Court Backs World Fuel Services Following $17 Million Bunker Theft

by Ship & Bunker News Team
Thursday June 9, 2016

A U.S. court has found in favour of World Fuel Services (WFS) after one of its insurers argued a policy held with it did not cover the bunker player for its loss stemming from a $17 million MGO theft, recent court documents filed in the United States District Court Southern District of New York show.

Following discovery, WFS and the insurer in question, AGCS Marine Insurance Company (AGCS), cross-moved for summary judgement - WFS seeking a declaration that it was covered for the loss, and AGCS seeking a declaration that WFS was not covered under the policy.

In finding that WFS was indeed covered, District Judge Paul A. Engelmayer held that the bunker supplier is now entitled to summary judgment on the matter.

The Theft

The theft in question, which is not in dispute, dates back to October 2013 when WFS received an enquiry from an individual identifying himself as James Battell who said he was employed by the Defense Logistics Agency (DLA), an agency that supplies the U.S. Government with fuel and one it was noted is also a regular customer of WFS.

Unaware that Battell was in fact an imposter, WFS agreed to sell him 17,000 metric tonnes (mt) of MGO valued at some $17 million on net 30 day payment terms.

WFS then contracted with physical supplier Monjasa, who between December 7 and 9, 2013, supplied Battell's nominated vessel, Ocean Pearl, with the bunkers via two ship-to-ship transfers off the coast of Lome, Togo.

WFS invoiced Battell on December 20, 2013 for $17,910,833.28, and on January 6, 2014, settled its invoice of $17,061,968.73 with Monjasa.

Also in January, over a two-week period WFS followed up with legitimate DLA personnel regarding the status of its invoice, and was eventually told by an FBI agent that Battell was not a DLA employee and that WFS had been defrauded.

"This was the first time World Fuel learned that Battell was an impostor. To date, the World Fuel invoice to Battell has not been paid; none of the MGO has been recovered; and the location of the MGO remains unknown," Engelmayer wrote.

The Policy

The policy in question was issued by AGCS effective October 1, 2013, the timing of which Engelmayer noted was less than a month before Battell contacted WFS.

It contained a number of provisions, most relevant being an "All-Risk Clause" protecting WFS "[a]gainst all risks of physical loss or damage from any external cause ... from time of leaving tanks at port of shipment and while in transit and/or awaiting transit and until safely delivered in tanks at destination."

WFS argued, amongst other things, that the theft amounted to a fortuitous loss of covered property during a time period covered by the all-risk insurance policy, and that AGCS had failed to establish any exception to or exclusion from that coverage.

AGCS did not dispute that it was an all-risk policy, but argued that the loss took place outside of the specified coverage period.

Their primary argument was that it took place after the MGO was "safely delivered," a position WFS countered by arguing the coverage-ending condition of safe delivery never actually occurred as Battell was an imposter.

AGCS alternatively argued the loss occurred before the coverage period began, because it was the result of the fraudulent contract WFS had entered into with Battell.

The Judgment

"The ultimate question is thus one of timing: whether this loss occurred while the MGO was still 'in transit' and thus covered by the All-Risk Clause, or whether it occurred after the MGO had been 'safely delivered.' Although the Court has unsurprisingly found no case involving the precise factual scenario presented here, it is well established that, under New York law, 'delivery' to a thief is not delivery at all," Engelmayer wrote in his judgement discussion filed May 17, 2016.

Of critical importance to the case, Engelmayer said, was that it is undisputed that WFS was the victim of a fraud, and there is no suggestion Battell ever intended to pay for the bunkers.

"Therefore, the Court holds that 'delivery' had not been effected, and 'transit' had not ceased, when World Fuel lost the MGO. The MGO was therefore lost within, not after, the period of coverage," wrote Engelmayer.

As for AGCS' alternative argument, that the loss predated the insurance coverage period, this was also dismissed by Engelmayer.

Under the concept of "inherent vice," coverage may have been excluded had there been a deficiency with the bunkers prior to the coverage period beginning, but in this case there was no such defect.

For the matter in hand, while the fraud scheme had indeed got underway prior to the commencement of the coverage period, at that point it was not guaranteed to be successful.

"Such a scheme can be - in a host of ways - abandoned, exposed, or frustrated before reaching fruition. The fraud here, for example, was hardly assured of success once the contract between Battell and World Fuel was signed," he wrote.

"To choose an obvious example, had World Fuel touched base earlier with the DLA, the impostor might have come to light before the MGO was transferred to the Ocean Pearl. A rotten fish, by contrast, cannot be un-rotted."

After addressing, and dismissing, WFS' several other arguments that it was covered by the policy, the Court held that WFS's loss is covered under the All-Risk Clause, and therefore WFS is entitled to summary judgment on the matter.

In that regard, documents filed June 1, 2016 show the parties submitted a subsequent briefing schedule that will end with AGCS' final reply due on July 29, 2016.

"If necessary the Court will schedule argument after full briefing," Engelmayer concluded.