Cocaine Haul Leads to Limitations on War Risk Exclusion

It is a sad fact that drug traffickers like to use ocean-going vessels to help them move their product.

If your vessel is the unwitting victim of drug trafficking operation and is detained so that she becomes a constructive total loss (CTL), is that a covered loss or an excluded loss under the standard War Risks terms?  According to the English Commercial Court, it is a covered loss.  In its recent decision in a case involving the "B ATLANTIC" the Court limited the operation of the "infringement of customs regulations" exclusion within the standard Institute War & Strikes Clauses cover.  The Commercial Court held that the exclusion does not apply where the infringement of customs is due to the malicious act of a third party without any involvement of the owners or crew.

Background

The "B ATLANTIC" loaded coal in Venezuela in August 2007.  As is usual for vessels loading on the north coast of South America, the owners conducted a dive inspection of the vessel's hull prior to loading to make sure that it was free of "unwanted cargo", i.e. drugs.  Unfortunately, the vessel had 132 kg of cocaine strapped to the stern of her hull 10 metres below the water line.  The vessel was immediately detained by customs and by local Court order.  After 6 months of vessel detention owners gave CTL notice of abandonment to war insurers which was declined on the standard terms.  The detention of the vessel was upheld by local Courts and two of the crew members were convicted.  All attempts to overturn the detention order failed before the Venezuelan Courts and the owners eventually abandoned the vessel and cargo to the Venezuelan Court 2 years after the detention.

The dispute

Owners and insurers agreed that the owners and crew had no involvement in the attempted trafficking.  It was also agreed that the actions of the drug traffickers could, in principle, fall within the scope of "persons acting maliciously" - an express insured peril under clause 1.5 of the Institute War & Strikes Clauses.  But insurers argued that this "malicious act" was not a proximate cause of the loss or, if it was a proximate cause, it was not the sole proximate cause of the loss.  Insurers alleged that, notwithstanding the malicious acts by the drug traffickers, the loss was proximately caused by detention of the vessel by reason of infringement of a customs regulation – an express excluded peril under clause 4.1.5 of the standard War Risks terms.  Under the standard insured peril/excluded peril doctrine, insurers said there was no cover.

The decision

At a preliminary issue hearing the Commercial Court decided that, in order to bring themselves within the "customs infringement" exclusion, the insurers did not have to show privity or complicity on the part of owners or crew.  After a full hearing of the claim in October this year, Mr Justice Flaux held that the exclusion for "infringement of customs regulation" did not apply, and that the sole proximate cause of the loss was the malicious act of a third party – an insured peril.  Owners' claim for a CTL therefore succeeded.

The Commercial Court held that to apply the "infringement of customs regulation" exclusion to every case where the vessel is held for breach of customs would offend the spirit of the war risks cover.  The Judge felt that there has to be an implicit agreed limitation on the exclusions so that they do not apply where the breach of customs was caused by a "put-up job" – a malicious act of a third party without any involvement whatsoever of the owners or crew.  The language of War Risks exclusion 4.1.5 is pretty clear and it is debatable whether it requires any further implied terms to make it work.

Comment

In reaching his view on construction, the Judge relied heavily on a concession made by insurers that deliberate acts of local authorities to plant drugs so as to facilitate vessel confiscation would not trigger the "infringement of customs regulations" exclusion.  The Judge saw no real distinction between that extreme circumstance, and the facts in the case before him.  In both instances the "infringement" was the manifestation of the malicious acts of third parties, for which the owners had cover. However, it is possible that insurers' concession was based upon settled law that perverse judgments by local authorities can break the chain of causation so that the "infringement of customs regulations" exclusion no longer applies.  It will be of interest to see if insurers seek and obtain permission to appeal.

The judgment is also of interest for its treatment of the owners' claim for sue & labour expenses.  After the CTL notice of abandonment was tendered by the owner and declined by insurers, the owner incurred almost US$2m in legal costs in Venezuela in its attempt to get the vessel and crew released.  Although undecided, there is strong judicial and academic support for the view that, in total loss claims, the assured's duty to sue & labour (and insurers' duty to reimburse sue & labour expenses) comes to an end when the CTL claim is crystallised – this usually being the moment when the notice of abandonment is tendered by the assured and declined by insurers but with agreement from insurers to treat the assured as if a claim form/writ had been issued against insurers that same day.  Flaux J. declined to follow the dicta of Rix J. in the Kuwait Airways litigation and held that, as the vessel remained in the grip of the insured peril beyond the notice of abandonment, the sue & labour expenses could be recovered.

For the full judgment, follow this link: The B ATLANTIC [2014] EWHC 4133 (Comm)