Unknown smugglers strapped cocaine to the hull of the ship B Atlantic in Venezuela. After the drugs were found, the authorities detained her for more than six months, and her owners claimed her insured value from war risks insurers as a constructive total loss. The Supreme Court dismissed the claim: the smugglers were not “acting maliciously” in the sense required by the policy, and the loss arose from detainment for infringement of customs regulations, which the policy excluded.
Unknown persons attached cocaine to the hull of the B Atlantic during loading in Venezuela. Divers found it before the ship sailed. In the insurance proceedings the parties did not suggest that the owners or crew had participated in the smuggling.
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The Venezuelan authorities lawfully detained the ship. When detention continued beyond the six months specified in the policy, the owners gave notice of abandonment. The insurers accepted that the notice was effective if the loss resulted from an insured peril.
The cover and the exclusion
The vessel was insured for a year from 1 July 2007 on the Institute War and Strikes Clauses Hulls-Time (1/10/83). Those clauses cover loss of or damage to the vessel caused by listed perils, including capture, seizure, arrest, restraint or detainment (clause 1.2), any person acting maliciously (clause 1.5), and confiscation or expropriation (clause 1.6). If the owners lost the free use of the vessel for a continuous period because of detainment, they could treat her as a constructive total loss. The standard period of twelve months had been reduced by agreement to six months.
The cover was cut back by exclusions. Clause 4.1.5 excluded loss arising from arrest, restraint, detainment, confiscation or expropriation under quarantine regulations or by reason of infringement of any customs or trading regulations. The appeal turned on how the insured perils related to that exclusion.
The decisions below
Hamblen J decided preliminary points in the insurers’ favour on the scope of the exclusion. Insurers did not have to show that the owners, or any servant or agent, were party to the smuggling. He also held that clause 4.1.5 was not limited to claims that would otherwise fall under clauses 1.2 or 1.6. Those conclusions on privity were not challenged. The owners kept the third point alive only as a fallback.
Until the Supreme Court hearing, both sides accepted that strapping drugs to the hull was a person “acting maliciously” within clause 1.5. On that basis Flaux J held that the owners could recover. He treated the cause of the loss as the third parties’ malicious act, and read the customs exclusion as subject to an implied limit: it would not apply where the only reason for the infringement was such an act. The Court of Appeal disagreed. It held that there was no basis for that implied limit, and that the loss could both fall within clause 1.5 and be excluded by clause 4.1.5.
Were the smugglers acting maliciously?
Lord Mance, with whom Lord Sumption, Lord Hughes, Lord Hodge and Lord Briggs agreed, thought that the shared assumption had to be re-examined. The phrase appears between cover for terrorists and for persons acting from a political motive. What the drafters had in mind were people whose actions were aimed at causing loss of or damage to the vessel, or to other property or persons, with loss of or damage to the vessel as a consequence.
The clauses were issued on 1 October 1983 and had to be read with the marine authorities then known to the market. In The Mandarin Star and The Salem, “persons acting maliciously” had been treated as requiring spite, ill-will or the like, not merely a wrongful act done for gain whose side-effect was loss. Lord Mance concluded that clause 1.5 covers a person who acts with an element of spite, ill-will or the like towards the insured property, or at least towards other property or a person, and thereby causes loss of or damage to the vessel or cargo. It is not enough that a wrongful act makes loss foreseeable.
That test was not met. Detection and any resulting loss were the opposite of the smugglers’ aim. They meant to avoid detection, not to bring about the vessel’s detention or loss. Two later judgments of Colman J did not support a wider reading. He was deciding whether the cover included casual or random vandalism, not a crime committed with a quite different intention which might foreseeably lead the authorities to seize the ship. Nor did definitions of malice in tort or under Victorian criminal statutes supply the meaning of the 1983 clauses.
Clause 1.5 therefore did not apply. That was enough to dismiss the appeal. The loss was caused by detainment. Detainment is an insured peril under clause 1.2, and the agreed six-month period in clause 3 was satisfied, but this was detainment by reason of infringement of customs regulations and so fell within clause 4.1.5. Lord Mance regarded it as inconceivable that the result would have differed if the drugs had been found before the vessel sailed. A similar smuggling claim had already failed on that exclusion in The Kleovoulos of Rhodes.
The position if the smugglers had been acting maliciously
Lord Mance also considered the appeal on the assumption, which he had rejected, that the smugglers had caused the loss while acting maliciously. He agreed with Hamblen J that clause 4.1.5 can apply to a claim put under clause 1.5. Its language echoes clauses 1.2 and 1.6, but an owner should not improve the position simply by labelling the claim as a malicious act. To establish a constructive total loss the owners had to rely on detainment under clause 3, which is the very subject of the exclusion.
The exclusion applied where a real customs infringement caused the detention. The Court distinguished cases involving a fabricated offence or the misuse of state power.
Here the malicious act, if it was one, was the infringement of the customs regulations. There was no choice between two competing causes. The wording had to be applied in stages: first, whether there was prima facie a loss by an insured peril; then, whether the means of loss was detainment lasting six months; then, whether that detainment was by reason of a customs infringement. An exceptions clause affects what counts as the dominant cause, because the area naturally belonging to the excepted event must be given to it. The same loss can be caused by a malicious act and still arise from detainment for breach of customs regulations.
Where an insured loss arises from two concurrent causes, one insured and one excluded, the exclusion prevents recovery. The smugglers’ act would not by itself have caused this loss. Detection, detainment and its continuation for at least six months were equally essential. The Court rejected the argument that detainment was only a sequel to the original act. In Cory v Burr, barratrous smuggling created a liability to forfeiture, but it was the seizure that brought the loss into existence, and the capture warranty defeated the claim. The same reasoning applied here.
The exclusion applied to infringements by third parties as well as by an owner or crew member. The insurers did not have to establish complicity on the part of the assured.
Verdict: The Court unanimously dismissed the owners’ appeal. The smugglers had no malicious intent within the policy wording. Even on the alternative assumption that a malicious act contributed to the loss, the customs exclusion barred recovery.
Source: Navigators Insurance Company Limited and others v Atlasnavios-Navegacao LDA [2018] UKSC 26
