Sunken Cargo Ship in the Pacific Highlights Need for Reliable Marine Insurance

Perils On Land & At Sea: Pirates, Fire and Extreme Weather

Securing cargo against casualty is no mean feat. Witness the Morning Midas, a cargo ship carrying approximately three thousand new vehicles that sank on June 24, weeks after the crew abandoned ship after they were unable to extinguish a fire on board. Thankfully, there were no serious injuries or fatalities. While it is unknown whether the fire started with lithium-ion batteries, hundreds of electric vehicles made up part of the ship’s cargo, and the use, storage and transport of batteries garner a lot of attention from fire departments across the globe. Zodiac Maritime said in a statement that the fire damage "compounded by heavy weather and subsequent water ingress" caused the 600-foot vessel to sink.

Of course, fire at sea is not the only significant risk to cargo. A host of other perils can conspire to impede safe transport and storage. Whether on land or at sea, extreme weather events more often play a hand in cargo loss and damage. Piracy on the high seas and inland also wreak havoc.

On land, cargo theft remains a major concern affecting freight-forwarders, merchants, retailers and consumers—the supply chain pays handsomely for the amount of cargo theft one way or the other. According to congressional testimony in the first quarter of this year, as recounted in Trucking Dive, “Broker fraud, shipment interception and other forms of cargo theft are costing supply chains up to $35 billion annually.” Cargo can be stolen from wharves, docks, warehouses, truck stops and at all other intervals of transport and storage.

An FBI information page identifies several varieties of cargo theft:

• Straight cargo theft occurs when cargo is physically stolen from its current location. Cargo thieves often look for items they can steal and sell quickly. This often occurs at truck stops, parking lots, roadside parking, drop lots, rail yards and other situations where cargo is left unattended.

• Strategic cargo theft occurs when thieves incorporate deceptive tactics to commit theft. This type of cargo theft involves the use of fraud to trick shippers, brokers, and carriers into handing loads over to thieves instead of the legitimate carrier. Other current strategic cargo theft trends include identity theft, fictitious pick-ups, account takeovers, double brokering scams, and fraudulent carriers as well as the implementation of a combination of these methods.

• Cyber cargo theft occurs when basic types of cyberattacks are used to aid in committing cargo theft. The attacks include phishing emails that install Trojan Horse malware granting access to a company’s systems for thieves to retrieve sensitive data. Thieves then use this information to print out copies of legitimate shipping paperwork they can use to commit fictitious pick-ups.

• Pilferage cargo theft occurs when criminals alter the bill of lading and pilfer small amounts off the truck.

Key Cases Governing Disputes Over Cargo Coverage

Too often, marine insurance companies will contest coverage. This is especially true where cargo is stolen or mysteriously disappears. Even where clear evidence establishes that cargo was stolen, the marine insurance company may argue that only certain forms of theft are covered while others are not—for instance, an insurance company may more readily pay a burglary loss as opposed to one where deceit or computer fraud is employed to accomplish the theft. See, e.g., United Fin. Cas. Co. v. Fateh Freightlines LLC, No. 2:24-cv-01607 (W.D.Wash. 2024).

Most cargo insurance these days is sold on an “all-risk” basis—even where certain arcane maritime insurance language is incorporated into the insuring agreements. While some all-risk policies include exclusions for “mysterious disappearance” of property, courts have generally held that in the absence of such an exclusion cargo theft is a covered peril, even theft by trickery, fraud, or false pretenses.

For example, in Great N. Ins. Co. v. Dayco Corp., 620 F. Supp. 346 (S.D.N.Y. 1985), an intermediary allegedly caused Dayco to manufacture and ship goods to and from its warehouse by representing, falsely, that certain contracts existed, then wrongfully appropriated the goods for their own use. The insurance company denied coverage, arguing that Dayco’s loss was a credit risk loss due to theft, while the policy covered direct physical loss to property. The court rejected the argument, finding that it “totally ignores the nature and plain meaning of an ‘all risks’ policy” which creates ‘a special type of coverage extending to risks not usually covered under other insurance.’” Id. (citations omitted). The court further ruled that “absent an express exclusion in the policy, a theft by trick or false pretense would be covered.”

