Navigators Insurance Company Ltd and ors v Atlasnavios-Navegacao LDA [2018] UKSC 26: malicious acts and exclusion of cover in standard war risk insurance

In Navigators Insurance Company Ltd and ors v Atlasnavios-Navegacao LDA (formerly Bnavios-Navagecao LDA), the Supreme Court has dismissed an appeal by the insured shipowners challenging the decision by insurers to decline cover to a vessel held by customs authorities in Venezuela due to the discovery of a substantial quantity of cocaine. In doing so, the Supreme Court upheld the result at the Court of Appeal, although it reached a decision which not only departed from the Court of Appeal’s reasoning, but also from the common ground between the parties as to the malicious nature of the acts in question.

The Supreme Court’s decision is considered by Mark Cannon QC and Anthony Jones of 4 New Square.

BACKGROUND

The case related to a vessel, the ‘B Atlantic,’ which was insured under a standard policy – the Institute War and Strikes Clauses 1/10/83 with additional perils. Among the named perils to which the policy would respond, clause 1.5 provided that ‘this insurance covers loss of or damage to the vessel caused by … any terrorist or any person acting maliciously or from a political motive’. As to ‘loss of’ the vessel, clause 3 (as amended by agreement) provided that a detention of the vessel for a period of more than 6 months would constitute constructive loss. But the policy was subject to various exclusions, including exclusion of cover for ‘loss damage liability or expense arising from … arrest restraint detainment confiscation or expropriation under quarantine regulations or by reason of infringement of any customs or trading regulations’ (clause 4.1.5).

In August 2007, the vessel loaded a cargo of coal in Venezuela for transport to Italy. But on inspection by authorities before the vessel left the country, 132 kilos of cocaine were discovered strapped to the hull. The vessel was detained and confiscated under Venezuelan law.  In due course the ship owners claimed under the policy for their loss, identifying the relevant insured peril as the conduct of unknown third parties acting maliciously in using the vessel for drug smuggling. The insurers accepted that the drug smuggling was carried out by third parties, and accepted that the detention by Venezuelan authorities amounted to a constructive loss of the vessel for the purposes of clause 3 of the policy. But the insurers denied liability, relying on clause 4.1.5, because the vessel had been detained by reason of infringement of customs regulations.

FIRST INSTANCE AND THE COURT OF APPEAL

A number of preliminary issues were determined before Hamblen J [2012] EWHC 802 (Comm), including, importantly, that in order to rely upon clause 4.1.5 insurers did not need to show that there was ‘any privity or complicity on the part of the servants or agents of the insured in any infringement of customs regulations.’

A full trial followed before Flaux J, who held that clause 4.1.5 of the policy was subject to an implied limitation so that insurers could not rely upon it where the only reason for the infringement of customs regulations infringement was the malicious act of a third party:

On appeal, the Court of Appeal overturned Flaux J’s decision. Christopher Clarke LJ (with whom Laws LJ and Sir Timothy Lloyd agreed) held that there was no implied limit on the scope of clause 4.1.5 so that insurers could rely upon it to deny cover.  The Court of Appeal noted that the policy explicitly provided that the insured perils were subject to the exclusions (not the other way around), and that, while detention of a vessel would not always involve smuggling, it was the ‘paradigm case’ of customs infringement. Accordingly, the Court of Appeal considered it most unlikely that an exclusion of cover for customs infringement could not be relied upon in a smuggling case such as this. But in addition to a textual argument, the Court of Appeal considered the issue through the prism of causation. The loss in this case was caused by a combination of both the malicious act and the detention of the vessel, and, on the application of orthodox insurance law, where there are two proximate causes, one covered and the other excluded, liability will be excluded: Wayne Tank and Pump Company Ltd v Employers Liability Assurance Corporation Ltd [1974] 1 QB 57 (CA).

THE APPEAL TO THE SUPREME COURT

The ship owners appealed to the Supreme Court, seeking to restore the decision of Flaux J. But in what must have come as a surprise to the parties, the Supreme Court decided that, before it reviewed the reasoning of the Court of Appeal, it needed to address a question the answer to which had been common ground between the parties throughout. That issue was whether the smugglers who had attached the cocaine to the vessel were ‘acting maliciously’ for the purposes of clause 1.5.  The parties and the Courts below had proceeded on the basis that they were.

