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Intro: Hello and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues and topics of interest affecting commercial policy holders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist. 

Margaret: Hello, welcome back to the Insured Success IRG podcast. I'm Margaret Campbell, a partner at Reed Smith and this is my partner, Laura-May Scott. We are both insurance recovery specialists. Today we're going to present to you a case analysis on a very important case that we worked on during the pandemic. In this case, we represented ABN AMRO who was suing a group of 14 insurers in the company and the Lloyds Market and ABN’s broker, Edge, for losses it thought it should have been covered for under its marine cargo insurance policy. 

Laura-May: And it's worth setting the scene here a bit and reminding listeners what a marine cargo policy typically covers. A marine cargo policy does not just provide cover for marine transit. It's capable of being extended to cover transport by air, rail, road and storage. So marine cargo cover can ensure the entire movement irrespective of the means of transport of the underlying goods. Now, under a standard insurance policy, it's only the physical loss or damage to the goods which is generally the subject matter of the insurance. 

Margaret: So going back to the ABN case, the case there concerned losses of £35 million suffered by the bank when two of its customers Transmar and Euromar defaulted under a series of repo financing deals over cocoa and cocoa products. And a significant fraud was uncovered in relation to the defaulted transactions. Not only had the same goods been pledged to various banks, but the quality of the goods was absolutely terrible. Following their defaults, the bank was left holding large quantities of cocoa and cocoa products worth only a fraction of the loan repayments due to the bank. During the course of this case, Laura-May and I learned a lot about cocoa and cocoa products, much more than the man on the street ever knows. And we would issue a warning to everyone listening to this podcast to avoid cheap chocolate. 

Laura-May: Yes, indeed. Initially, we worked with the bank and the broker to seek to persuade the insurers to actually pay out under the policy. We gave presentations to them on the underlying goods and the steps that were being taken by the bank to recoup losses. Thereafter, we entered into formal correspondence where the bank formally claimed an indemnity for the shortfall under an all risks policy of marine cargo insurance, which as Margaret says was placed with 14 cargo insurers in the London market by Edge brokers. However, the insurers formally rejected the claim after five long months of discussion. 

Margaret: So this claim was actually made for financial losses arising from the defaulted transactions. The problem was the cargo was valued at 35 million and when it came to be sold, it was worth, you know, just a couple of million. Uh There had been no physical loss or doubt with just a question of quality. For those of you familiar with marine cargo insurance, there have been many legal authorities in England that say that in order to trigger a marine cargo policy, you must have physical loss or damage to the cargo. So what was different here? Well, in this case, this was precisely the risk that the bank was, was concerned about and they talked about it internally, they took legal advice from outside lawyers, they talked to their brokers, they went backwards and forwards for months saying in this scenario, what would happen in that scenario, what would happen? They wanted to make sure that their insurance would respond to them in the event that there were any problems. So this was the risk they were concerned about and they negotiated or thought they'd negotiated a bespoke clause in the policy which is called the Transaction Premium Clause. And this provided, the bank was covered for amounts that the insured would otherwise have received and or earned in the absence of a default by a customer. The bank and the broker contended that the effect of this clause was to add a form of credit risk or financial default insurance to the cargo policy. This had been written into the contract after, as I said, all the advice they've taken from everybody and they had instructed their brokers to negotiate it with the underwriters. The brokers had confirmed, they discussed it with the lead underwriter. And as far as the bank was concerned, they had this cover and no problem. 

Laura-May: And it's worth noting there that the marine cargo policy in question had various add ons, didn't it? So it wasn't a standard marine cargo insurance policy. Uh It had add ons such as confiscation, expropriation, fraudulent bills of lading. So this was really a very bespoke policy that the client had created over a course of many years. And the crux of the dispute with the insurers really was that those various add-ons needed to still be tied to the underlying physical loss or damage. So the Transaction Premium Clause in and of itself did not provide stand alone credit risk type cover. 

