Court of Appeal considers the issue of insurable interest

The judgment in the appeal of Quadra Commodities S.A. v XL Insurance Company SE and Others [2023] EWCA Civ 432 sheds some light on determining whether there is an insurable interest under a policy of insurance.

BACKGROUND

The Claimant is a commodities trading and logistics company, specialising in the trade of agricultural commodities. Under a series of purchase contracts, it acquired cargoes of grain from Agroinvestgroup, an association of companies involved in the production, storage and processing of agricultural products.

The Claimant dealt with two entities in the Agroinvestgroup – Agri Finance SA (Agri Finance) and Linepuzzle Ltd (Linepuzzle). The Claimant would buy grain from Linepuzzle and then sell it to Agri Finance to assist those entities with the financing of commodities under purchase contracts.

By January 2019, the Claimant had entered into purchase contracts under which it had paid 80 per cent of the price towards a number of the cargoes stored at various warehouses in Ukraine.

The case concerned a claim by the Claimant under its Marine Cargo insurance underwritten by the Defendant insurers (the Policy). The Claimant’s claim arose as it was an innocent victim of the ‘Agroinvest Group Fraud’ (the Fraud). The Fraud involved multiple fraudulent warehouse receipts being issued in respect of the same goods to different buyers, including the Claimant. When the time came physically to deliver the goods against the warehouse receipts, the quantities in the warehouses were insufficient.

The Policy covered declared shipments and storage operations attaching during the relevant policy period. The Policy was an All Risks cover and included cover, amongst other things, for all physical loss directly caused to the insured goods by misappropriation (under the Misappropriation clause) and cover for physical loss of or damage to goods insured through acceptance of fraudulent shipping documents (under the Fraudulent Documents clause).

FIRST INSTANCE DECISION

We have considered the judgment of Butcher J in the High Court in full detail here. A short summary of his findings, as relevant to the appeal, is set out below.

Subject matter of the policy

Butcher J found that the Policy was an insurance on property and that the Claimant had shown, on the balance of probabilities, that goods corresponding in quantity and description to the lost cargoes were physically present in the warehouse at the time the warehouse receipts were issued. Butcher J stated that this was an essential element for the Fraud to succeed: if there had been insufficient goods in the warehouse, the Fraud would have been uncovered much sooner when traders sent inspectors to the warehouses to verify the existence of the goods.

Insurable Interest

Given that Butcher J held that there were goods in the warehouses corresponding to the warehouse receipts at the time the receipts were issued, the next question was whether the Claimant had an insurable interest in those goods. Butcher J accepted the Claimant’s argument that it had an insurable interest because it had entered into contracts to purchase goods which were to be transferred or delivered to it at the warehouses upon presentation of warehouse receipts, and had agreed to pay, and had paid, the purchase price for those goods. Therefore, the Claimants had a right in relation to the goods derivable from “a contract about the property” (in the language of Lord Eldon LC in Lucena v Craufurd [1803] 2 Bos and Pul (NR)269 at 321).

Butcher J found that the three usual features of an insurable interest in property as defined by s.5(2) Marine Insurance Act 1906 were present, namely: (i) the assured may benefit by the safety or due arrival of the insured property or be prejudiced by its loss or damage or detention, or in respect of which he may incur a liability; (ii) the assured stands in a legal or equitable relation to the adventure or to any insurable interest in such adventure; and (iii) the benefit, prejudice or incurring of liability must arise in consequence of the legal or equitable relation of the assured to the property or adventure.

Insured peril

Butcher J found that there was loss caused by misappropriation as defined in the Policy. This gave rise to an actual total loss in respect of the cargoes, in that the Claimant had been irretrievably deprived of them at the time of the commencement of the proceedings. Butcher J did not consider that the loss was covered under the Fraudulent Documents clause, not least because the physical loss of the goods was not caused by the Claimant’s acceptance of fraudulent warehouse receipts.

APPEAL

Insurers pursued four grounds of appeal:

• Ground 1: the existence of the goods. Insurers argued there were no goods corresponding in quantity and quality to the cargoes at the time when the warehouse receipts were issued.
• Ground 2: the identification of the goods. Insurers argued that the Claimant did not have an insurable interest in the cargoes in circumstances where they did not form part of a bulk which was sufficiently identified.
• Ground 3: the immediate right to possession. Insurers argued that the Claimant did not have an immediate right to possession and therefore did not have an insurable interest in the cargoes.
• Ground 4: the practical consequences. Insurers argued that the practical consequences flowing from Butcher J's decision indicated that the decision was incorrect.

