Insufficiency of packing exclusion (Institute Cargo Clauses)
The Institute Cargo Clauses (“ICC”) are a set of standard marine cargo clauses maintained by the Joint Cargo Committee. The latest iteration of these clauses, the ICC 1/1/2009, offers three levels of cover in descending scope of protection: ICC ‘A’ (all-risks), ICC ‘B’ (named perils, broader), and ICC ‘C’ (named perils, narrower).
All three levels of cover are subject to a common set of excluded perils. One commonly encountered exclusion is clause 4.3 of the ICC 1/1/2009 (“the Packing Exclusion”), which excludes:
“… loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject matter insured to withstand the ordinary incidents of the insured transit where such packing or preparation is carried out by the Assured or their employees or prior to the attachment of this insurance (for the purpose of these Clauses "packing" shall be deemed to include stowage in a container and "employees" shall not include independent contractors)”.
Where an insurer purports to decline cover in reliance on this exclusion, it is important for a policyholder to closely examine the insurer’s reasons for doing so. In every case, the burden falls on the insurer to prove that the loss was proximately caused by the excluded peril (i.e., the insufficiency of packing). This requires the insurer to show that:
- The packing or preparation of the subject matter insured was insufficient or unsuitable to withstand the ordinary incidents of the insured transit;
- The insufficiency or unsuitability of the packing or preparation was the proximate cause of the loss or damage;
- The packing or preparation was carried out by the assured or their employees; and
- The packing of preparation was carried out prior to the attachment of the insurance.
Each of these elements is considered below.
- The packing or preparation of the subject matter insured was insufficient or unsuitable to withstand the ordinary incidents of the insured transit
‘Packing’ and ‘preparation’ refer to those steps necessary to prepare the cargo for the loading process. ‘Packing’ generally encompasses the placing of an outer covering over the cargo or the placing of the cargo in a container, but may at times include the insertion of material into the cargo to protect internal components. ‘Preparation’ generally involves other acts that may be necessary to prepare the cargo for loading, for instance the removal or adjustment of mechanical parts.
In no case would ‘packing’ or ‘preparation’ refer to the very acts resulting in the cargo being loaded on board. Thus in The Icebird [1991] LMLN 312, the Supreme Court of Victoria held that the failure to properly secure helicopters in the hold of the vessel could not be considered an act of ‘packing’ or ‘preparation’.
The phrase ‘the ordinary incidents of the insured transit’ has not been considered in any reported judgment relating to the ICC. A leading textbook suggests that this phrase should be read broadly to impose a ‘a rigorous requirement for packing’. On this reasoning, ‘ordinary incidents’ would refer to all reasonably foreseeable circumstances of the insured transit. Thus, if the packing of cargo was insufficient to withstand foreseeably rough sea conditions such as sudden high winds, the exclusion would apply.
That said, the formula ‘the ordinary incidents of the insured transit’ closely mirrors the classic definition of inherent vice set out in Soya v White [1983] 1 Lloyd’s Rep 122, namely:
“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”.
The phrase ‘the ordinary course of the contemplated voyage’ has been ascribed a narrow meaning in the context of inherent vice. The UK Supreme Court has held that the phrase does not encompass all reasonably foreseeable weather conditions on a voyage, but instead stands as a counterpoint to voyages on which a fortuitous external accident or casualty did occur. In other words, loss or damage involving the intervention of a fortuitous external accident or casualty would not be regarded as taking place in the ‘ordinary course of the contemplated voyage’: see The Cendor MOPU [2011] UKSC 5. There is scope, therefore, for arguing that the ‘ordinary incidents of the insured transit’ should be understood in a similarly narrow fashion and that, where insufficiency of packaging is being relied upon by insurers to decline cover, a careful examination of the circumstances leading up to the loss should be carried out.
- The proximate cause of the loss or damage was the insufficiency of the packing or preparation to withstand the ordinary incidents of the insured transit
The onus falls on the insurer to prove that the insufficiency of packing was the proximate, i.e. the dominant, cause of the loss. This need not necessarily be the cause that was closest in time to the loss.
As a practical matter, a policyholder should consider whether some other cause was dominant. This might include, for example, extraordinary weather conditions (including temperature) or sea states, or unforeseeable delays. Ultimately the cause of a loss is a question of fact and policyholders with complex losses with multiple factors at play should seek the assistance of experts.
- The packing or preparation was carried out by the Assured or their employees
The Packing Exclusion only applies where the packing or preparation was carried out by the policyholder’s employees, rather than an independent contractor, and a policyholder should always consider this distinction.
It has been suggested that the rationale for the distinction is that insurers potentially have a right of subrogation against an independent contractor who carried out the packing or preparation, and may therefore be more willing to accept the risk of insufficient packing in that situation.
- The packing or preparation was carried out prior to the attachment of the insurance.
The Packing Exclusion only applies where the allegedly insufficient or unsuitable packaging was carried out “prior to the attachment of this insurance”. The time of attachment is governed by clause 8.1 of the ICC 1/1/2009, the first paragraph of which provides:
“[the] insurance attaches from the time the subject-matter insured is first moved in the warehouse or at the place of storage (at the place named in the contract of insurance) for the purpose of the immediate loading into or onto the carrying vehicle or other conveyance for the commencement of transit …”
Cover under a policy subject to the ICC clauses attaches when the cargo is moved for ‘immediate loading’ onto the carrying vehicle. ‘Immediate’ in this context means as quickly as possible, without any unreasonable delay. As such, where goods are moved, albeit not for the purposes of the immediate loading (e.g. when cargo is moved into a holding area but loading onto the carrying vehicle only takes place several days later), it would be difficult to establish that the policy had attached at the time the cargo was moved into the holding area.