Margaret: So how the case unwound with the uh the losses have been suffered? The bank thinking they were covered, said to the brokers, can you please notify the insurers? Uh the brokers notified the insurers but without actually consulting the bank at all. They just notified a small claim and put a value of $50,000 on which was completely inadequate. The brokers also notified under the wrong clause of the policy and it turned out many months later that we discovered they were looking at the wrong version of the policy. Um So that was not particularly helpful in dealing with the insurers. However, uh to begin with, the insurers didn't take any points defending the claim. They just acknowledged the claim. They reserved their rights generally. And uh we invited them to meetings to discuss the claim and gave them presentations on what was involved. And at that point when they realized that it was not a $50,000 claim, but it was potentially a 35 million claim, they actually changed their position and formally declined the claim. 

Laura-May: So in their defense insurers argued many different things. They argued primarily that the underwriters would never have agreed to underwrite credit risk. And that the clause in question was only concerned with the basis of valuation. So they were trying to link it to another valuation clause that did require physical loss or damage and their explanation exactly of how that basis evaluation clause linked with the transaction premium clause was never entirely clear. Um They also raised arguments around the ability of the marine insurers to actually write the credit risk. They said that they weren't entitled to do so under Lloyd's regulations. They argued that the policy had been induced by misrepresentation or non disclosure and they purported to avoid it by a late amendment to their defense. 

Margaret: Basically, threw the kitchen sink at it and every single point they could raise, they did raise and they continued to change their position as they went along every time they thought of a different defense. Now, normally in the commercial court, which is the court we were in, in um, in London, it's a rule that prior to trial parties have to try and mediate the claim. And uh the reason for that is uh the courts take the view that it's not in anybody's interest to go through lengthy trials and costs and expense. And if a settlement could be reached, that's in everybody's interest. Our mediation in this case was unsuccessful and a large part as to why it was unsuccessful is that it was hybrid. Certain parties were present in the room with the mediator and other parties were on the screen and we were in the midst of the pandemic. So various people just were not prepared to come into London and attend the mediation. But I think this really brings home how important in any mediation it is to have people in the room. Only by being in the room, can they become properly part of the process and be persuaded to settle. Uh And by way of a side, you know, definition of a successful mediation is one where both parties go away feeling they haven't got a good deal. In this event, both parties, all parties went away and there was no deal. So there we were off to court. 

Laura-May: And the case went to the commercial court as Margaret says, and we were still in the midst of a pandemic. And therefore, the trial had to be conducted on a hybrid basis, which was a logistical feat. when you think that we had over 20 factual witnesses, over eight expert witnesses and some days we were in the courtroom other days we were on the video. I mean, it really was quite an exciting new case to run in that the, this new way adapting to the circumstances of the pandemic. 

Margaret: Yeah, I think it was one of the first commercial court cases to be run in that way. And in fact, on the first day, we were all, you know, in our own homes uh trying to do the case uh from there and we just found it didn't work because by the time you've emailed or messaged the barristers, the cases, you know, the points have moved on and all credit to the clerks to our barristers because we phoned up and said this isn't working. They arranged for a room which we sat in for five weeks with the barristers dealing with the case. Us down one end, we had a separate entry entry, uh all COVID rules and regulations were complied with that there, we were kind of not in court but kind of four screens and all all remote but able to communicate. 

Laura-May: And then on to a lengthy judgment.

Margaret: All the witnesses gave their evidence remotely, but we were in court for the final submissions with the barristers, uh which included last minute applications by the insurers for adjournments and retrials. So that was all very dramatic. More evidence was sort of provided at the last moment. And uh they said that they wanted the opportunity to cross examine all the witnesses again on this new evidence. Anyhow, that was rejected by the judge and he proceeded to issue his judgment shortly after the six week trial, the bank was successful and uh they obtained full recourse from insurers and from the broker, Mr. Justice Jacobs accepted the banks submissions on the meaning and effect of the Transaction Premium Clause and he entirely rejected the insurer's attempts to avoid the policy. He agreed with the bank's argument that as a matter of construction, the Transaction Premium Clause provided cover for credit risk and or financial losses regardless of physical loss of or damage to the goods. 

