The recent Farr Man Coffee case (88 Civ. 1692) in the Southern District Court of New York sheds light on the meaning of “all-risk” as used in modern cargo insurance policies. The 106-page opinion, which often resembles a textbook on marine insurance, addresses the issue of whether an “all-risk” policy covered the loss of 42,100 bags of coffee that mysteriously disappeared from a warehouse in Paraguay before shipment to plaintiffs in the United States.

By way of background, marine cargo insurance indemnifies cargo interests for insured losses while goods are at risk under the policy. The insurer, when evaluating a risk, may limit liability by imposing exceptions in the policy. Traditionally, insurers also minimize their exposure by utilizing “named-perils” policies that list all covered perils. In order to recover under this type of policy, the assured must prove the loss was caused by an insured peril. IN the case of a mysterious cargo disappearance, this could be difficult

In recent years, all-risk policies have been frequently utilized by cargo interests to eliminate some of the uncertainties associated with named-perils policies. Under all-risk policies, fortuitous losses from external causes are usually covered.

In order to recover, the assured has the initial burden of proving the existence of an all-risk policy, a fortuitous loss and an insurable interest in the cargo. Thereafter, the burden shifts to the insurer to prove the loss was caused by an exclusion under the policy.

To prove a fortuitous loss, an assured must show that three factors did not produce the loss: inherent defect, ordinary wear and tear, and intentional misconduct by the assured. Where cargo mysteriously disappears, the assured must prove that the loss occured.

In the Farr Man case, plaintiffs’ cargo has been insured under a cargo open cover policy that afforded insurance from the time the coffee left the suppliers’ facilities until delivery at final destination. The policy also provided coverage against “all-risks of loss of or damage to the subject matter insured from any external cause.”

The policy contained only one exclusion relating to coffee damaged during processing, which was irrelevant. The policy contained no exclusion for losses due to theft, misappropriation, conversion or fraud by persons entrusted with possession of the assured’s goods.

In early 1989, only 500 of the 42,600 bags of coffee were exported to the plaintiffs. The balance was never received. Plaintiffs notified their cargo underwriters that to the best of their knowledge the loss occurred after the goods arrived at the warehouse in Paraguay, but before ocean transit to the United States.

The underwriters investigated the matter, but failed to determine the cause of the loss. The claim was thereafter denied. Plaintiffs then sued on the policy.
The court held in the absence of a policy exclusion for mysterious disappearance, an all-risk assured need only show that the loss occurred or furnish the insurer with a good faith explanation of the loss. While the assured must prove a fortuitous loss, an assured is not required to prove the specific cause of loss..

“If the underwriters had desired to exclude mysterious losses from coverage, they could have done so by writing such an exclusion in the policy . . . The policy contained no such exclusion, and therefore, even a mysterious cause of loss is not sufficient to defeat plaintiff’s claim,” the court ruled.

It then ruled that the plaintiffs were entitled to $6,078,825, the full value of the coffee, plus prejudgment interest of approximately $3 million.

The Farr Man case should send a clear message and reminder to marine insurance underwriters that mysterious cargo losses will be covered under all-risk policies unless expressly excluded.