In the decision in The B ATLANTIC” [2014] EWHC 413 (Comm), the Commercial Court ruled in favour of vessel owners on the construction of an exclusion clause relating  to customs regulations infringements in the Institute War and Strikes Clauses Hull 1/10/83 (the Institute War & Strikes Clauses) relied on by war risk underwriters.

The Commercial Court held, that where a vessel is detained so that she becomes a constructive total loss as a result of a customs infringement arising from a malicious act  of a third party, without the involvement of the owners or crew, underwriters will not be able to rely on the exclusion contained at clause 4.1.5 of the Institute War & Strikes Clauses1.

Background

In 2007, after The “B ATLANTIC” (the Vessel) had completed loading of a cargo of coal in Venezuela for discharge in Italy, a customary underwater inspection of its hull was undertaken. Three bags strapped to the hull containing 132kg of Cocaine were discovered, and the Vessel was immediately detained by the authorities, and the crew arrested. The court in Venezuela proceeded to charge the Master and Second Officer with complicity in the drug smuggling, and, pursuant to local law, ordered the continuation of the Vessel’s detention for an unspecified period.

The Vessel was eventually abandoned by its owners two years later, and was confiscated by the Venezuelan authorities pursuant to a court order. The Vessel’s owners proceeded to claim under their war risks insurance policy, which incorporated the Institute War & Strikes Clauses as amended. However, whilst underwriters accepted the Vessel was a constructive total loss, they rejected the claim on the basis that the loss arose “by reason of infringement of any customs ...regulations reason”, an expressly excluded peril under clause 4.1.5 of the Institute War & Strikes Clauses.

Although the Master and Second Officer were convicted, it was accepted by underwriters that the owners and crew were not, in fact, involved in the attempt to smuggle drugs out of Venezuela. Further, underwriters accepted  that the acts of drug smugglers could, in principle, fall within the scope of clause 1.5 of Institute War & Strikes Clauses, which provides that “loss or damage to the Vessel caused by...any person acting maliciously” is covered. However, underwriters argued that the actions of the drug traffickers were not the proximate cause of the loss, and, instead, asserted that the proximate cause of the Vessel’s detention was the infringement of customs regulations, an expressly excluded peril.

The Commercial Court’s decision

Persuaded by the Court of Appeal’s approach in Handelsbanken v Dandridge [2002] EWCA 577 (The “ALIZA GLACIAL”) when interpreting a different exclusion in the Institute War & Strikes Clauses, Flaux J held that to apply clause 4.1.5 to every claim in which a customs infringement arose “would not accord with the spirit of the policy”.

The Commercial Court concluded that, as a matter of construction, the customs infringement exclusion could not be applied where it is brought about by the malicious act of a third party. Accordingly, underwriters were not, therefore, entitled to reject the Vessel’s owner’s claim under the policy.

Comment

The Commercial Court’s decision not to apply the exclusion clause to this situation is significant, and follows a pattern by the English Courts to adopt a holistic approach when applying exclusion wordings. It remains to be seen whether underwriters will seek to appeal the judgment.

First published in Insurance Day, 22 January 2015