Toby v Allianz Global Risks US Insurance Company – FSD 152 of 2013 (IMJ): illegality in insurance contracts and the operation of the loss payee clause and financial loss exclusion
The Grand Court of the Cayman Islands has recently handed down its…
In circumstances where an insured party has potentially been caused loss by both an insured peril and an eventuality excluded by a clause of their policy, the courts have to consider which was the proximate cause of the eventuating loss and how the policy responds. In Atlasnavios – Navegacao, LDA v Navigators Insurance Company Ltd & Ors  EWCA Civ 808 the Court of Appeal reconfirmed the two-stage character of the question that lawyers and judges should be asking when concerning themselves with insured risks, exclusion clauses and proximate causes.
In August 2007 a ship named ‘B ATLANTIC’ (‘the Vessel’) found itself inspected by divers whilst moored for loading in Lake Maracaibo, Venezuela. The authorities discovered 132kg of Cocaine attached to the Vessel’s hull. The Vessel, originally intended to leave port bound for Italy, was detained pursuant to Articles 63 and 66 of the Venezuelan 2005 Anti-Drug Law.
It was detained until August 2010 when final confiscation was ordered by the Venezuelan courts, but had been abandoned as early as September 2009. Two officers on board the Vessel were convicted.
The owners of the Vessel (‘the Respondents’) had taken out insurance with war risk insurers (‘the Appellants’), by way of a standard war risks insurance policy on the Institute War and Strikes Clauses 1/10/83 (‘the Policy’).
By virtue of Clause 3 of the Policy, detainment for a continuous period of 6 months constituted a constructive total loss of the Vessel. The question for the English courts was whether the Respondent was entitled to be indemnified for this constructive total loss.
Clause 1.5 of the Policy stipulated that among those losses insured by its scope were those caused by ‘…any person acting maliciously…’. However, Clause 4.1.5 served to exclude any loss arising ‘by reason of infringement of any customs or trading regulations.’ Squaring the two provisions became a task first for Flaux J and then for the Court of Appeal.
FLAUX J’S DECISION
Most would agree that there were two causes of loss in this situation.
The first was the independent act of the third party placing the drugs on the underside of the Vessel with the intention of smuggling narcotics. (It is important to note here that the Appellants at no point took any issue with the assumption that the Vessel owners had been wrongly convicted by the Venezuelan authorities – this was undoubtedly to be treated as a malicious act by a third party). The second cause was the detention of the Vessel by the Venezuelan authorities for the infringement of customs regulations.
Flaux J acknowledged that this was ‘not any easy point’, but came to the conclusion that Clause 1.5 defined the ‘spirit of the policy’ as enveloping within the insured risk those losses caused by the malicious acts of third parties. Therefore, any exclusion clause that was based upon an infringement of customs regulations must bow to the spirit of the insuring clause. The specific contractual mechanism that Flaux J adopted was the implication of a term limiting the operation of the exclusion clause to those infringements of customs regulations that were not the result of the malicious acts of third parties.
The Appellants accepted before Flaux J that the exclusion clause would not apply in the case of a ‘put up job’, whereby the Venezuelan authorities had planted the drugs on the Vessel to engineer an infringement of customs regulations. The court did not consider that there was a principled distinction between this hypothetical situation and the facts of this case.
THE COURT OF APPEAL
The appellate court disagreed with this reasoning. Giving the leading judgment in the Court of Appeal, Clarke LJ adopted an approach that would not require the implication of Flaux J’s limitation:
Clarke LJ stressed that English judges should be reluctant to ‘write in’ limitations when construing clauses drafted for global insurance contracts.
Having adopted this more methodical approach to the question of which losses fell within the ambit of the indemnification afforded by the Policy, the Court determined that the loss in question initially fell within the insuring clause but then fell foul of the exclusion clause. In essence, the loss past the first test and failed the second.
The Respondents’ argument was designed to jettison ‘infringement’ as a proximate cause as, in the words of Clarke LJ, it duplicated ‘the malicious act which constituted the infringement’. But the detention was undoubtedly caused by the concealment constituting the infringement. It was necessary for the Respondents to seek to remove an infringement consisting of the requisite malicious act. They had failed to do so as a matter of implication or construction.
When the English courts are faced with a scenario such as that which transpired in the Atlasnavios, they are considering a question of fact followed by a question of law: firstly what did and did not constitute a proximate cause of loss on the facts; and secondly, to the extent that there are two competing proximate causes falling simultaneously within the insuring and excluding clauses under the policy, how should the policy be construed as a matter of law?
The first conundrum will be to determine whether there are in fact competing proximate causes. Proximate, dominant, effective – Clarke LJ underlined that these were all adjectives to describe the same enquiry: identifying what event or events ‘have the necessary causative potency’. Consideration was given by Clarke LJ to the judgment of the House of Lords in Cory v Burr (1889)8 App Cas 393 in which their Lordships could not quite agree as to whether the act of smuggling by the ship’s Master (constituting barratry) was a cause of the loss alongside the seizure of the ship by the Spanish authorities. Clarke LJ suggested that he, like many others, would find it difficult to fail to conclude that the barratry was at least a cause of the eventuating loss in Cory v Burr. The consequence of an alternative conclusion would be that in the analogous case of the criminal being captured for her crimes, the proximate cause of her imprisonment would be her arrest as opposed to the commission of her crimes (Professor Bennett in The Law of Marine Insurance).
Once the issue of proximate cause of loss has been resolved, the second dilemma is determining how the contractual clauses respond. The Court of Appeal confirmed that the incorrect approach is to attempt to ascertain the spirit of the contract by reference to the insuring clause and assume that it must be the dominant consideration when construing an exclusion clause that appears on its face to be in conflict. To do so fails to recognise the two-stage approach that has now been reaffirmed by the Court of Appeal.
On the facts it was important to ask two separate questions. Firstly, what loss had been caused by the peril? Undoubtedly the total constructive loss of the Vessel had been caused by the malicious act of a third party. The loss was therefore, prima facie, insured. However, the second question to ask was whether the detainment of the Vessel was by reason of the infringement of customs regulations. If so, as in this case, there was an exclusionary carve out that extracted the loss of the Vessel from the ambit of the indemnifying provisions.
Clarke LJ summarised his thoughts by stating that the policy ‘Intended to exclude a subset of loss which arose from detainment by reason of breach of customs regulations. If it is clear that the loss was so caused the exception applies.’
Relying on the decision in Cory v Burr (1889)8 App Cas 393 (per Lord Blackburn), Clarke LJ underlined that ‘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.’ (at 26).
In summary, a loss arising from an insured peril may also entail a sub-set of loss arising from an excluded peril. In such circumstances, both clauses have to be considered in turn in line with the Court of Appeal’s latest guidance.
 Following determination of preliminary issues by Hamblen J.
The Grand Court of the Cayman Islands has recently handed down its…
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