The LMAA 5403 Marine Cyber Endorsement is invariably incorporated by reference to marine cargo policies placed in the London Market. An increased focus on its meaning and application has ensued due to the potential for the wording to exclude what may otherwise be considered recoverable physical loss of goods, namely theft. This has triggered a wide-ranging review of the wordings against an uncertain backdrop and without the benefit of any guiding authority from the English Courts.
Mechanism of theft
The modus operandi of organised criminal gangs is far more sophisticated than the old fashioned "break and enter" that would ordinarily lead to theft of goods either in store or in transit. The potential for a remote attack by use of computers or computer software has enabled thefts to take place in a more subtle manner such that losses often go unnoticed for days, or even weeks, after the event.
The peril of theft has long been recognised to fall within the all risks parameters of physical loss/damage cover and is often likely to amount to at least a concurrent cause of the loss of goods in circumstances where those goods have been wrongfully removed to the detriment of an insured. However, the issue faced by the marine cargo market within the confines of the Marine Cargo Cyber Endorsement was that the exclusion applied in respect of any loss, damage, liability or expense "directly or indirectly caused by or contributed to by or arising from" the “cyber event” (i.e. the use of a computer/computer software as a means for inflicting harm).
This extraordinarily broad wording meant that losses flowing from the resulting theft of goods, being the last event in time, may be excluded if the factual matrix encapsulated a cyber event that facilitated said theft. The significance of proximate cause was reduced by the above wording as the clause merely required that said cyber event was part of the operation. The intention of underwriters in compiling, and in use of, the wording was seemingly not to preclude theft losses. However, the English Courts have made clear on a number of occasions in recent memory that where the words are clear and unambiguous, the intention of the draftsman is unlikely to be relevant to construction of the insurance contract.
It has therefore necessitated a pro-active response from the cargo market, leading to a revised wording which ‘carves back’ into cover losses which arise from a theft even where the cyber elements might otherwise have been satisfied. Writing back a named peril within the confines of an exclusion is not a straightforward exercise. However, the revised wording, termed the Marine Cargo Theft Confirmation Cyber Endorsement, goes some way to dealing with the issues which the market has faced in recent times:
“Where this clause is endorsed on policies covering the risk of physical loss or physical damage by theft of insured goods, paragraph 1 shall not operate to exclude physical loss or physical damage (which would otherwise be covered) where any computer … is used to facilitate access to the insured goods, provided that further physical human intervention is subsequently required to permanently deprive the insured of the insured goods or cause damage to insured goods through such theft.”
The effect of the write-back is such that the above elements of a cyber event will no longer preclude cover for losses suffered following the occurrence of a theft. Clause 4 of the revised wording envisages a cyber event being followed subsequently by an element of human intervention (i.e. the human element of any theft being the physical removal of the goods as part of the wider attack). The definition of theft used reflects the position under the Theft Act 1968. It therefore attempts to bring all forms of theft of goods within scope of the ‘carve out’ and does not require a cumbersome evidential threshold to be met by the insured in seeking to recover a claim on its cargo policy.
Various iterations and redrafts have been considered by the marine cargo market in seeking to deal with this issue including whether or not to define parameters in which certain types of theft may be brought back into the scope of cover and who must discharge the evidential burden. However, such wordings were, in our view, rightly dispensed with as such parameters would seem to merely open further debate on future claims. Cargo underwriters are seemingly prepared to accept that the peril of theft will enable an insured to recover any losses suffered as a result notwithstanding the fact that such theft has been facilitated by a cyber attack.
It is an imperfect solution to a complex problem, but the clarification provided ought to resolve the growing number of issues regarding cyber attacks and subsequent thefts and the reflection of underwriters’ risk appetite in that regard is an important one to get right.
Conclusion
The LMAA 5403 wording was not subject to judicial scrutiny and it remains to be seen whether the revised wording will achieve the carve out for theft which the marine cargo market intends to cover. It seems from our side that this wording does go some way to reflecting how the marine cargo market perceives the peril of theft to be recoverable under Marine Cargo and Stock Throughput policies and one which is not affected by the exclusion for cyber perils.
As technology continues to evolve exponentially, the cargo market is tasked with seeking to keep up at pace to meet the needs of sophisticated insureds and the movement of their goods on a global basis.
In light of these developments, it is essential for all stakeholders to stay informed and collaborate closely with your insurance partners to navigate this evolving landscape with confidence. Contact our team if you require any advice or guidance.
