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Bad faith bar lowered
While marine insurers traditionally have not been subject to bad faith exposure, a recent US court ruling could alter the landscape, according to David Y Loh, of law firm Cozen O’Connor. In North American Foreign Trading Corp v Mitsui Sumitomo Insurance USA, et al (2007 US Dist LEXIS 30673, SDN 2007), the Honorable Shira A Scheindlin of the US District Court for the Southern District of New York specifically found a marine insurer had acted in “bad faith” in its claims handling, and described its conduct as “evasive”.
Plaintiff North American Foreign Trading Corp (NAFT) was in the business of importing and selling personal consumer electronics goods. Marine insurer Mitsui Sumitomo Insurance USA Inc (Mitsui) provided marine cargo insurance coverage for NAFT’s goods while being held in storage in China. When NAFT lost custody of its goods, valued in excess of $8m, in a couple of Chinese warehouses, Mitsui ultimately declined coverage.
Mitsui argued NAFT could not establish a prima facie case for coverage for the overwhelming majority of the claim. In particular, the insurer alleged NAFT could not prove, by a preponderance of the evidence, that the China warehouses had actually received the goods. Because Mitsui did not raise this issue in its initial declination letter, nor at any time during pretrial discovery, the court ruled that Mitsui was estopped from arguing that the goods did not arrive at the subject warehouse. In fact, Mitsui raised this defence only one week before trial.
The other primary basis for coverage declination was that NAFT failed to commence suit within the time required under the policy. Interestingly, the court did not disagree that NAFT filed one week beyond the one-year time bar. However, it ruled that Mitsui had deliberately delayed issuing its final declination letter just before the expiration of the one-year time bar, focusing on the fact that Mitsui advised NAFT it was waiting to hear from its forensic accountants before rendering a final decision. As Mitsui already had all the information needed to decline NAFT’s claim, the court ruled that the insurer had acted in bad faith and breached its duty of good faith and fair dealing.
David Loh says, “The court incorrectly interpreted applicable marine insurance case law. The insured, ie NAFT, always bears the initial burden of establishing coverage, and until that burden is met, it never shifts to the underwriter. Mitsui was not and should not have been required to educate NAFT on its respective burdens of proof at trial. The court’s decision was especially harsh, because nothing prevented NAFT from filing suit as a precautionary measure.
“Although technically incorrect, Mitsui’s assertion that it was still waiting to hear from its forensic accountants did not give false hope to NAFT that its claim would, in fact, be paid. Perhaps this is why the court did not award punitive damages to NAFT, even though Mitsui was found to have breached its insurance contract in ‘bad faith’. It is not known whether Mitsui intends to appeal this decision. However, as long as this decision stands, the bar for finding marine insurers in bad faith has been lowered considerably.”
Rise in demand for charterers cover
A surge in the volume of fixed premium business accounted for by time chartering is highlighting the growth and complexity of insuring these types of shipping operation, says the UK P&I Club. Legal and regulatory changes, the approach of port authorities and court decisions have effectively meant an increase in charterers’ legal liabilities across a wide spectrum of marine incidents. These growing liabilities concern slot, space, voyage and time charterers, traditional charterers with a ship operating background, trading companies moving raw materials or finished products, and traders moving goods on a scale which requires chartering. Increasingly, charterers are looking for cover tailored to their particular situations, which integrates hull and other covers, provides pure liability protection for non-operational charters and offers pollution liability without sub-limit. The key charterers’ risks can be categorised as direct liability to third parties, indemnification of owners and hull damage.
IUMI focuses on human element
The annual IUMI conference, to be held in Copenhagen from 9-12 September this year will look at growing concerns in the insurance industry, including the increasing importance of the human element, and the impact of environmental forces on shipowners and underwriters in the future. The common theme of this year’s conference is “Marine Insurance – the Technical, Financial and Human Challenge”, including a session on “The Future Shortage of Experience”, which, says IUMI, is now rapidly emerging as one of the most critical problems facing operators and insurers.
“We are very excited about this year’s conference which will break new ground on several fronts. Also, to have it in Copenhagen is very timely since Denmark is becoming increasingly important and influential in the maritime industry,” said Deirdre Littlefield, president of IUMI.
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