Spurious claims of fraud in cargo deals by trade credit insurers are disrupting shipping supply chains, according to a Singapore lawyer.
Watson Farley & Williams (WFW) partner Sumeet Malhotra told TradeWinds that reputable underwriters have developed a “narrative” of dishonesty in the sector following high-profile cases of fraud involving traders such as Hin Leong and Agritrade.
Insurers quite rightly refused to pay in these cases.
But he said the current problems began a year after that, when Covid-19 unfolded.
Supply chains were disrupted and a number of parties started to default.
Cash flow was restricted, the market panicked and bona fide claims were made by traders.
“The narrative from insurers was that because the industry was seeing fraud, they were going to impose exhaustingly high levels of scrutiny in relation to every claim,” Malhotra said.
“As a claimant, I cannot humanly establish there’s been no fraud, it’s impossible to do.”
The WFW team has been seeing a trend of underwriters using this narrative of potential fraud to vexatiously deny genuine claims, the lawyer said.
“They are inundating claimants with documents and clarifications,” he added. “Either the claimant gets fed up and abandons the claim, or they go insolvent, because trade credit insurance is a form of financing and they run out of this important source of liquidity.”
Claims unpaid
Liquidators do not have the expertise to pursue claims, and they go unpaid.
Malhotra said underwriters are making “utterly baseless accusations”.
He mentioned one recent question from an underwriter, who asked why the parties named on a cargo manifest and a bill of lading were different.
But one is a logistics document and one is a bill of title, the lawyer said. They perform different functions and are created at different times.
He also referred to a previous case that is a matter of record, involving trading giant Louis Dreyfus Co (LDC) and insurer Euler Hermes, now Allianz Trade.
Malhotra advised Euler Hermes not to deny a claim for a failed deal.
He told the insurer: “They’re going to come after you and they’re going to win. Please behave reasonably, there is no basis for this whatever.”
Summary judgment
There was no response from Euler Hermes, and a summary judgment was given in Singapore, meaning it had to pay up.
Even then, there was a 19-day delay in payment, with accrued interest equalling legal costs.
“I would be genuinely surprised if LDC chose to underwrite risks again with the team at Euler Hermes that handled this matter,” Malhotra said.
Allianz Trade has been contacted for comment.
In recent days, the lawyer has had to write to a Singapore insurer, telling it it will be taken to court over an unpaid claim — and lose.
“There’s a moment of reckoning coming for these underwriters,” Malhotra said.
“The market has lost faith. They recklessly collected premiums, have not underwritten the risk appropriately and they’ve sought to renege on their obligations.
“This has a real knock-on effect on international trade and the quality of lives of people.
“These are food cargoes. If you can’t insure a counterparty, you can’t deal with that counterparty. If that cargo doesn’t move to that geography, it means that trade contracts.”
Malhotra believes insurers are “making a mockery of the system of risk exchange that has existed for 400 years”.
However, there are alternatives to trade credit insurance, with a number of different financial instruments available.
All about trust
“I work with clients to make sure insurers will respond to claims,” he said.
“People don’t recognise the impact it’s having on trading volumes and on trust. International trade hinges on trust.
“An essential link in that chain has weakened itself due to a lack of professionalism and short-sighted financial goals.
“Now these judgments are coming to light. There are parties who are still trading and are outraged: ‘You took the money, where are you now that I need you?’”
The WFW commodity trade disputes team in Singapore tends to act only for commodity trading principals, and has built a reputation for going after delinquent underwriters.
