The Supreme Court in this case considered whether the smuggling of drugs on a vessel by unknown third parties fell within the scope of a ‘person acting maliciously’ under a war risks insurance policy and would entitle the owners of the vessel to claim indemnity for its constructive total loss.

Factual background

In August 2007, the “B ATLANTIC” was used by unknown third parties in an unsuccessful attempt to export 132kg of cocaine from Venezuela by strapping it to the vessel’s hull ten metres below the waterline. After her consequent detention by the Venezuelan authorities and the expiry of a period of more than six months, the owners treated her as a constructive total loss and sought to recover her insured value from war risks insurers.

The “B ATLANTIC” was insured for war risks on the terms of the Institute War and Strikes Clauses Hulls-Time (1/10/83). The issue was whether the vessel sustained a loss by an insured peril, entitling her owners to claim under the policy. The owners contended that her detention had been caused by the malicious acts of the drug smugglers, which fell within the scope of clause 1.5 and afforded them with cover for losses arising from ‘any terrorist or any person acting maliciously or from a political motive’. The insurers denied cover relying on the exclusion of losses arising from ‘detainment … by reason of infringement of any customs or trading regulations’ under clause 4.1.5.

At first instance, Mr Justice Flaux rejected the insurers’ argument and held that the exclusion clause was to be read as subject to an implied limitation that it did not apply where the reason for the infringement was the malicious acts of third parties. This conclusion was overturned by the Court of Appeal which decided that the vessel’s loss could both be attributed to a malicious third party act and fall within the exclusion. The owners appealed to the Supreme Court preserving their argument that clause 4.1.5 did not apply.

Legal issues

The Supreme Court not only dismissed the owners’ case but also decided that the smugglers' actions did not constitute third parties acting maliciously. The latter had been conceded by the insurers at first instance and was thought to be common ground between the parties. However, the judges examined in detail the meaning of a ‘person acting maliciously’ and decided that that the owners’ claim did not fall within the cover provided by clause 1.5 in any event, essentially declaring the premise on which this appeal was reached incorrect.

In fact, Lord Mance considered the historical context of the Institute War Risks clauses, reviewed previous case law and concluded that clause 1.5 ‘is not designed to cater for situations where the state of mind of spite, ill-will or the like is absent’. The judge agreed with the reasoning followed in the cases of The Mandarin Star [1968] 2 Lloyd’s Law Rep 47 and The Salem [1982] 1 QB 946, adding that recklessness will not suffice.

On the facts of the case, Lord Mance, with whom the other justices agreed, found that ‘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’. On the contrary, they were trying to avoid detection and counting on the fact that the vessel would leave Venezuela and reach her destination. Thus, the court held that although, the smuggling was undoubtedly a wrongful act, it was not malicious within the meaning of clause 1.5 and the appeal should be dismissed.

Lord Mance went on to address what the position would have been if the appeal had been accepted. He determined that the loss would still have been excluded by clause 4.1.5 as arising, at least concurrently, from detainment by reason of infringement of customs regulations. Albeit obiter, the judge’s comments confirmed a well-established English law principle that where a loss is proximately caused by an insured peril and an excluded peril, the insurance will not cover that loss.

Comment 

This decision may come as a surprise to owners and insurers alike, seeing as both parties in this case believed that the smuggling of drugs fell within the scope of a ‘person acting maliciously’. The judgement emphasises that traditional war risks insurance may not cover all the needs and expectations of an assured, thus, acting as a reminder for all traders to consider carefully their commercial objectives when opting for a specific insurance policy.

This article originally appeared in the June 2018 edition of shipping case digest