The high price of brand protection
In their standard form, the marine cargo policies used in international freight transport only cover property damage. While brand protection clauses offer extended cover, loss potential for insurers has increased as some of these clauses considerably restrict insurers’ rights when settling claims.
Brand protection clauses (BPC) are found above all in automotive policies, protecting policyholders against the risk that actual or assumed property damage could tarnish the brand name. There have been several disasters involving car carriers in recent years, although natural catastrophes have also played a part. The explosion at the port of Tianjin is a particularly noteworthy case. The explosion affected some 68,000 vehicles of different makes which were stored in the port area. Some were covered by property policies, others by marine cargo policies. It has not yet been decided what will happen to these vehicles. We can assume that the majority of marine cargo policies include brand protection clauses allowing the manufacturers to declare seemingly undamaged vehicles as a total loss on account of suspected chemical contamination, for example. This is because manufacturers baulk at the risk of bad publicity and subsequent liability claims.
This was also the case with the Cougar Ace, which capsized in the Bering Sea in 2006 with over 4,000 vehicles on board and continued to list severely for more than two weeks. Unable to gauge the repercussions of this disaster and fearing possible liability claims, the manufacturer decided to write off the vehicles as a total loss even if they showed no outward signs of damage. This is because in order to protect consumers, product liability legislation makes it at times impossible to exclude liability claims.
Mainly cars and other luxury goods affected
One conceivable scenario would be that new mobile phones suffer water damage during transportation by sea. A loss adjuster brought in to assess the damage concludes that the mobile phones can be repaired and marketed with a markdown and arranges for them to be sold through a wholesale dealer in order to realise the salvage proceeds. However, over the course of time the phones’ status as damaged goods “fades from view” and consumers never find out that the devices have sustained water damage and have been repaired. Naturally, the phones begin to malfunction after some time. Reports of quality defects circulate and damage the brand’s reputation, causing the manufacturer’s sales to plummet.
Had a BPC been concluded, the manufacturer could have insisted on the removal of its logo from the devices and could have established whether this was a case of a total loss, either acting alone or basing its conclusion on an expert’s evaluation or possibly even without consulting the insurer, depending on the wording of the clause. If a control of damaged goods clause had been agreed, then it would also have been able to decide whether the phones should be placed on the market at all. An agreement can also be made to the effect that the insurer will cover the costs of scrapping/disposing of the goods affected. Depending on the type of goods concerned, such costs can be substantial.
The clause must be viewed critically, scrutinised and priced by the insurer, as the insurer’s rights can be restricted to different degrees, depending on the wording of the clause.
Risks in storage areas
A different situation applied in 2012 when Hurricane Sandy flooded a storage area near the port of Newark in the US, damaging around 14,000 vehicles. Most of the vehicles were scrapped in a move that was no doubt partly prompted by the desire to pre-empt liability claims.
As already mentioned, there are various forms of brand protection and control of damaged goods clauses. With comprehensive cover, the question of whether goods have actually been damaged is completely immaterial. The mere assumption of damage is sufficient, for instance if a ship was listing for several days. The policyholder can decide whether the goods may be salvaged in order to minimise the loss, acting completely independently and without consulting an expert. In individual cases, this can be a sensible option for highly specialised products that could only be inspected by rival companies with the requisite expert knowledge. On the other hand, such clauses can also result in policyholders being given “carte blanche” with regard to loss adjustment.
In diluted forms, the policyholder must consult an expert to assess the condition of the goods. It can then decide on the goods’ further use, sometimes in consultation with the insurer. Should the goods be salvaged in any form whatsoever, the insurer is entitled to the salvage proceeds. The salvage and further utilisation of damaged goods can, however, be fraught with problems in cases where no BPC has been agreed. Although the insured has an obligation to minimise losses, a fear of liability claims might make a carmaker much less likely to supply spare parts for vehicles which have been involved in a loss.
The vehicle serial numbers, which must be quoted when ordering spare parts, would identify the vehicles concerned. This would make further utilisation of the vehicles virtually impossible. In order to prevent dispute about who should ultimately bear the costs of the resulting (total) loss, the obligation to minimise losses and the procedures for further utilisation of damaged vehicles definitely need to clarified prior to conclusion of the contract.
If a control of damaged goods clause has been agreed, a total loss is a great deal more likely, as the policyholder can decide for itself whether the damaged goods may be salvaged and utilised further. In other words, the policyholder can determine at its own discretion whether a product involved in a loss may be marketed so that the insurer can realise the salvage proceeds. This much greater risk of a total loss must be taken into account by insurers and reinsurers in risk assessment, premium pricing and loss accumulation cover. The events at Tianjin have demonstrated the importance of premiums commensurate with the risk prevailing in the market. In the case of comprehensive brand protection clauses, it is therefore particularly important that the clause be handled responsibly by the policyholder. Variations of the clauses which completely reverse the burden of proof for the occurrence of a loss and its magnitude to the detriment of the insurer and place the question of utilisation entirely in the hands of the policyholder should be avoided or amended. At the very least, the parties should jointly decide in consultation with a loss adjuster whether the loss can be minimised without diminishing the reputation of the brand.