Tanker owners need to be aware that a war risk insurance claim may not cover attempted drug smuggling, comments Tatham Macinnes partner Stephen Askins
In an unexpected turn of events, on 22 May 2018, the Supreme Court considered the scope of the “malicious acts” peril in detail and ruled that it did not cover the present circumstances of attempted drug smuggling, which had been accepted as common ground between the parties in the case.
The decision will be of particular interest to owners and operators whose vessels trade to areas where the risk of judicial detention is higher than normal.
The B Atlantic was insured on the standard war risks terms contained in the Institute War and Strikes Clauses Hulls-Time (1/10/83) with additional perils. When it was preparing to leave Venezuela, a large amount of cocaine was discovered strapped to the vessel’s hull. The vessel was detained by the Venezuelan authorities and ultimately confiscated.
The owner abandoned the vessel and claimed for a constructive total loss on its war risks insurance. In total, the owner’s claim exceeded US$20M.
The owner was not aware of the attempted drug smuggling, which was ostensibly carried out by persons unconnected to the ship or the assureds, and the owner sought to rely on the terms of its war risks insurance, which covered losses arising from “any person acting maliciously”.
The insurers denied cover and sought to rely on the exclusion of losses arising from “detainment by reason of infringement of customs regulations”. The insurers argued that confiscation arising from the lawful acts of a sovereign government is not a peril that the war risks insurance was intended to cover.
Counsel for the owner argued that the exclusion, which refers specifically to the peril of “detainment” but not malicious acts, must be subject to an implied limitation that it would not undermine or cut back the cover afforded for malicious acts of third parties. They also argued that the peril of detainment in these circumstances was no more than the mere manifestation of the malicious act of attempted drug smuggling and did not therefore operate as a concurrent cause of the loss.
During the hearing, some members of the Supreme Court expressed the view that maliciousness required something more than recklessness by the perpetrator. The Court asked the parties for written submissions on this point.
In the Court’s opinion, the attempted drug smuggling was not malicious, because the smugglers did not intend any harm to come to the vessel. In fact, the opposite was true: the smugglers no doubt wanted the vessel to sail from Venezuela and reach its destination safely and without delay.
This was an unexpected turn of events, given that both parties had proceeded to the Supreme Court on the basis that it was agreed that the drug smuggling was a malicious act.
The Court went on to consider the position based on the parties’ argued cases, assuming that there was a malicious act. The Court found that if, hypothetically, the loss was caused proximately by the malicious act of the drug smugglers, it was also caused by the detainment of the vessel arising from an infringement of Venezuelan customs regulations – the detainment was not only a mere manifestation of the attempted smuggling. Accordingly, the owner’s claim failed.
Advice from Tatham Macinnes
It is essential for owners and operators to know whether their war risks insurance will respond to claims arising out of the detention of their vessels. That will ultimately depend on the terms of the insurance and the circumstances of the detention. Where the detention arises from the lawful act of a foreign government, whether for infringement of customs legislation or in the context of a criminal investigation, that is most likely excluded from traditional war risks policies. That may follow even in circumstances where the detention is the result of the act of third parties and in no way attributable to the owners.