The Commercial Court recently considered an application by the insured, owners of the vessel “B ATLANTIC”1, against their insurers for constructive total loss under a war risks insurance policy. The owners claimed for sums insured plus sue and labour expenses. This article focuses principally on issues of coverage under the marine war risks insurance policy and whether the claim is lost by reason of the exclusion clauses contained therein.

Background

The vessel was detained by the Venezulean authorities after an underwater inspection revealed bags of cocaine strapped to the vessel’s hull (affixed by persons unknown - the owners were not implicated in the commission of any offence). The Venezuelan trial judge ordered continued preventative detention of the vessel. In these English proceedings, the owners sought to argue constructive total loss of the vessel by reason of her detention for more than six months, pursuant to a clause in their war risks insurance policy.

Issues before the English court

The owners were insured on the standard war risks insurance on the Institute War and Strikes Clauses 1/10/83 with additional perils (IWSC). The owners’ primary case was that the drugs had been affixed to the vessel’s hull by unknown drug smugglers and that this constituted ‘malicious damage‘ or ‘malicious mischief‘ within the conditions for Section A of the policy; alternatively, that it constituted ‘loss… of the Vessel caused by… any person acting maliciously’ within clause 1.5 IWSC. In those circumstances, owners argued that the exclusion for infringement of customs regulations was not applicable. The insurers conceded that the vessel was a constructive total loss, but sought to rely on two exclusions to the policy:

‘4. Exclusions

4.1.5 …detainment, confiscation…by reason of infringement of any customs or trading regulations

4.1.6 …failure to provide security or to pay any fine or penalty or any financial cause…’

The court held that the exclusion for infringement of customs regulations did not apply. The insurers themselves conceded that if the Venezuelan authorities had deliberately planted the drugs so as to facilitate the confiscation of the vessel, the exclusion in clause 4 would not be triggered. The judge considered this as an implied limitation on the scope of the exclusion, and there was no reason to distinguish between ‘some sort of put up job’ by the authority with malicious or reckless acts of smugglers. In short, the exclusion did not apply where the ‘infringement’ was brought about by the malicious act of a third party.

In addition, the court accepted that there would be a break in the chain of causation between the ‘infringement’ and the detainment if the decision by the local court to detain the vessel was perverse or wrong (i.e. that it was a decision which no reasonable court could have reached). There was no separate requirement that the local court had acted in bad faith, knowing that its decision was perverse or wrong. However, on the findings of fact, there was no evidence of direct political interference and as a matter of Venezuelan law the decision to detain the vessel was justified.

Nor did the exclusion for failure to put up security apply to this case. The owners had made every effort to provide reasonable security and the judge decided that, in the circumstances, the Venezuelan court would most probably have insisted on security for the full value of the vessel which would be wholly disproportionate and unreasonable.