The Claimant sought to have Butcher J's decision upheld on three additional grounds:

• Additional Ground 1: the existence of goods. The Claimant argued it adduced sufficient evidence of the physical presence of goods corresponding in quantity and quality to satisfy its burden of proof and place the evidential burden on insurers.
• Additional Ground 2: a proprietary interest in the goods. The Claimant argued it had an insurable interest in the goods found physically to be present in the warehouses by having acquired a proprietary interest in the bulks of which those goods formed part pursuant to section 20A of the Sale of Goods Act 1979 (SGA).
• Additional Ground 3: the Fraudulent Documents clause. The Claimant argued, if necessary, the loss would be covered under the Fraudulent Documents clause in the Policy.

COURT OF APPEAL DECISION

The Existence of Goods

There was a dispute between the parties as to whether the Claimant had adduced sufficient evidence to show, on the balance of probabilities, that goods corresponding in quantity and quality to the cargoes was physically present in the warehouses at the time the warehouse receipts were issued. The Court of Appeal agreed with the Claimant and Butcher J that there was ample evidence.

The Court of Appeal noted that Butcher J had been correct to appreciate the nature of the Fraud and that, consequently, the warehouse receipts, the inspections carried out, and the physical delivery of some goods, were evidence of the existence of the goods in the warehouse at the time of the issue of the warehouse receipts. Snowden LJ pointed out that the contrary conclusion would involve all administrative and technical staff involved in signing the warehouse receipts to be complicit in the Fraud, which was deemed "inherently unlikely".

The Identification of the Goods

On the second ground of appeal, insurers submitted that there could be no insurable interest unless the goods were identifiable and identified. That is to say, where goods had been unascertained, they were now ascertained or, if the goods formed part of a larger bulk, the bulk had to be identified. Insurers argued that the test for identifying a bulk for the purposes of assessing whether there is an insurable interest should be the same as under section 20A of the SGA.

By contrast, the Claimant argued that, if it were to be held that an insured could not have an insurable interest in unascertained goods unless the requirements of section 20A SGA were satisfied, there would be a significant restriction on the circumstances in which an insurable interest could be held to exist. The Claimant argued that this would run counter to the direction of travel of the law on insurable interest, which has continuously expanded (citing Sir William Brett CR in Inglis v Stock [1884] 12 QBD 564 at 571).

The Court of Appeal found in favour of the Claimant, stating that the nature of an insurable interest is "to be discerned from all surrounding circumstance" and that whether a contract of insurance embraces the insurance interest intended to be covered "is a question of construction". The Court of Appeal found that in the present case the Policy contained a wide definition of interest in the Interest Clause. The shipments were automatically covered and the Claimant made monthly declarations of shipments. These shipments only identified the grain covered generically as corn, wheat, or barley, without specific declarations as to the grade or the year. Consequently, provided such grain present was generically corn, wheat or barley (which it was), it was held that would be sufficient evidence of the physical existence of goods covered by the Policy for the Claimant to establish an insurable interest (subject to the third ground of appeal below).

The Court of Appeal also disagreed with insurers' argument that the Claimant did not have an insurable interest in the cargoes where they did not form part of a sufficiently identified bulk describing it as "fundamentally unsound". The Court of Appeal determined that this would add additional requirements on the relationship between an insurer and an insured and, fundamentally, was not supported by any authority. The Court of Appeal held that insurers' argument was illogical as insurable interest is not dependent on a proprietary interest.

The Immediate Right to Possession

Given that the first and second grounds of appeal were determinative of the appeal against the insurers and the third and fourth grounds would not lead to a different decision even if the Court of Appeal agreed with insurers, they were considered only briefly.

On the third ground of appeal, the Court of Appeal agreed with Butcher J that the Claimant had an insurable interest in the goods for the additional reason that it had an immediate right to possession of the goods under Ukrainian law (the applicable law), regardless of whether there were competing rights of possession.

The Practical Consequences

As to the final ground of appeal, insurers argued that had multiple insureds had an insurable interest and a right to indemnity in relation to the same goods, insurers would be "injuriously affected".

The Court of Appeal held that this argument was misconceived for two key reasons:

1. There was no evidence as to whether insurers had paid a full indemnity to other insureds in respect of the same grain; and
2. There could be no objection to the payment by insurers to several insureds in relation to the same grain where that is the consequence of the policy wordings issued by insurers.

Additionally, the Court of Appeal agreed with the Claimant that its recovery reflected its own interest, not any loss sustained by any other insureds, and so no question arose of the Claimant being over indemnified.

COMMENT

The case provides some useful clarity on how to determine whether there is an insurable interest under a policy of insurance. However, it is worth noting that the Court of Appeal emphasised that an insurable interest is "to be discerned from all surrounding circumstances" and that whether a contract of insurance embraces the insurance interest intended to be covered "is a question of construction".