MT ZOUZOU: detention, constructive total loss and mortgagee’s interest insurance - Commercial Court clarifies scope of indemnity

This article was co-authored by Benjamin Coffer, Counsel, Quadrant Chambers

The Commercial Court handed down judgment today in Piraeus Bank v Antares Underwriting Limited and others ('The ZOUZOU'), providing clarity in respect of the proper construction and scope of indemnity cover of mortgagee's interest insurance (MII) policies. Kennedys, together with Guy Blackwood QC and Benjamin Coffer of Quadrant Chambers, were instructed on behalf of the successful defendant MII underwriters.

In the judgment, which will be welcomed by the international marine insurance market, the Commercial Court - after considering issues around detention and constructive total loss - rejected in full a mortgagee bank’s claim in the sum of US$71 million made against mortgagee interest underwriters, which arose out of the detention of the vessel 'ZOUZOU' in Venezuela in August 2015.

Background

The claimant, Piraeus Bank A.E. (the Bank), was the mortgagee of The ZOUZOU, insured by the defendant MII underwriters. The Hellenic Mutual War Risks Association (HMWRA) insured the vessel against war risks, which included a provision that if the vessel was detained for more than 12 months, the owners would be deemed to have been deprived of possession without any likelihood of recovery. The vessel was insured for a total of US$55 million. The MII policy insured the Bank’s interest as assignees and loss payees under the owners’ insurance.

The claim arose out of the detention of the vessel ZOUZOU in Venezuela, following an allegation that the crew were attempting to smuggle diesel oil. The vessel was detained for about 14 months before being released. Four members of the crew were subsequently tried and acquitted. The owners of the vessel claimed for a constructive total loss (CTL) under their war risks cover, but the war risks underwriters avoided the policy on the grounds of material non-disclosure by the owners, unrelated to the detention.

Following the avoidance of the war risks policy, the Bank sought to recover from the defendant underwriters under the MII. The Bank’s claim was for about US$71 million plus interest.

The dispute

The detention of the vessel gave rise to issues as to whether the vessel was a CTL under the vessel’s owners’ war risks policy, and if so, whether the Bank could recover an indemnity from MII underwriters in respect of the Bank’s loss as assignees and loss payees under the vessel’s owners’ war risks policy.

The defendant MII underwriters successfully submitted that the Bank could not show that the vessel was a CTL because it was unable to demonstrate that the full 12 months period of detainment was caused by an insured peril. Further, the Court found that the MII policy was not intended to, and did not, cover losses that would not have been covered by the owners’ policies because, for example, there was no CTL under the owner’s policies or the loss was excluded. The clauses of the MII policy must be read together in order to determine the scope of the indemnity.

Judgment

The Bank’s primary argument was that the policy exclusions did not apply because the detention of the vessel had been unlawful under Venezuelan law.

The Court, however, rejected the Bank’s submissions on the proper construction of Venezuelan law provisions and held that the detention had not been unlawful as a matter of Venezuelan law. The Court also rejected the Bank’s fall-back argument that the exclusions in the war risks policy only applied where the owners of the vessel were themselves accused of an offence.

The Bank argued that even if the loss would have been excluded from the war risks policy, it was nevertheless entitled to recover in full for a CTL under the MII policy. The Bank’s argument was essentially that their MII wording provided cover for any loss or damage caused by the owners or their servants or agents, if there was subsequent non-payment by the owners’ insurers.

The Bank’s position was that the clause was applicable because the detention of the vessel had been caused either by an intentional act on the part of the crew in attempting to smuggle the fuel, or alternatively their accidental or negligent conduct in allowing diesel to be loaded in such a way as to create the impression that they were attempting to engage in smuggling.

The Court rejected that argument. The insuring clause required an “alleged” act or omission, which (the Court held) must refer to an allegation by the owners’ insurers. The purpose of the clause was to indemnify the Bank where the owners’ insurers decline cover on the basis of their allegation that the loss or damage to the vessel was caused by the owners or their servants or agents – in other words, where it is the alleged involvement of the owners or their servants or agents in the loss which results in there being no cover under the owners’ insurance (as would be the position, for example, in a scuttling case).

Of particular note was the Court’s decision that it was unnecessary for the Bank to tender their own notice of abandonment under the MII policy, separate from the notice of abandonment tendered by the owners under the war risks policy. The Court agreed with the insurers that the interest insured by the policy is the Bank’s interest in the owners’ policies as assignee and loss payee, rather than the Bank’s interest in the vessel as mortgagee. The Bank was therefore not required to abandon the vessel in order to claim a CTL.

Comment

The decision confirms that mortgagee interest insurance provides secondary insurance to banks and is not a ‘catch all’ or ‘umbrella’ cover that responds to every type of claim or loss.

The terms of the primary insurance in respect of loss of, or damage to the subject matter insured, have to be considered carefully in light of the provisions of the MII cover. Specific cover to fill any perceived gaps can be purchased for premium and both insurers and banks alike will welcome the clarity in respect of the proper construction and scope of indemnity cover of mortgagees interest insurance policies.

Read other items in London Market Brief - May 2022