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:

1. The packing or preparation of the subject matter insured was insufficient or unsuitable to withstand the ordinary incidents of the insured transit;
2. The insufficiency or unsuitability of the packing or preparation was the proximate cause of the loss or damage;
3. The packing or preparation was carried out by the assured or their employees; and
4. The packing of preparation was carried out prior to the attachment of the insurance.

Each of these elements is considered below.

1. 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.

2. 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.

3. 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.

4. 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 certain ‘extreme circumstances’ (namely, 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

Eugene Lee, Senior Associate