Nam Kwong v. China Insurance

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Nam Kwong Medicines & Health Products Co. Ltd. v China Insurance Co. Ltd.
Hong Kong High Court: Stone J: 28th June 2002
Mr Peter Graham, leading Miss Jane Curzon Lo, instructed by Messrs Crump & Co, for Nam Kwong Medicines
Mr Charles Sussex SC, leading Mr David Stokes, instructed by Messrs Richards Butler, for China Insurance
Where cargo was stolen as part of an elaborate fraud involving a ‘phantom’ ship, the Institute Classification Clause, requiring the ship to be classed by an approved Classification Society, provided cargo insurers with a defence to the claim; in addition, the risk never attached, within the meaning of s.44 of the UK Marine Insurance Act 1906, even though the policy contained a ‘warehouse to warehouse’ clause.

DMC Category Rating: Confirmed

This case note is based upon a note prepared by the website’s former International Contributors from Hong Kong, Koo and Partners/Paul Hastings

This was an action brought by the assured, Nam Kwong Medicines (‘NK’) against its insurer, China Insurance, which had declined to indemnify NK under the terms of a Marine Cargo Policy. The case was quite unusual, given that it was not possible to ascertain precisely what happened to the insured cargo, the loss of which had given rise to the claim under the policy. On 1 June 1998, the subject cargo, some 15,788 drums of palm olein, valued at US$2.44 million, was shipped on board the vessel "Pacifica" at Pasir Gudang, Malaysia. The discharge port for this cargo was intended to be Beihei, Guangxi, China. However, the "Pacifica" never arrived at Beihei and has never been found. She was described as a ‘phantom ship’, that is, a ship which disappears on voyage only to assume a new identity, thereby facilitating the theft and onward sale of her fraudulently acquired cargo.

On 19 October 1998, China Insurance formally declined liability under the policy. NK then commenced these proceedings in February 1999. No issue arose as to the existence of the policy or as to the insurable interest of NK; it was also agreed that the insurance was subject to English law and practice. China Insurance advanced a number of defences, including: (1) a defence based on the Institute Classification Clause (‘ICC’) and (2) a defence based upon section 44 of the Marine Insurance Act 1906. That section provides:
"where the destination is specified by the policy, and the ship, instead of sailing for that destination, sails for another destination, the risk does not attach".

NK’s action was dismissed with costs.

  1. The ICC policy condition was contractually applicable. The Institute Classification Clause (1/8/97 version) provided that vessels not classed by an approved Classification Society within the terms of the clause ‘are held covered subject to a premium and conditions to be agreed’. Since the ‘Pacifica’ was not classed with an approved Classification Society and there was no possibility that a prudent underwriter would be prepared to underwrite this risk at any reasonable premium on the basis of the facts capable of being known at the material time, China Insurance was entitled to avoid liability.
  2. Section 44 of the Marine Insurance Action, 1906, was applicable, despite the existence of a warehouse to warehouse clause in the insurance policy, providing that the insurance was to attach "when the goods leave the warehouse for the commencement of the transit". In this regard, the court relied on the decision of the Privy Council in Kallis v. Success [1985] 2 Lloyd’s Rep 8, of the English Court of Appeal in Simon Israel v. Sedgwick [1893] 1 QB 303, and on dicta of Lord Denning in The ‘Salem’ [1982] 1 Lloyd’s Rep 369. The judge said:

"A voyage policy is no more than insurance on a particular risk…. If in actuality the voyage performed is not the voyage described in the policy, then it is not the risk that the insurer has bargained to cover… The scope of the cover from shipment is defined by reference to the voyage and it is not easy to see why [the warehouse to warehouse clause] should… be regarded as circumventing that situation."

Since the judge held specifically that the ‘Pacifica’ was a ‘phantom ship’, whose owners/operators had formed the intention, prior to loading the cargo, to steal it, it followed, as a matter of logic, that she had sailed from Pasir Gudang for a destination other than Beihei, the intended destination under the policy. As a result, no risk attached and China Insurance were under no liability to pay the loss that NK had claimed.


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