June 2006

"ALL RISKS" POLICIES DO NOT INSURE ALL RISKS TO CARGO: THE FORTUITY REQUIREMENT

Nelson Marketing International Inc. v. Royal & SunAlliance Insurance Company of Canada

The recent decision of the British Columbia Court of Appeal in the case of Nelson Marketing International Inc. v. Royal & SunAlliance Insurance Company of Canada provides an excellent illustration of the 'inherent vice' exclusion in marine cargo policies. The case highlights how the "All Risks" designation on a policy can be a misnomer. This case turned on two critical related aspects:

1. The application of the rule that the "peril" suffered by cargo while in transit must be a fortuitous event, to be covered by the policy, and
   
   
2. The lack of an evidentiary foundation at trial that would allow a finding that the cargo in question had in fact been subjected to a fortuitous event

The Facts

Royal and SunAlliance Insurance Company of Canada ("RSA") issued an "all risks" policy of marine cargo insurance (the "Policy") to Nelson Marketing International Inc. ("Nelson") over three shipments of laminated truck flooring, intended for use in road haulage trailers.

These shipments of flooring were being shipped by Nelson to its buyer, Utility Trailer Manufacturing Company ("Utility"), which involved transit from Malaysia, the place of manufacture, to Utility in California, via a transshipment port of Singapore. As mentioned below, the Policy incorporated the Institute Cargo (A) [or All Risks] Clauses, which, subject to the terms, conditions and exclusions therein covered all risks of loss or damage to the shipments during transit. The relevant part of the policy wording for the purposes of this case, being the aforesaid (A) Clauses provided inter alia:

RISKS COVERED

1. This insurance covers all risk of loss of or damage to the subject matter insured except as provided in Clauses 4, 5, 6 and 7 below.

EXCLUSIONS

4. In no case shall this insurance cover

4.4 loss, damage or expense caused by inherent vice or nature of
the subject matter insured.

The flooring in question is manufactured from hardwood having relatively high moisture content. Much of the moisture is removed during manufacture by virtue of a kiln drying process, after which the wood strips are glued together and finished to create laminated hardwood planks. The finished product is however susceptible to both the absorption and the release of moisture, depending on changes in the temperature and humidity conditions to which it is exposed. During the period of June through August of 1999, the shipments were each separately carried to the vessel loading port for carriage from Malaysia on "feeder" vessels for carriage to Singapore, where they were transshipped onto ocean leg vessels for carriage to the final destination port of Long Beach, California.

Following discharge at the port of Long Beach, all three shipments were noted to have been damaged by moisture. The flooring was to varying degrees cracked, delaminated and water-stained. Nelson filed an indemnity claim with RSA in respect of the three shipments. RSA declined coverage on the basis that the damage was not the result of transit damage within the scope of coverage provided by the Policy. RSA alleged that the damage was on account of "inherent vice", or the intrinsic properties of the subject matter insured, which, not involving a fortuity, giving rise to the damage complained of, would not be covered by the Policy.

At Trial

Both Nelson and RSA led expert evidence at trial on the cause of the loss, which trial culminated in a judgment¹ in favour of Nelson for the value of the shipments damaged being $375,916.70 plus significant pre-judgment interest.

Expert witnesses called for both sides at trial gave competing opinions on the cause of loss. The flooring was covered during transit with plastic, which is some instances was found to have been torn prior to or during transit. The issue was raised as to whether the moisture damage could be attributable to the shipments thereby being exposed to rainfall, which, it was common ground, would have meant that the loss had been fortuitous as being caused by an external agent to the product itself. This would have been regarded as a fortuity given the expectation that the plastic covering would have protected against such exposure, and the intention that while en route the carriers and handlers would take necessary precautions.

RSA argued that the damage pattern was inconsistent with the tears to the plastic covering and that the cause of loss was therefore something internal to the product. Nelson's expert on causation differed, suggesting that the cause of loss was the ingress of rainwater into the packaging.

The trial judge rejected the opinion of the expert called by the insured and found that the moisture that had caused the substantial amount of the damage was not caused by the flooring being exposed to rainfall. The trial judge preferred the evidence of the expert called by RSA, who expressed the opinion that the moisture that had caused the damage was in fact absorbed at the mills, after the point of manufacture, but prior to the shipment of the cargo. That expert explained a process that followed whereby the heat to which the flooring was exposed in the holds of the three vessels, while being carried to Singapore caused moisture to escape from within the laminated wood and then to condense on the surface of the flooring under the plastic covering. The judge accepted that there had been absorption of moisture while the flooring was awaiting shipment at the mills and that, while being carried in the holds of the three feeder vessels in conditions that constituted a drying environment, the flooring became wet and sustained the damage through such process of repeated moisture loss and condensation. In essence, the judge concluded that the source of the moisture that caused the damage was internal to the product itself - rather than external - as RSA had contended.