Similarly, in Farr Man Coffee Inc. v. Chester, 1993 WL 248799, (S.D.N.Y. May 28, 1993), aff'd, 19 F.3d 9 (2d Cir. 1994), a shipment of 42,600 bags of Paraguayan coffee were identified in warehouse documents and deposited in a warehouse for delivery to the plaintiffs. However, 42,100 bags disappeared, apparently stolen, and only 500 bags reached plaintiffs. Plaintiffs’ policy provided coverage against “all risks of loss or damage to the subject-matter insured from any external cause.” The underwriters denied coverage, arguing that even if the coffee had been stolen, the dispute amounted to uninsured “non-performance under the contract.” According to the court, “neither law nor logic supports such a result, which effectively eliminates mysterious disappearances from the purview of all risk insurance.” The court held that “even assuming larceny by trick -- that the suppliers obtained the warehouse documents for the purpose of converting the coffee -- the theft undoubtedly involved a covered risk”.¹

Even if the insurance company ultimately concedes coverage for the peril of theft in concept, there still may be a dispute over the actual existence of the cargo as well as the amount of the cargo. See, e.g., MCC Non Ferrous Trading, Inc. v. AGCS Marine Ins. Co., No. 14-CV-8302 (SDNY 2014). Disputes over the existence of cargo, for example, may be litigated even where no theft occurred. In a decision from earlier this year, a New York appellate division panel ruled that the policyholder was entitled to warehouse insurance protection for losses of inventory held at a terminal where the terminal operator declared bankruptcy and only a partial amount of the inventory was recoverable through the bankruptcy proceedings. The panel held that all risk cargo insurance “should be interpreted broadly in favor of the insured.” The panel also ruled the policyholder’s warehouse receipts were sufficient to establish a loss of property and that the “loss occurs when the insured suffers a ‘dispossession from the property that was never remedied”. Endurance Am. Ins. Co. v. StoneX Commodity Sol., LLC, No. 2024-00728 (1^st Dept. Feb. 18, 2025). Last, the panel rejected application of the misappropriation and infidelity exclusion as there was no evidence of a “dishonest act” on the part of the policyholder or “other party of interest."

Insurance Coverage Considerations

Reliable marine insurance is critical to protect against both first-party and third-party losses. In the realm of marine cargo insurance, just because losses may take place at port, in warehouses and during inland transit, doesn't mean you fall outside the arcane realm of maritime law and custom. Policyholders and those who guide them are well served by becoming familiar with some of the peculiarities and harsh doctrines that appear in the world of admiralty law, which can govern questions and the scope of protection under cargo insurance.

First, the insurance policies themselves may use esoteric terminology hailing back hundreds of years ago (“barratry”, “assailing thieves”, “general average”, etc.).

Second, the documentation for cargo insurance may be convoluted, incomplete, and non-standard. Some cargo insurance policies will be self-contained agreements whereas others may simply “include” coverage terms by reference to standardized language perpetuated over the years in the London insurance markets and syndicates. Yet other insurance policies will be modernized and look more like a domestic, homogenous insurance policy akin to the insurance products consumers buy outside of the maritime space.

Third, some insurance policies will include specific insurance clauses depending on the type of cargo transported and stored. For example, temperature and refrigeration clauses may play an important role to protect cargo during transport and storage when dealing with perishable goods. Other cargo insurance policies may seek to condition coverage on Beaufort Wind Scales and cargo storage requirements above and below deck.

Fourth, valuation clauses may vary depending on policyholder and insurance company preferences to reflect contract prices, insurance and shipping costs. Thus, some cargo policies reference CIF (Cost, Insurance and Freight), FOB (Free On Board) and CFR (Cost and Freight). Many cargo policies will also add a percentage increase to the valuation to protect the cargo shipper’s / buyer’s profits if the cargo is lost, damaged, or stolen.

Fifth, some insurance policies are better than others in specifying what documents are needed to prove up insured cargo or inventory. Some are silent, some have clear guidance, and some use vague terminology.

Tips for Improving Insurance Protection

Getting reliable insurance protection is easier said than done. Policyholders are regularly up against an industry that is willing to battle them when they need their coverage the most. With that said, there are steps one can take to make their insurance more reliable:

• Provide more information to insurance brokers and underwriters than they may even ask for. Marine insurance is unusual in that many insurance companies will argue, and some courts will require, the policyholder to volunteer information that is not asked for on an insurance application. This is under the obscure doctrine of uberrimae fidei (the duty of utmost good faith). In these instances, policyholders are best off providing as much information as they can about loss history, vessel use, vessel configuration, particulars about the cargo traded in, and any other details or designations they can furnish. Too much information in this case is better than too little as it is nearly impossible to guess what a particular cargo underwriter will view as important to their ultimate decision to sell insurance. Further, invite your underwriters to visit your operations, warehouses, and shipping operations. This is useful for avoiding insurance companies second guessing your risk management after a loss has occurred.

• Be very careful with any time-sensitive provisions. Most marine insurance policies have time sensitive clauses calling for certain actions by the policyholder or broker once a loss situation arises. These clauses involve providing notification of occurrences of losses/claim (even where the extent of the harm is not yet known), voyage delays or detours, proofs or statements of loss, and suit limitation clauses—which can sometime be as short as 12 months. Calendar these time sensitive clauses carefully and comply with them as best as possible.

• Work with seasoned insurance brokers that can steer you toward better quality coverage with less traps (aka “the fine print”). Most coverage can be tailored to specific cargo protection needs.