Open to question?

   Rather than buying insurance for each shipment, shippers often rely on marine “open cargo” or “open cover” policies to insure the goods they move. 
   This is an arrangement where an insurer undertakes to issue policies for shipments when required by the assured, and is popular due to its flexibility.
   Marine open cover usually allows the shipper to declare shipments either individually or periodically — say once a month or once a quarter, though with the Internet, some shippers send them as shipments occur.
   But what happens if a loss occurs before a shipment is declared?
   That issue is discussed in a recent 11th Circuit Court of Appeals decision. (I.T.N. Consolidators, Inc. v. Northern Marine Underwriters. 11th Cir. No. 10-15152. Feb. 13, 2012.)
   ITN, a freight forwarder, arranged for a shipment of electronic goods valued at about $1 million for Alfa Co. from Miami to Paraguay.
   The shipment left Port Everglades, Fla., on Oct. 22, 2007, and arrived in Santos, Brazil on Nov. 6. It was driven across Brazil to Paraguay, escorted by two armed guards. The shipment was hijacked by armed men as the truck neared the Paraguay border.
   The defendant insurance companies in this case had insured ITN under a marine cargo policy for the period from Aug. 16, 2007 through Aug. 14, 2008. 
   The policy had a clause that read “the basis of valuation for the purpose of this Open Cover shall be the value declared for insurance, but in no case shall the valuation exceed CIF (i.e., Cost, Insurance, and Freight) 30 percent unless prior written consent of the insurer is given. In the event of declaration after loss or arrival, the basis of valuation will be CIF 10 percent only.”
   The declaration mentioned that the “basis of valuation” provision refers to the Certificate of Marine Cargo Insurance (COI) that ITN issued and thereupon paid a premium — for each shipment.
   Alfa’s president learned of the loss the evening of Nov. 7 and reported it to ITN the next day. ITN spoke to its insurance broker who informed Northern, also on Nov. 8.
   That same day, ITN generated a COI from Northern’s Website. While the parties disagreed whether Northern knew of the loss prior to the issuance of the COI; the district court, however, found that all parties were aware of the loss when ITN generated the COI.
   The COI described the date of shipment, its value, and the payee (in this case the shipper Alfa), among other terms and conditions of insurance. The COI also contained the declaration “NO KNOWN OR REPORTED LOSSES at November 8, 2007.”
   ITN submitted the COI to Northern, paid the premium, and submitted a claim for the loss. Northern denied coverage, so ITN sued. After the suit was brought, Northern tried to refund the premium to ITN, but ITN refused to accept it.
   ITN said coverage was not pre-conditioned on the issuance of a certificate for marine cargo and said the defendants breached the policy when they denied coverage.
   Northern denied coverage on three grounds:

• The policy language did not cover the loss.
• ITN breached the “NO KNOWN OR REPORTED LOSSES” warranty.
• The uberrimae fidei doctrine.

   (Uberrimae fidei refers to the requirement of “utmost good faith” called for in marine insurance policies, whereby an insured must fully and voluntarily disclose to the insurer all facts material to calculating an insurance risk.)
   ITN contended the COI was irrelevant to the existence of insurance coverage on any shipment under the open cover policy. Further, it argued that based on the valuation clause, the policy contemplated post-loss COIs, not withstanding the “NO KNOWN OR REPORTED LOSSES” statement.
   The district court said under ITN’s reading of the open cover policy, ITN would be able to forgo the issuance of COIs and payment of premiums for shipments that arrived safely but at the same time be permitted to issue COIs, pay the premium, and collect compensation for shipments when they were lost. But Michael Olin, an attorney for ITN, said Alfa consistently had its products insured and paid premiums for that coverage. And the district court said ITN’s record of shipments on behalf of Alfa showed delays between sailing and certificate issuance for 14 shipments ranging from four to 21 days between Aug. 16 and Nov. 9, 2007.
   The district court nevertheless found “ITN’s subsequently-issued certificate was without consideration and void…at the time of the hijacking, ITN’s shipment was not declared to (Northern), and, therefore, was not insured by the policy.” It held Northern was accordingly entitled to summary judgment.
   The 11th Circuit said the district court erred when it concluded that no coverage attached to ITN’s cargo at the time of its loss because a COI could not issue after a loss. It said the court failed to consider whether Northern and ITN had nevertheless contracted, outside the policy’s conditions for automatic coverage, to insure a mutually known loss.
   The 11th Circuit said coverage in this case turns on whether Northern agreed to insure the lost shipment, and that depends on whether Northern accepted ITN’s premium payment, thereby consummating the contract. ITN claims it paid the premium at the time the COI was issued, and Northern, after initially keeping the payment, tried to return it.
   The 11th Circuit sent the case back to the lower court for it to consider whether Northern formed a contract to insure the lost shipment. It will also consider whether the armed guards accompanying the container as it crossed Brazil fulfilled the policy’s “convoy” requirement.