Supreme Court rules on definition of "malice" in a marine policy and proximate cause arguments

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 the following perils:

"Capture, seizure, restraint or detainment, and the consequences thereof…" (Clause 1.2); and

"Any terrorist or any person acting maliciously…" (Clause 1.5).

It also contained an exclusion for loss arising from "arrest, restraint, detainment, confiscation or expropriation…by reason of infringement of any customs…regulations" (Exclusion 4.1.5).

The Court of Appeal had held that exclusion 4.1.5 applied where the infringement was brought about by the malicious acts of a third party and the owners appealed to the Supreme Court. It had been common ground between the parties that the attempted use by unknown third parties of the vessel for the purpose of smuggling had involved those third parties "acting maliciously", and so the focus in the lower courts had been on whether exclusion 4.1.5 applied (because if clause 1.2 applied instead, it would have been (in the words of the Supreme Court in this case) "thought impossible to argue that the present was not a case of "detainment…by reason of infringement of any customs…regulations" within clause 4.1.5".

However, during the course of the hearing before it, the Supreme Court concluded that it was necessary to re-examine that common ground in order "to avoid the risks attaching to any exercise of deriving conclusions from what might prove a false premise". The Supreme Court took into account the context of the policy wording: The Institute War and Strikes Clauses had been issued in 1983 as "part of a determined attempt by the London market to update its marine forms….While the clauses were freshly drafted, they did not abandon, but sought to bring fresh order and clarity to many of the time-honoured concepts used in the market". For that reason, prior caselaw on the meaning of persons acting maliciously was relevant. After reviewing that caselaw, the Supreme Court unanimously held that "What the context and authorities indicate is that an element of spite, ill-will or the like is required. But I would not limit the concept to conduct directed towards the insured interest. An act directed with the relevant mental element towards causing the loss of or damage or injury to other property or towards a person could lead to consequential loss of or damage to an insured interest within clause 1.5".

Accordingly, clause 1.5 did not apply and the owners were not entitled to be indemnified under the policy.

Although not required to decide the point, the Supreme Court went on to consider, obiter, what the situation would have been had it found that the attempted smugglers had been acting maliciously. It held that exclusion 4.1.5 could be reading as applying to clause 1.5. It went on to find that Flaux J, in an earlier decision, had been wrong to imply a limitation to the effect that exclusion 4.1.5 would not apply "where the only reason why there has been an infringement of the customs regulations by the vessel is because of the malicious acts of third parties”. Although there could be situations where the exclusion would not apply (eg where a malicious third party plants drugs in order to blackmail the owners and then tells the authorities when the owners refuse to pay), that did not mean that any other malicious acts (such as the ones involved in this case) also fall outside of exclusion 4.1.5.

Here, the malicious act was the infringement of the customs regulations, but even if it wasn't, "it does not follow that this gives rise to a binary choice between two competing proximate, real or effective causes of the insured loss". The Supreme Court went on to hold that (applying the principle confirmed in Wayne Tank & Pump v Dumas [1924] that where an insured loss arises from the combination of two causes, one insured, the other excluded, the exclusion prevents recovery) "Here, the two potential causes were the malicious act and the seizure and detainment. The malicious act would not have caused the loss, without the seizure and detainment. It was the combination of the two that was fatal. The seizure and detainment arose from the excluded peril of infringement of customs regulations, and the owners' claim fails".

COMMENT: The Supreme Court's decision regarding the meaning of "malicious" is in line with non-marine caselaw, such as Mandalia v Beaufort Dedicated (see Weekly Update 46/14), where the judge held that maliciousness in a property policy required a desire to harm someone, and Dunnage v Randall and UK Insurance, where the Court of Appeal found that maliciousness in a liability policy required an intent to cause injury. In the lower courts in this case, reliance had been placed on Colman J's decision in "The Grecia Express" (2002) (another war risks policy case) that maliciousness "…did not require proof that the person concerned had the purpose of injuring [the assured]", but the Supreme Court said that Colman J had been intending to do no more than decide the narrow issue before him, which was whether spite, ill-will or the like required conduct targeted specifically at the insured property or its owner, rather than casual or random vandalism.