Supreme Court dismisses appeal in the Venezuela drug smuggling saga

Supreme Court London

Navigators Insurance Company Limited and others v Atlasnavios – Navegação, LDA (B Atlantic) [2018] UKSC 26

In a judgment of importance to the marine war hull market, the Supreme Court unanimously dismissed the Owners’ appeal (with Lord Mance delivering the judgment) holding that the war risk insurers (“Insurers”) were not liable for the total loss of the B Atlantic (the “Vessel”), which was confiscated by the Venezuelan authorities after cocaine was found strapped to her hull. 

The Supreme Court held that the Vessel’s loss was not caused by the peril relied upon by the Assured (“any person acting maliciously”) but simply by detainment by reason of breach of customs regulations, which was a risk expressly excluded by the insurance policy (the “Policy”).

The background facts 

On 16 August 2007, the Vessel was detained and the crew arrested after an underwater inspection of the Vessel in Lake Maracaibo revealed cocaine strapped to her hull below the waterline.

During an underwater survey on 12 August, divers had noticed various objects not belonging to the Vessel inside a space behind a loose grille on the hull. The Master had been told to have the grille re-welded because of the risk of drug smuggling. He failed to do so because the Vessel was due to sail that night. In the event, the Vessel did not sail as scheduled because there had been a miscalculation of her draft and consequently a short-loading. During a second underwater inspection the following day, the divers discovered three bags of cocaine weighing 132 kg strapped to the Vessel’s hull.

The presence of drugs constituted a breach of the Venezuelan 2005 Anti-Drug Law and the Master and Second Officer were charged with drug offences. The Vessel was detained. In August 2010, the two officers were convicted and sentenced to nine years imprisonment, and the court then ordered the final confiscation of the Vessel. The Owners brought a constructive total loss claim after expiry of the six month period agreed in the amended detainment clause in the policy.

The Insurers did not suggest that the Owners were implicated in the activities in any way and the case in the London litigation proceeded on the basis that the Master and Chief Officer were wrongly convicted in Venezuela.

The Policy notably provided cover against loss of, or damage to, the Vessel caused by any person acting maliciously or detainment. It however excluded loss, damage, liability or expense arising from detainment or confiscation by reason of infringement of any customs or trading regulations (the “Exclusion”).

The Commercial Court decision

It was common ground between the parties that the act of concealing the large quantity of cocaine was a malicious act, but the Insurers declined the claim on the basis that the confiscation was caused by breach of customs regulations and thus excluded.

The Court held that the words of the Exclusion were subject to an implied limitation. As a matter of construction of the Policy terms, the Exclusion was not engaged where the infringement was, as in this case, merely a manifestation of malicious actions of third parties that were covered by the Policy. As a result, the Insurers were liable for the loss, although it was conceded that if this construction of the Policy was wrong, the Exclusion would apply to exclude the loss.

The Court of Appeal decision

On appeal, the Court of Appeal held that both the malicious act, which was common ground, and the resulting customs breach were proximate causes of the loss. As a result, subject to the construction argument, this was a simple case of a loss caused by a covered peril and an excluded peril. As to that construction argument, the Court of Appeal concluded that the first instance court had been wrong to decide that the Exclusion did not operate to exclude liability because: (1) the perils and exclusions together expressed the ambit of cover; (2) they had to be construed together; (3) each had to be looked at in light of the other; and (4) it was wrong to start from the premise that one has primacy over the other.

Consequently, following the established principle that a loss will not be covered by a policy of insurance if the loss is proximately caused by a covered peril and an excluded peril, the Insurers were not liable.

The Supreme Court decision

During the course of the hearing, the Supreme Court decided to re-examine the premise upon which the parties had proceeded so far, namely that the attempted use by unknown third parties of the Vessel for smuggling involved the third parties “acting maliciously”, and invited the parties to make submissions on this point.

Contrary to the common ground between the parties at First Instance and in the Court of Appeal, the Supreme Court held that the Vessel’s loss was not caused by “any person acting maliciously”. The court held that an element of spite, ill-will or the like was required for a “malicious act” to be established but the concept was not otherwise limited to conduct directed towards the insured interest. Based upon the leading authorities on the meaning of “malicious act” available to the draftsman of the 1983 Institute War and Strikes Clauses, which the Policy incorporated, the intention must have been for this expression to apply to persons whose actions were aimed at causing loss of or damage to the insured property, or other property or persons as a by-product of which the insured property was lost or damaged. Although the risk that concealed drugs may be detected was foreseeable, their detection and any consequent loss of the Vessel were, in the words of the court, “the exact opposite of the unknown smugglers’ aim”, which was to avoid detection. Therefore, in the court’s view, the proximate and only cause of the loss was the detainment of the Vessel by reason of infringement of the customs regulations, which was a risk expressly excluded under the Policy, thereby rendering the Insurers not liable for the total loss.

Although it was not necessary for the court to do so, it went on to consider what the outcome would have been had the “malicious act” peril been established on the facts. In this respect, the Supreme Court arrived at the same result as the Court of Appeal, holding that the loss would still have been excluded as arising, at least concurrently, from detainment due to breach of customs regulations, an expressly included peril.

Comment

This is a welcome decision from the Supreme Court, which reinstates the meaning of the “malicious act” peril to that established by the jurisprudence which the drafters of the 1983 War Clauses must have had in mind. Through re-examination of what was a common ground between the parties, the court avoided the risk of setting a precedent based on a false premise derived from a broader approach adopted in more recent case law, albeit in a fact-specific context. The remainder of the decision, which is obiter, is relatively uncontroversial and in line with the Court of Appeal’s findings.

Joe O’Keeffe
Mateusz Bek