.
2. Contractual agreements: They include Bills of Lading as well as agreements with freight forwarders and warehouses. These contractual documents will contain relevant clauses, such as notice clauses and limitation of liability clauses, which will be critical for the cargo insurer considering a recovery.
3. Information on the stage of transit where the theft of the cargo occurred: For example, if it is unclear whether the theft took place at the discharge port or at an inland warehouse, surveyors may be able to obtain CCTV footage or other evidence in order to determine the stage at which the loss occurred. This step is often carried out by the surveyor.
4. The evidence gathered in determining the location of the theft could assist the insurer in identifying the proper recovery target to pursue. This information would naturally assist in ascertaining the party who had custody of the cargo at the time of the loss. Custody would include physical custody as well as legal custody – for example, if the cargo was entrusted to a freight forwarder, who thereafter subcontracted the storage of the cargo to a warehouse, both the freight forwarder and the warehouse may be found to have custody of the cargo.

Recovery – legal basis

The insurer may pursue a claim against a cargo thief based on, inter alia, the tort of conversion (i.e. the interference with another’s property). However, pursuing the thief for recovery may not be a realistic option, and insurers would be advised to consider alternative targets, which could include:

1. The freight forwarder who had possession / custody of the cargo at the time of the theft;
2. The warehouse which stored the cargo; and
3. If lost during inland transit, the haulier.  

The recovery claims could be based on contract, or alternatively, in tort; for instance, negligence or breach of the duty of bailment may be considered where the bailor failed to take reasonable care of the cargo while in their possession.

Comment

The outbreak of COVID-19 is likely to cause an increase in cargo theft in ports and warehouses. Cargo insurers called upon to cover the resulting losses will need to carefully explore their options when considering a recovery against a third party.

If you require clarification or assistance on any of the points discussed in this article, at Clyde & Co we have extensive experience in marine cargo recoveries, and will be happy to assist you.