In brief - Insurers unsuccessful in relying on exclusions in Institute War and Strikes Clauses

In a recent case before the English High Court, insurers sought to rely on exclusions for loss arising from detainment by reason of infringement of customs regulations and for loss arising from failure to provide security.

Vessel detained and ultimately confiscated following discovery of cocaine

An interesting decision of Mr Justice Flaux in the English High Court of Justice in Atlasnavios-Navegacao LDA v Navigators Insurance Company Limited & Others  (2014) EWHC 4133 (Comm) concerned an insurance claim by the owners for the constructive total loss of a vessel by reason of her detention for longer than six months after the vessel was detained in Venezuela following the discovery of bags of cocaine strapped to the vessel's hull below the waterline.

While it was never suggested by insurers that the owners themselves were implicated in the commission of a drug smuggling offence, insurers sought to rely upon exclusions in clause 4 of the Institute War and Strikes Clauses for loss arising from detainment by reason of infringement of customs regulations and for loss arising from failure to provide security.

While two officers, the Master and the second officer, were charged in Venezuela with complicity in drug smuggling, of which offence they were convicted in August 2010, the court also ordered the final confiscation of the vessel. The owners had abandoned the vessel to the Venezuelan court some two years after the initial discovery of the drugs.

Exclusions under the insurance policy

The Institute War and Strikes Clauses provide in clause 3:

In the event that the Vessel shall have been the subject of capture seizure arrest restraint detainment confiscation or expropriation, and the Assured shall thereby have lost the free use and disposal of the Vessel for a continuous period of (6) months then for the purpose of ascertaining whether the Vessel is a constructive total loss the Assured shall be deemed to have been deprived of the possession of the Vessel without any likelihood of recovery.

There were also exclusions of loss damage liability or expense arising from, amongst other things, "arrest restraint detainment confiscation or expropriation under quarantine regulations or by reason of infringement of any customs or trading regulations" (4.1.5) and "the operation or ordinary judicial process, failure to provide security or to pay any fine or penalty".

The owners maintained that there was no infringement of customs regulations, as the proximate cause of the detention of the vessel was the malicious act of the drug smugglers, rather than the infringement of the customs regulations. They further maintained that the proximate cause of the detention of the vessel was "the wrong and perverse decision" of the judge who ordered detention of the vessel.

The insurers conceded that the infringement of customs regulations exclusion would not apply to a "put up job" such as would occur if the Venezuelan authorities had deliberately planted the drugs (or engaged a third party to do that) so as to detain the vessel. 

Court finds that policy provided cover for malicious acts of third parties

The judge saw no distinction between a "put up job" and a case where drug smugglers were involved in planting the drugs upon the vessel.

Following an extensive analysis of the evidence and of the applicable law, Mr Justice Flaux concluded that the claim for a constructive total loss succeeded on the basis that there was cover under the policy for the malicious acts of the third parties who strapped the drugs to the hull of the vessel and that the exclusion for infringement of customs regulations did not, as a matter of construction, apply to exclude cover in the circumstances of the case.

He also concluded that the exclusion for failure to put up security did not apply, as he doubted whether owners would have been able to negotiate satisfactory and reasonable security with the Venezuelan authorities in any event.

Owners entitled to recover range of expenses related to vessel's detainment

The judge found that the owners were entitled to recover sue and labour expenses, including the legal expenses incurred in seeking the release of the vessel and defence of the crew, the running costs during detainment of the vessel until the actual abandonment and a payment made to private investigators, ostensibly to determine who were the real perpetrators of the drug smuggling and with a further success fee to be paid if the vessel was released.

The judge rejected the argument that the proximate cause of the detention of the vessel was a perverse or wrong decision of the Venezuelan court.

Effect of exclusions where there is malicious intervention by a third party

While the case was very much one which was considered on the basis of its own peculiar facts and which involved evidence from Venezuelan lawyers largely around the proceedings in Venezuela, it nevertheless raised interesting issues about the exclusions under the Institute War and Strikes Clauses and their effect when there is malicious intervention by a third party.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2019.

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