Claim for loss of vessel following discovery of drugs on board was not covered under standard war risks insurance

The Supreme Court has unanimously rejected the shipowners’ appeal, confirming that the constructive total loss (CTL) of a vessel detained by customs authorities in Venezuela after drugs were found strapped to its hull was not covered under standard war risks policy terms because the detainment by reason of infringement of customs regulation exclusion clause applied.

Background

Vessels discovered to be being used by third parties as a means of smuggling drugs and other contraband are likely to be detained for several months, often triggering a claim for a CTL under a war risks cover. Insurers have traditionally been unwilling to cover such risks as standard, hence the exclusion for detainment “by reason of infringement of any customs or trading regulations” as found, for example, in clause 4.1.5 of the Institute War and Strikes Clauses 1/10/83 (IWSC).

Previously the courts have given a broad interpretation to this exclusion to apply to all kinds of smuggling. The decision of the Commercial Court in The B Atlantic seemed to turn this approach on its head. The Court of Appeal, however, reverted to the more orthodox approach, which has now been endorsed by the Supreme Court.

Case facts

• The B Atlantic was insured on the IWSC; the detainment period necessary for a CTL reduced to six months.
• In 2007, the vessel was detained and the master and crew arrested in Venezuela following the discovery of bags of cocaine which had been attached to the hull by persons unknown.
• The vessel remained under detention until 2010 when a Venezuelan court ordered its confiscation.

Owners claimed against war risks insurers on the basis that the vessel was a CTL having been detained for over six months. Insurers accepted that the vessel was a CTL but declined cover on the basis that the detention arose by reason of an infringement of customs regulations.

Owners argued that the IWSC exclusion did not apply because:

• The confiscation was due to political interference in Venezuela
• The loss arose from an insured risk, namely the malicious acts of a third party.

The Commercial Court held that it was not necessary for insurers to show any complicity of the insured or its servants or agents to be able to rely on the exclusion and that there was no political interference. The planting of the drugs was a malicious act. However, the exclusion did not apply where the infringement was no more than the manifestation of the relevant act of persons acting maliciously. The loss was therefore covered under the policy.

Insurers appealed. The Court of Appeal held that Commercial Court had been wrong to limit the scope of the exclusion. It was common ground that the act was malicious, but in accordance with established principles, where a loss is caused by a covered peril and an excluded peril, the exclusion operates, so the loss was not covered.

Owners obtained permission to appeal from the Supreme Court but were unsuccessful. The Supreme Court held, unanimously, that the loss was not covered but, even if it had been, the IWSC exclusion operated because a proximate cause of the loss was detention by reason of an alleged customs infringement.

There was no evidence that strapping drugs to the hull involved spite or ill will. The smugglers were not intending that any act of theirs should cause the vessel’s detention or cause it any loss or damage at all. Even if that were wrong, this was at best a case of concurrent proximate causes, so the IWSC exclusion operated and the insurers were not liable under the policy.

Comment

The sole or a concurrent proximate cause of the loss in these types of case will almost always be detainment (the period of detention will trigger the potential claim for a CTL). Coverage will depend on whether insurers can prove one of the policy exclusions applies.

Those interested in vessels trading to countries which present a particular risk that the vessel might be used by others for smuggling will now need to consider whether to purchase bespoke cover against the detention risk which is squarely outside the scope of standard war risks cover.

Of wider interest, the market will also welcome the clarification as to the scope of coverage for malicious acts under a marine war risks policy. The Supreme Court considered that a concession by insurers that the strapping of drugs to the hull was a malicious act within the meaning of the IWSC was wrongly made and that no insured peril operated at all. Properly understood cover for malicious acts under the IWSC requires the insured to prove that the act in question involved ill will or spite, and recklessness does not suffice. Detention or loss of the vessel is highly unlikely to be intention of third parties seeking to use a vessel to smuggle contraband.

Whether this approach is of significantly wider application than just to the IWSC and similar marine policies remains to be seen, but insurers and brokers alike should consider whether current coverages offer insureds what they need or expect.

Read other items in the Marine Brief - June 2018