If the process of loading the cargo onto the carrying vehicle consists of several discrete steps taken in close succession, at which step would the insurance attach? Usefully for policyholders, case law suggests that the policy would attach when the first (rather than the last) of these steps is taken.
Thus in Swashplate v Liberty Mutual [2020] FCA 15, (i) a helicopter was moved out of a hangar and loaded into a container where it was secured, and (ii) the container was then loaded onto the carrying truck two hours later. The helicopter was damaged during transit as it had not been secured properly in the container. Insurers attempted to argue that the policy attached only when the container was loaded onto the truck. However, the Federal Court of Australia commented in obiter that the requirement for immediacy was satisfied once the helicopter was moved out of the hangar, and that the policy attached at that point. Since the error in securing the helicopter took place after the policy attached, the insurers could not rely on the Packing Exclusion.
Conclusion
Although we commonly see insurers seeking to decline cover on the basis of the Packing Exclusion, whether they are entitled to do so is often far from straightforward.
For example, we were recently consulted on behalf of a policyholder with a claim arising from molasses that had been packed into flexibags, which were then loaded on to shipping containers. The flexibags did not have automatic air vents and ended up bulging after being exposed to unusually high temperatures while in transit. It was questionable whether the Packing Exclusion was truly applicable, since the damage arguably was not caused by the ‘insufficiency or unsuitability of packing … to withstand the ordinary incidents of the insured transit’.
In short, for the Packing Exclusion to apply, the facts of the case must always fall within the four requirements identified above. A policyholder should thus closely scrutinise a declinature which relies on the Packing Exclusion and consider if the insurer has genuinely satisfied these requirements.
Authors
Toby Nabarro, Director, Singapore
Arbitration Act 2025 – What policyholders can expect
In the biggest legislative development in the field of arbitration in England for thirty years, the English Arbitration Bill received Royal Assent on 24 February 2025 and was enacted as the Arbitration Act 2025 (the Act). The date on which the Act will come into force is to be determined, but the Government has indicated that this will be “as soon as practicable”.
Rather than replacing the existing statutory framework, the Act amends and adds to the Arbitration Act 1996.
The intention of the Act is to reinforce England’s position as the best place to resolve disputes by arbitration. We consider below how the developments may affect policyholders.
Power to make award on summary basis
The Act codifies the power under which an arbitral tribunal may make a summary award in relation to a claim or issue if the tribunal considers that a party has “no real prospect of succeeding”. This brings welcome clarity, the previous position as to whether a tribunal had such power being uncertain.
This will not markedly change practice for parties used to arbitrating disputes under the LCIA rules, which have previously provided that a tribunal may find a claim is (i) inadmissible; (ii) manifestly without merit; or (iii) manifestly outside the jurisdiction of the tribunal. This change will therefore have the greatest impact on parties arbitrating under ad hoc rules, and offers those parties an opportunity to save time and resources when faced with unmeritorious claims or unmeritorious defences.
Applicable law
Previously, the common law has provided that the law governing an arbitration agreement will be determined by the law governing the underlying contract, unless otherwise provided.
The new approach under the Act provides that, absent express agreement, the law of the seat of the arbitration shall apply, and an express choice of law governing the underlying contract will not constitute an express choice in relation to the arbitration agreement.
While this may seem to lay observers like a technical point, the change in approach is significant. The previous (and criticised) position meant that parties to a non-English law contract, but with a London-seated arbitration agreement (which did not specify the law applying to the arbitration agreement), found that the arbitration agreement was not governed by English law. Parties would therefore not benefit from the full protection and support of English law, which generally seeks to uphold references to arbitration.
Jurisdictional challenges
The Act limits the scope to challenge an award on jurisdictional grounds such that the court will not hear objections which have not been first raised with the arbitral tribunal, or consider evidence that was not put before the arbitral tribunal, save where the applicant shows they did not know and could not with reasonable diligence have discovered that ground, or put the evidence before the tribunal during the arbitration proceedings. It will also not rehear evidence that was heard by the arbitral tribunal, unless the interests of justice dictate otherwise.
These changes represent a significant restriction on a party’s right to challenge substantive jurisdiction.
Upon hearing a jurisdictional challenge the court now has a menu of remedies, including remitting the award to the tribunal for reconsideration or declaring that the award (in whole or in part) has no effect.
In reducing the scope of jurisdictional challenges, parties should have more certainty that an arbitral award will be final.
Codification of Arbitrator’s duty of disclosure
The common law duty of an arbitrator to disclose circumstances that might reasonably give rise to justifiable doubts as to their impartiality has now been codified such that a proposed arbitrator must as soon as reasonably practicable disclose to the referrer (where disclosure is prior to appointment), or to the parties (where disclosure is after appointment), any circumstances which reasonably give rise to justifiable doubts to impartiality.
We would expect this codification to result in earlier disclosures, reducing the risk that a party will apply to remove an arbitrator, potentially scuppering the process.
Emergency Arbitrators
The Act provides welcome certainty as to the enforceability of final awards made by an emergency arbitrator, empowering them to make final awards which can be enforced by the courts.
Conclusion
It can be seen that the Act has introduced a number of changes that should increase the efficiency of the arbitral process and the certainty and enforceability of arbitral awards.
Where policyholders are referring adverse coverage decisions by insurers to dispute resolution, these changes should be welcomed, in the expectation that final decisions will be reached more quickly and economically.
Matthew King is an Associate at Fenchurch Law, Singapore.
