Transport, Trade and Logistics Update

Introduction

In March 2024 decision, the English Commercial Court upheld a claim under a war risk policy by a shipowner for the loss of its vessel that had been detained for “illegally parking” in territorial waters. The decision deals with several grounds advanced by the insurers for rejecting the claim, but is most helpful in its comments relating to what constitutes a fortuity in circumstances where the Master knew or ought to have known that he was anchoring illegally. The rejection of the insurer’s argument on this point highlights the fact that unlawful conduct on its own does not prevent the resultant consequence being fortuitous.

Background

The claim arose from what the court described as “illegal parking” of the mv Win Win, a Capesize bulk carrier. The vessel had anchored within Indonesia territorial waters off Singapore in a position which vessels had used as an anchorage for many years without permission and without sanction. The Indonesian Navy seized the vessel on 8 February 2019 and detained her for nearly a year. Her Master was prosecuted and found guilty of anchoring illegally. He was sentenced to seven months suspended for year and fined USD7 000. The vessel was one of a large number of vessels seized by the Indonesian Navy at the same time despite there being no precedent for this action.

The claimants advanced a claim of USD37.5 million against the defendant insurers under a war risks hull and machinery policy which included losses arising out of detention. The claimants asserted that the vessel became a constructive total loss (CTL) as a result of having been detained for more than six months.

The insurers rejected the claim on four principal grounds being:

1. the detention was not fortuitous because the Master and/or one of the owners knew or ought to have known that the vessel had anchored in Indonesian territorial waters and accordingly the detention was a consequence of their voluntary conduct in doing so;
2. the claim fell within an arrest exclusion to the policy;
3. the continued and lengthy detention was materially caused by the claimants’ unreasonable conduct in not securing the early release of the vessel from detention and accordingly was in breach of their duty to mitigate their loss; and
4. the material non-disclosure by the owners of the vessel entitled the insurers to avoid the policy.

The parties had agreed that: the vessel had anchored in Indonesian territorial waters without permission; her resultant detention was lawful and exceeded a period of six months; and that detention was not an ordinary judicial process and accordingly fell within the restraint or detention clause in the war risks policy. Insurers accordingly conceded that the requirements for CTL were established in principle.

The court, in upholding the claim under the policy dealt with the issues summarised below.

Insured peril/fortuity

The court accepted the evidence of the Master, owners and an expert that vessels had routinely anchored in that area for a long period without detention. Although the charts on board did not reflect the boundaries of Indonesia’s territorial waters, the court accepted that the Master or owners knew or ought to have known that she had anchored within Indonesian waters even though that area is bordered by three counties whose territorial sea boundaries are complicated. In commenting on the Master’s decision, the court held that:

“Fortified by his experience over the previous 20 to 25 years and the presence of numerous other vessels, he regarded this as a usual anchorage and simply did not apply his mind to the question of whether he was in territorial or international waters. I find it entirely plausible that in busy sea lanes such as these, he was more concerned with finding an anchorage which was safe from a physical and navigational point of view than a legal one.”

In upholding the principle that insurance is concerned with the risk or uncertainty of loss, the court held that this does not mean that coverage is limited to events which are unexpected or unforeseeable. Coverage can include loss caused by events which are both probable and foreseeable. The policy does not protect the insured agianst losses which are certain to result or which are caused by ordinary wear and tear or are deliberately caused by the insured. These principles were set out in a line of English cases culminating in the Cendor Mopu [2011] UKSC 5.

The insurers relied heavily on a decision in the Wondrous [1991] 1 Lloyds Rep 400 dealing with the detention of a vessel following the owners’ refusal to pay port dues where it was held that:

“How to characterise their limit of fortuity in this context is not easy. Had the owners asked themselves at the time of placing the cover or at the time of making the charterparty whether the detention … was to be anticipated or likely to occur in the ordinary course, they would have correctly answered that it was not. But on the other hand, where a situation comes about as a result of the voluntary conduct of the assured, it would not normally be described as fortuitous. It does not happen by chance, but by the choice of the assured. Put another way, it would be in the ordinary course that, of the owners of a vessel do not pay the port dues for which they are liable … the vessel will not be cleared. For the purpose of the law of insurance … a policy should not be construed as covering the ordinary consequences of voluntary conduct of the assured arising out of the ordinary incidents of trading; it is not a risk.”

The court held that the circumstances in the Wonderous were different to that in the mv Win Win because in the former, her detention was a consequence which can be accepted to flow in the ordinary course of events from a deliberate choice made by the insured, and accordingly those consequences are not fortuitous.

The Master may well have made a choice to anchor in that particular position, but he was not choosing to anchor inside territorial waters. That issue did not cross their minds and accordingly the choice of the insured did not relate to the territorial waters. The Master was unaware that he was making a choice which potentially carried a legal significance so even if he ought to have known these were territorial waters, his decision was at most, negligent and not a choice of the insured as contemplated in the Wondrous.

