Case Alert - [2016] EWCA Civ 808

Court of Appeal discusses proximate cause and construes a policy exclusion

When the claimant's vessel was being loaded in Venezuela, an underwater inspection revealed that bags of cocaine had been strapped to its hull. The drugs had been affixed by persons unknown (presumably a drug cartel). The vessel was detained and the crew arrested. The vessel was abandoned by the owners 2 years later and eventually confiscated by the Venezuelan authorities following a court order. The claimant owners claimed under their war risks insurance policy. It was accepted that the vessel was a constructive total loss.

The policy covered "malicious damage" and "malicious mischief" and the vessel had been detained by a malicious act. However, the insurers sought to rely on an exclusion under the policy (exclusion 4.1.5), which excluded cover for loss arising from "arrest restraint detainment confiscation …. by reason of infringement of any customs or trading regulations".  Although Hamblen J had held (as a preliminary issue) that insurers did not have to prove that the insured or its agents committed the infringement for the exclusion to apply, Flaux J held that the exclusion did not apply where the infringement was brought about by the malicious act of a third party. The insurers appealed to the Court of Appeal, which has now held that the exclusion did apply to the facts of this case.

The Court of Appeal discussed the situation where there are said to be two proximate causes (events A and B, where B is last in time). A number of possibilities arise in such a situation. Either A or B may be said to be the sole proximate cause: "The court may, depending on the facts, select A as the proximate cause because its causative potency is such as to eclipse the significance of the fact that it is earlier in time than B or that something else had to happen before the loss arose; or because putative cause B is the inevitable consequence of cause A or will, in the ordinary course of events, arise from A without any intervening fortuity, or will usually do so". Alternatively, both A and B may be said to be the proximate causes (ie both must occur for the loss to arise or the loss would have arisen if either A or B occurred, but on the facts both caused it).

If there are two proximate causes one of which is covered and one of which is within the exclusion, insurers are not liable, at any rate if, as here, both causes need to operate if the loss is to occur (see Wayne Tank and Pump Co Ltd v Employers Liability Corporation Ltd [1974]).The effect of the exclusion is that, if the matter excluded is a cause, liability does not arise even if an insured peril is also one. On the facts of the case, putting the drugs on the vessel would not have caused the owners any loss if the detainment had not occurred; and the detainment by reason of the customs infringement was, itself, a proximate cause.

The Court of Appeal rejected the argument that the exclusion does not apply if the malicious act constituted the infringement. Smuggling is a paradigm case in which detention occurs because of the infringement. The proposition that "infringement" cannot include an infringement which is itself no more than the manifestation of the malicious act would involve writing in words which are not there: "The court should be reluctant to do some form of writing in in clauses drafted for use in insurance contracts throughout the world".

In reaching its conclusion, the Court of Appeal also considered arguments that the insurers' stance was "unbusinesslike": "As so often, the question of what is business-like depends on whose business is being considered. For present purposes it is sufficient to state that there is nothing unbusinesslike in the insurers' position even though it is favourable to them".