But the Supreme Court was unconvinced, and, following further submissions from the parties, Lord Mance (with whom Lords Sumption, Hughes, Hodge, and Briggs agreed) held that the relevant part of the clause referred only to third parties acting in a manner aimed to cause loss or damage to the vessel. The reference to ‘terrorist(s)’ and to those acting ‘from a political motive’ was significant, since it suggested a purposive requirement of harm to the vessel. In contrast, third parties acting for ulterior motives (such as drug smuggling) were not ‘acting maliciously’ vis-à-vis the vessel’s owners, even though their actions were unlawful. Indeed, as Lord Mance observed, far from maliciously intending to cause loss or damage to the ship, the smugglers’ aim was presumably exactly the opposite: that the vessel would reach Italy and deliver its clandestine cargo of cocaine unharmed. The Supreme Court concluded that, as the loss could not be attributed to the malicious acts of third parties, the ship owners were not entitled to cover relying on clause 1.5 of the policy at all. Accordingly, the Supreme Court upheld the result in the Court of Appeal, but on a significantly difference basis.

In reaching his decision Lord Mance observed that the relevant policy terms (the Institute War and Strikes Clauses) had been drafted and then issued in 1983 as part of an attempt by the London Market to update its marine forms, amongst others replacing a form which had been “criticised as to its form and content for some 200 years”.  He considered that the new provisions had been drafted against extant legal authorities which would not have “escaped the knowledge of marine insurance practitioners and lawyers or of the specialist drafters of the revised Clauses”.  The key decisions were those of Donaldson J in Nishina Trading Co Ltd v Chiyoda Fire and Marine Insurance Co Ltd (The “Mandarin Star”) [1968] 1 WLR 1325 and of the Court of Appeal in Shell Petroleum Co Ltd v Gibbs (The “Salem”) [1982] QB 946.

A wider interpretation (and the consensus before the case reached the Supreme Court) was based upon a misunderstanding of two decisions of Colman J (Strive Shipping Corpn v Hellenic Mutual War Risks Association (Bermuda) Ltd (The “Grecia Express”) [2002] EWHC 203 (Comm); [2002] 2 Lloyd’s Rep 88 and North Star Shipping Ltd v Sphere Drake Insurance plc (The “North Star”) [2005] EWHC 665 (Comm); [2005] 2 Lloyd’s Rep 76).  Neither justified widening the scope of “person acting maliciously” beyond that established by the pre-1983 decisions.

Having determined the appeal on the basis of the scope of clause 4.1.5, Lord Mance considered, obiter, the position if the parties’ common understanding of the meaning of ‘persons acting maliciously’ held good. But even in the circumstance that ‘malicious’ acts of smuggling could be characterized as insured perils, Lord Mance did not accept that the policy could be construed in the manner found by Flaux J. As Lord Mance noted, there is no indication in the language that the exclusion should be so limited, and ‘[t]here is nothing to suggest that insurers were willing to accept the risks of smuggling by third parties.’ Accordingly, the appeal would have failed even on the basis of the premise agreed by the parties before the lower courts.

COMMENTARY

The willingness and ability of the Supreme Court to take points not taken by the parties should be borne in mind by parties considering appealing to the Court and by advocates preparing for hearings.

Here the Supreme Court took the opportunity to clarify the meaning of a standard clause and to bring it back into line with the law as it stood when the clause was drafted.  The approach was interesting.  It has often been held that where parties choose to include a term in their contract which has been the subject of a judicial decision they may be taken to have intended the clause to bear the construction found by the Courts.  Here, new wording was held to have been intended to accord with earlier decisions.  Lord Mance was particularly well placed to express a view as to the intention behind the Institute War and Strikes Clauses in 1983 since he was a QC practising in the field at that time.

The result is that – on current wording – there may be a gap in cover where a ship is lost (or constructively lost) as a result of the acts of third party smugglers.  The market will doubtless determine whether insurers would agree to an extension of cover by both expanding the insuring clause and reducing the scope of the exclusion clause.  But the possible complicity of a ship’s crew in smuggling may make insurers unwilling to accept such an expanded risk.

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