The court’s decision was influenced in part by the fact that vessels had anchored in that position (and the Master knew this) for decades without detention and accordingly the detention was not an inevitable consequence of the Master’s decision. In reaching its decision, the court held that:

“Thus, whilst detention was a permissible and possible consequence of the vessel’s choice of anchorage, and even foreseeable should anyone have cared to investigate the position under Indonesian law, the detention could in my judgment not be said to be an inevitable or even ordinary consequence in the circumstances prevailing at the time. The position might well have been different if there had been even a few arrests for illegal anchoring in previous years. Although, it would then be necessary to determine what level of arrests elevated detention to an ’ordinary consequence’”.

Exclusion for detention under customs or quarantine regulations and similar

The insurers relied on an exclusion contained in the American Institute Hull War Risks clause which provided that:

“This insurance does not cover any loss, damage or expense caused by, resulting from or incurred as a consequence of:

…

6. Arrest, restraint or detainment under customs or quarantine regulations and similar arrests, restraints or detainments not arising from actual or impending hostilities …”.

An addendum to the clause provided that:

“In the event that the vessel shall have been the subject of … detainment … and the assured, by reason thereof, has lost the free use and disposal of the vessel for a continuous period of six months then for the purposes of ascertaining whether the vessel is a constructive total loss, the assured shall be deemed to have been deprived of the possession of the vessel without any likelihood of recovery.”

In the absence of any direct authority under English or American law as to the meaning of the word “similar”, the court held that it was bound to interpret the policy in accordance with the ordinary principles of construction. This meant determining what a reasonable person with all the background knowledge which was reasonably available to both parties at the date of the contract would have understood the meaning of the exclusion to be.

The court held that:

“In the specific context of an insurance policy, it is, as I have noted above, necessary to construe any exclusions together with the insured peril so as to arrive at a coherent construction of the policy as a whole. I also accept that where there are alternative constructions, the fact that one of them deprives the policy of most of the cover which it would otherwise provide is a relevant factor in determining which of them is correct.”

The court found that the exclusion only applied to customs and quarantine regulations or similar, without stating what aspects must be similar. Although all government detentions are to some extent “similar” this would have the effect of categorising almost any detention as being similar or customs or quarantine law detention. This could not have been intended and there was no sufficient similarity between the vessel’s detention for anchoring illegally and a detention under the customs or quarantine law to make these detentions similar.

Sue and Labour and the duty to mitigate

The policy and section 78(4) of the Marine Insurance Act, 1906 imposed an express duty to avert or minimise a loss. This sue and labour duty is akin to the duty to mitigate and in order to rely on this ground, the insurers would have to show that the insured had failed to exercise its obligation to sue and labour and that caused the loss. The court found that unreasonable conduct is a necessary but not sufficient requirement for breaking the chain of causation.

In line with other decisions such as AMS Ameropa Marketing Sales AG & Another vs Ocean Unity Navigation Inc [2023] EWHC 3264 (Comm) which is discussed in our Big Read Book volume 16, the court held that: “action taken by an assured while in the grip of a peril will not be weighed in too nice a set of scales. Accordingly, even an error of judgment or negligence is unlikely to constitute a new intervening cause unless it is so significant as to displace the operation of the insured peril.” The court endorsed a finding in ABN Amro Bank NV vs Royal and Sun Alliance Insurance Plc [2021] EWHC 442 (Comm) where it was found that:

“The question is whether the insured failed to act to avert or minimise loss in circumstances where any prudent uninsured would have done so. If so, then the chain of causation between the insured peril and the loss will be broken.”

Following the vessel’s detention, her owners’ P&I Club and lawyers engaged with the Indonesian Navy to negotiate her release against payment of a fine or similar penalty. Those negotiations dragged on and the owners withdrew when it became clear that the vessel would only be released against payment of a bribe. Insurers had suggested that opening these discussions itself constituted a breach as it became inevitable that it would create expectations of a bribe. The court held that it was not unreasonable for the insured to explore various possibilities of obtaining the release of the vessel from detention and that termination of those discussions was reasonable. The conduct of the insured was accordingly not in breach of the sue and labour clause.

Avoidance

In passing, the court rejected insurers final main argument that it was entitled to avoid the policy because a director of the owning company had failed to disclose to insurers that he was facing charges relating to a drug shipment on another vessel owned by his company. Those charges had been dormant for several years at the time the mv Win Win was insured. The court found that the insured had neither actual nor constructive knowledge of the charges and that in any event, the risk under the policy was not materially affected by these facts.

Conclusion

The court’s analysis of what constitutes a fortuity importantly finds that unlawful conduct on its own does not prevent the consequences of that conduct being fortuitous. It also reminds those involved in insurance of the process to be followed in interpreting an exclusion clause within the context of the policy as a whole. Finally, it reiterates that the obligation of the insured to mitigate its loss or act in accordance with the sue and labour clause must be assessed on the basis of whether or not its conduct was reasonable in all of the circumstances.