Laura-May: A great win for the client. The, you know, the Transaction Premium Clause that they had worked hard to create and put into the bespoke policy was carefully drafted. And the court found that the language was clear and they held that the bank's claims for the difference between the repo prices for the commodities and the amounts recovered by the bank through exercising its rights of sale were covered by the policy and due to be paid by the insurers and those sales were difficult. Those sales of the cargo when, when the bank was left holding the cocoa were difficult due to the underlying quality of the goods. 

Margaret: I mean, some at the end of the day, just have to be sold for animal feed and some had to be scrapped. I mean, for example, some of the goods had already, we found out being treated for salmonella some years ago in Malaysia and we're now many years old, so not very attractive uh uh to buy on paper. Anyhow, the detailed judgment clarifies and elucidates many areas of law and is extremely helpful reading for insurance practitioners on the law of insurance in London. It covers many points, but I'll just pick out a few. First of all the interpretation of insurance contracts and the weight to be given to factual matrix considerations rather than just the words that were there in the policy. Secondly, the effect of a non avoidance clause in the policy of insurance and whether underwriters can circumvent such a provision by arguing that the clause itself should specifically have been disclosed when the policy was placed. And just as an aside on the non avoidance clause, I would say that if you have a negotiation in relation to your policy wording, if you can get a non avoidance clause in there, do try and get one because it really does help as Laura-May will explain later. 

Laura-May: And the doctrine of affirmation, especially with regard to underwriters affirming a policy by pleading in a that was quite a key point raised in the judgment. The judgment also looked at the precise formulation and application of the test for inducement following a misrepresentation. Quite a large part of the judgment covers that. 

Margaret: It also looked at the meaning of a reasonable endeavors obligation imposed on the insured during the currency of the risk and whether it can be breached by any conduct falling short of recklessness and it's quite difficult, quite difficult before that and to find uh actually evidence of what reasonable endeavors were, it was all very subjective in relation to, you know, every transaction. So it was, you know, very helpful, I think for any insurer to know that, you know, this can't be breached if you're not reckless. Finally, they looked at the duties of insurance brokers in detail and in particular, the nature and effect of the broker's duty to procure, cover that clearly and indisputably meets the insurance requirements and protects it against an unnecessary risk of litigation. Our expert witnesses were key in particular, our broking expert witness was marvelous and the judge was really impressed by him. Attempts by the other side to say that he was taking too rigid position were rejected by the judge. 

Laura-May: So a full recovery for the bank mostly from the insurers and a little from the broker. This was an exciting case to be part of and a great result for the client. It's not the end of the chapter for certain of the other parties that are involved in the case. 

Margaret: No, both the insurers and the brokers appealed against the decision. However, the insurers dropped their appeal against the bank after a day in court. The appeal continued solely between the insurers and the brokers. Case is now on appeal to the Supreme Court in relation to a dispute between the insurers and the broker on the question of estoppel. The appeal concerns the high court judge's finding that the bank was a stop by convention from relying upon the transaction premium clause against two of the 14 insurers. Mr. Justice Jacobs had rejected an avoidance case based upon a misrepresentation that the policy was as expiry, in part because the policy contained a non avoidance clause which prohibited avoidance save in a case of fraud. He nonetheless found that the as expiry misrepresentation created estoppel by convention because edge acquiesced in the underwriters assumption that the policy was as expiry. Consequently, edge was liable to the bank for the shares of those two insurers. Edge had appealed against this estoppel finding on the basis inter alia that the non avoidance clause not only prohibited avoidance, but also the rejection of a claim on the grounds of any non fraudulent misrepresentation. The court of appeal allowed the appeal on that basis. This will be a really interesting case when it comes to uh the Supreme Court as a question of estoppel is not being considered by the Supreme Court for many years. Originally, this was meant to be heard in July 2023 but it's been delayed by other more urgent cases which are going to the Supreme Court. We expect it to be heard early next year and we're certainly going to follow up on this in our next podcast and we'll explain the intricacies of that case further. 

Laura-May: Great. Well, thanks for listening and we'll speak to you soon. In the meantime, don't forget to check out some of our other podcasts. 

Outro: Insured success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact insuredsuccess@reedsmith.com. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and it is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

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