The insured argued at the trial as an alternative submission that even if the source of the moisture was internal to the flooring, that the cause of loss was nonetheless attributable to a casualty or a fortuitous occurrence, arguing that the environment in the holds of the three ships into which the flooring was loaded, was not suited to safe carriage free from moisture damage, which environment would be "unexpected and unforeseen and was accordingly fortuitous". Given that the finding that the cause of loss was "internal" as opposed to "external", one would have thought victory to be close at hand for RSA. This was however not to be the case. Remarkably, and what was clearly the crux of the trial judge awarding judgment for Nelson, the judge found that the environments that the shipments interacted with were "abnormally and unnaturally amplified in the hold by conditions having nothing to do with the inherent characteristics of the cargos". Accordingly, the judge ruled that the damage was not caused by inherent vice or the nature of the shipments, but was caused by the "fortuity" of being put in the holds of the ocean vessels, which substantially altered the normal environment to which the cargos would be exposed.

The Appeal Proceedings²

RSA appealed. The decision of the British Columbia Court of Appeal provides an interesting insight into the question of onus of proof as concerns who must prove the proximate cause of loss and a review of the applicable law concerning "inherent vice". The essence of RSA's appeal was that the loss was not in fact a fortuity. RSA argued that Nelson had not proved that the loss in question was caused by an insured peril.

The Court of Appeal reverted to first principles, the most important of which being, that an "all risks" policy of marine insurance does not in fact insure anything and everything that happens to cargo during transit. While it affords the insured an indemnity against loss caused by a broad range of events, it remains fundamental to any coverage that the cause of loss be a true accident or casualty. The loss must be fortuitous. Citing long established authority, the Court ruled that to succeed on a claim under an "all risks" cargo policy, that the insured must establish, by direct evidence or by an inference to be drawn from the available evidence, that an external fortuitous occurrence caused the deterioration of the cargo as distinct from the cargo having simply succumbed to the ordinary incidents of the voyage because of the cargo's inherent nature or susceptibility³.

In its analysis the Court of Appeal considered the following definition of inherent vice:

"It means the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty".⁴

The Court of Appeal noted that the trial judge did not consider whether the conditions in which the flooring was carried in each of the three vessels, though different from what was referred to as the "natural environment", was other than the conditions to be expected in the ordinary course of carriage aboard vessels trading between Malaysia and Singapore during the time period in question. On appeal RSA argued that the insured had not proven that the loss was fortuitous because there was no evidence that the noted environmental conditions in the holds of the vessels was other than what might reasonably have been expected and that there was no evidence suggesting that the conditions in the holds were any different from what would be encountered in the normal course between the port of loading and Singapore.

On the appeal, Nelson argued, in response, that inferences could be drawn from the evidence, that such problematic conditions of the holds - the holds being the responsibility of the carriers - were such that the carriers were then negligent in the care of the flooring. While clearly carriers' failures or negligence (causally connected to the loss) would amount to a fortuity, if established, the Court of Appeal ruled that there was simply no evidence at trial that the carriers were remiss in any way in their handling and carriage of the cargo, and whether there was any failure to meet any standard in that regard. Quite simply, such negligence or breach of contract on the part of the carriers was not established at trial.

The Court of Appeal ruled in favour of RSA on the appeal, ruling that the insured bore the burden of establishing that the conditions in the holds of the three vessels were substantially different than what was to be expected as part of the ordinary course of carriage. The Court of Appeal found that there was no evidence that would support a finding that the environmental conditions were substantially out of the ordinary. While Nelson did call expert evidence at trial, that witness knew nothing of the actual temperatures in the holds of the vessels, let alone what the expected temperatures might be.

Conclusions to be Drawn

It may seem to be a technical distinction, but it is an important one. While the conditions in the vessel's holds may have differed from the environmental conditions outside the vessels, this by itself did not mean that those conditions were in any way exceptional in the sense of being other than what was ordinary for the carriage. "Different" conditions was not enough. Evidence should therefore be led by insureds in such cases to suggest that there was a fortuity or something outside of the normal course of events, or the likely course of events, to be experienced by the cargo, for there to be an insured peril. As noted by the Court of Appeal :

"Had this been a case where the insured had deduced evidence to establish that the temperatures in the holds of the vessels were substantially beyond what was to be expected in the ordinary course of events, it might then be said that the cause of damage was fortuitous, subject to any significance to be attached to the fact that moisture could be absorbed while the flooring was awaiting shipment."

The Court of Appeal had pointed to the trial finding that the damage was caused by the escape of moisture absorbed prior to the commencement of the shipment in the conditions that were not established to have been other than that, which would be expected in the ordinary course of events. As such, the loss was not caused by a fortuitous occurrence external to the flooring, but rather to the nature of the flooring itself. In these circumstances, the loss was excluded under the policy of insurance.

Gordon Hearn

Endnotes

1. (2005), 27 C.C.L.I. (4th) 57 (B.C.S.C.)
2. Reasons published at (2006) B.C.C.A. 327 Docket #CA033065
3. at paragraph 13
4. Noten B.V. v. Harding [1990] 2 Lloyd's L.R. 283 at p. 287(C.A.)