Navigators Insurance Company Ltd & Ors v Atlasnavios-Navegacao LDA [2018] UKSC 26

The vessel 'B Atlantic' was detained in Venezuela after unknown third parties attached cocaine to her hull in a smuggling attempt. The owners claimed on their war risks policy. The Supreme Court held the loss was not caused by persons acting maliciously and, in any event, was excluded as arising from detainment by reason of infringement of customs regulations.

Facts

In August 2007, the vessel ‘B Atlantic’, owned by the appellant, was loading coal in Venezuela for carriage to Italy. An underwater inspection discovered 132 kg of cocaine strapped to her hull, ten metres below the waterline, placed there by unknown third parties presumably associated with a drug cartel. The master and second officer were subsequently charged, tried and convicted in Venezuela (although in the present proceedings it was not suggested that owners or crew were implicated), and the vessel was detained and ultimately ordered confiscated under the Venezuelan Anti-Drug Law 2005.

Owners served a notice of abandonment on 18 June 2008 and, after the detention exceeded the agreed six-month period, claimed the insured value from their war risks insurers under a policy incorporating the Institute War and Strikes Clauses Hulls-Time (1/10/83).

Issues

The appeal concerned the interplay between the insuring clauses and the exclusions in the Institute War and Strikes Clauses, particularly:

• Whether the loss was caused by ‘any person acting maliciously’ within clause 1.5;
• Whether the exclusion in clause 4.1.5 (loss arising from detainment by reason of infringement of customs regulations) was capable of applying to claims brought under clause 1.5;
• Whether, if clause 4.1.5 did apply, it operated to exclude the loss on the particular facts.

Arguments

Owners (Appellant)

Owners submitted that the smugglers’ act of attaching drugs to the hull constituted a malicious act within clause 1.5, so that the loss fell within the specific cover for malicious acts. They argued that clause 4.1.5, which echoes the language of clauses 1.2 and 1.6 (detainment, confiscation, expropriation), was not directed at clause 1.5 and should not cut back that cover. Alternatively, the malicious act rather than the infringement of customs regulations should be regarded as the proximate cause of loss, or an implied limitation should be read into clause 4.1.5 where the sole reason for the customs infringement was third-party malicious conduct.

Insurers (Respondents)

Insurers contended that clause 4.1.5 applied on its face: the vessel was detained by reason of infringement of Venezuelan customs regulations, and the loss arose from that detainment. They argued there was no basis for any implied limitation, and that to hold otherwise would undermine the scope of the exclusion.

Judgment

Lord Mance (with whom Lord Sumption, Lord Hughes, Lord Hodge and Lord Briggs agreed) dismissed the appeal.

Meaning of ‘acting maliciously’ in clause 1.5

Although the parties had proceeded below on the common ground that the smugglers acted maliciously, the Supreme Court concluded it was necessary to re-examine that premise. Reading clause 1.5 in context alongside ‘any terrorist’ and ‘any person acting… from a political motive’, and in light of the authorities that must have been in the drafters’ minds when the 1983 Clauses were issued (notably The Mandarin Star [1969] 2 QB 449 and The Salem [1982] QB 946), Lord Mance held that ‘acting maliciously’ requires an element of spite, ill-will or the like directed at the insured property, other property or a person, with consequential loss or damage. The smugglers here were intent on avoiding detection; their aim was not to cause loss of or damage to the vessel. Accordingly, clause 1.5 was not engaged.

Lord Mance considered Colman J’s analysis in The Grecia Express [2002] 2 Lloyd’s Rep 88 and The North Star [2005] 2 Lloyd’s Rep 76, concluding that Colman J had addressed only the narrower question whether the conduct had to be targeted at the particular insured, and had not intended to extend the peril to wrongful acts foreseeably causing loss where the actor had no relevant spiteful state of mind. The tortious meaning of malice in Allen v Flood [1898] AC 1 and the criminal law concept under the Malicious Damage Act 1861 were not apt guides to the meaning of the insurance clause.

Application of clause 4.1.5

Even if clause 1.5 had applied, Lord Mance held the exclusion in clause 4.1.5 would still have operated. First, on Hamblen J’s unchallenged determination, clause 4.1.5 was capable of applying to perils beyond clauses 1.2 and 1.6, including clause 1.5. Owners themselves had to rely on the fact of detainment under clause 3 to establish a constructive total loss, which brought them squarely within the subject matter of clause 4.1.5.

Second, there was no basis for Flaux J’s implied limitation that clause 4.1.5 would not apply where the only reason for the customs infringement was third-party malicious conduct. None of the criteria for an implied term was satisfied.

Third, on causation, Lord Mance drew heavily on John Cory & Sons v Burr (1883) 8 App Cas 393, which established that smuggling and subsequent seizure cannot be separated so as to attribute the loss solely to the underlying wrongful act. The detection, detainment and its continuation for six continuous months were essential contributing causes. Where a loss arises from the combination of an insured and an excluded peril, the exclusion prevails (Wayne Tank [1974] QB 57). Following Fenton Atkinson LJ in The Anita [1971] 1 WLR 882, smuggling and infringement of customs regulations were not materially distinct.

Interrelationship with Institute Time Clauses Hulls

Lord Mance considered the relationship between the war risks cover and the Institute Time Clauses Hulls (including the barratry cover in clause 6.2.5 and the war exclusion in clause 23). The natural inference was that detainment arising from third-party smuggling was not intended to be covered by the war risks clauses at all.

Implications

The decision clarifies two important aspects of the Institute War and Strikes Clauses Hulls-Time (1/10/83):

• Scope of ‘acting maliciously’ in clause 1.5: the concept requires an element of spite, ill-will or the like directed towards the insured property, other property, or a person, resulting in consequential loss or damage. Foreseeability of loss arising from a wrongful act with a different motive (such as smuggling) is insufficient. The judgment carefully situates this reading within The Mandarin Star and The Salem, and qualifies the broader language in Colman J’s judgments in The Grecia Express and The North Star.
• Operation of clause 4.1.5: the exclusion applies according to its terms even where owners seek to frame their claim under a different insuring peril, and there is no implied limitation where the customs infringement is the result of third-party malicious conduct. Where detainment arising from infringement of customs regulations concurrently causes the loss, the exclusion operates even if another insured peril is also engaged.

The decision is significant for shipowners, war risks insurers and marine insurance practitioners. It confirms that losses arising from detainment following third-party smuggling will generally fall outside war risks cover under the standard 1983 Clauses, unless specific additional cover is obtained. The Court expressly declined to speculate on whether the commercial result was satisfactory or whether gap-filling cover is available in the market. The decision leaves open some marginal questions (including the narrowness of Mustill J’s reasoning in The Salem) but settles the principal points of construction and causation on facts that had divided the courts below.

Verdict: Appeal dismissed. The Supreme Court held that the vessel’s loss was not caused by ‘any person acting maliciously’ within clause 1.5 of the Institute War and Strikes Clauses, and in any event the loss was excluded by clause 4.1.5 as arising from detainment by reason of infringement of customs regulations. The owners’ claim against the war risks insurers therefore failed.

Source: Navigators Insurance Company Ltd & Ors v Atlasnavios-Navegacao LDA [2018] UKSC 26