Glencore v. Alpina Insurance
This case illustrates that, where the scope of a proposed insurance cover is broad, the insured need not disclose that he plans to operate in a way that exposes the insurer to greater risk than necessary, provided that what he intends to do does not fall outside the range of possibilities that the insurer ought to have in mind. Meanwhile, underwriters claiming an entitlement to avoid the insurance contract must be able to provide a cogent explanation as to why the matter complained of would have led them to act differently, given the nature of the underlying business, the terms of the coverage and the manner in which they underwrote the risk.
DMC Category Rating: Developed
This case note is based on an article that appeared in the April 2004 edition of ‘Reinsurance Notes’, published by the London solicitors, Lawrence Graham
Glencore made use of open insurance covers in connection with its commodity trading. The insurance contracts were worded in broad terms and took the form of marine open covers in favour of Glencore, covering transit by land, water, air and pipeline from any port or place in the world to any other port or place. The cover made express reference to storage operations on the facility off Fujairah and gave coverage at a fixed premium, on the basis of an estimate of throughput at the facility. Glencore sought to recover from its insurers, Alpina, in respect of the stolen oil, which they said had a value in excess of US$250m. Alpina declined liability on the grounds of misrepresentation and non-disclosure.
The first issue was whether underwriters could avoid the policy on the basis of an erroneous pre-estimate of "throughput" at the storage facility. Alpina’s argument was that, whilst they had been entitled to assume that Glencore's pre-contractual estimate of throughput at Fujairah had been made in good faith, was accurate, and not prone to unreliability, the difference between the estimate and actual throughput (which was in fact some three times greater) was not advised to them at renewal. Therefore, the underwriter had been deprived of the opportunity to question whether to continue charging an "in full" premium without imposing an end of year adjustment.
Alpina's second argument was that the details of certain material aspects of the relationship with MTI should have been disclosed, given (a) the high volume of oil traded between the two parties and the contractual arrangements between them, (b) that the oil was to be sold to MTI as an end-user for its business of blending and selling fuel oil, (c) the absence of independent inspectors to monitor discharge of cargoes carried into MTI's facilities, (d) the absence of arrangements for the verification of quantities held in store, and the non-use of holding certificates, (e) the failure of Glencore to instruct independent inspectors to measure the quantity of oil held in storage, and (f) that MTI, rather than Glencore, chose the vessels that made up the floating storage facility. These were, alleged Alpina, aspects of the business that required disclosure to underwriters if a fair presentation of the risk was to be made.
The judge further held that Alpina had the burden of showing that its underwriter would not have written the policy in the same terms, if proper disclosure had been made. He found that Alpina had been unable to demonstrate this.
On the second issue, the particular way in which Glencore conducted its business with Metro, Moore-Bick J concluded that, when an insurer was asked to write an open cover in favour of a commodity trader, he must be taken to be aware of the whole range of circumstances that might arise in the course of carrying on business of that kind. Having looked at each aspect complained of, the judge held that none of them was so unusual that it fell outside the range of possibilities that a prudent underwriter could be expected to have taken into account. On the basis that the arrangements described above were not uncommon in some circumstances, the insured was not bound to disclose them, even though they tended to increase the risk.
The judge pointed out that Glencore's storage of oil at Fujairah represented only a small part of the risk covered by the open cover as a whole. In these circumstances, whilst requirements as to formalities recording the quantities stored might have been appropriate had the Fujairah storage operation been written as a facultative risk, the underwriter of this open cover was not concerned with the precise arrangements at the storage facility.
Moore-Bick J was prepared to accept that circumstances, none of which could be described as extraordinary in isolation, could when combined give rise to a duty of disclosure. However, for this to be the case, the combination of circumstances had to operate so as to enhance the risk of loss significantly. This was not the case here since, on analysis, each matter complained of was unrelated to any other. Accordingly, Glencore had not been bound to disclose the nature of its relationship with MTI.
Glencore had positively misrepresented that it did not have reason to believe that there would be any blending of oil held by MTI to its order. The judge accepted that this may have been a material mis-statement. He held, however, that Alpina had not been induced by that representation to grant cover in that, on the facts, the statement had not made any difference to the individual underwriter's perception of the risk.
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