Following the recent decision in London in the B Atlantic, this article considers whether the assured would have had their claim for a CTL paid had the B Atlantic been insured under the Nordic Plan.

 

What the English Courts decided under the Institute War Risk Clauses

For the purposes of determining liability in the B Atlantic it was assumed by the Court of Appeal in London that the master and second officer were wrongfully convicted for being complicit in the concealment of 132 kg of drugs behind a grill on the hull of the vessel. That will be of little comfort to them given they were sentenced to nine years in a Venezuelan prison. The vessel itself was detained for nine months by the authorities and subsequently abandoned. The owners claimed for a CTL under their war risk policy.

 

The issue for the High Court was whether the owners could recover for the loss of the vessel under a standard war risk insurance policy and in particular clause 1.2 of the Institute War Risk Clauses which covers losses by:

  • “… capture seizure arrest restraint or detainment” (where the latter was defined as a detention lasting over 6 months; or
  • “any person acting maliciously”

 

The insured risks were subject to a number of exclusions, one of which was for detention caused:

 “… by reason of infringement of any customs or trading regulations.”

 

At first instance, the High Court found that where there was a malicious act (which includes the hiding of drugs on the hull of the vessel) there must be, by implication, a limitation on the scope of the exclusion. In other words, the infringement of the customs regulation arose directly from the malicious act itself (what the Court called a “mere manifestation”) and the exclusion did not apply. Accordingly, the Court found in the assured’s favour.

 

The underwriters successfully appealed the matter. The Court of Appeal decided that the policy was to be read in a businesslike way or as war underwriters put it (in “everyday language”): they do not cover incidents caused by crew sickness or smuggling. The Court found that the concealment of drugs was malicious. It was also an infringement of customs regulations. In terms of causation, the loss was caused by the concealment and then the vessel’s subsequent detention. It was the concealment that was the infringement, but because the detention was excluded the claim failed. It was not inevitable that the drugs would have been found.

 

The question for the Scandinavian market is:

Would the position have been any different had the policy in question been under the Nordic Plan?

 

General position under the Nordic Plan

Contrary to the English hull conditions which are based on the named perils principle, the Nordic Plan covers all risks not expressly excluded (see clause 2-8). However, this point of departure does not apply for the War Risks cover. Clause 2-8 contains, inter alia, the following exclusion applying to Hull & Machinery insurance:

“…intervention by a State power. A State power is understood to mean individuals or organisations exercising public or supranational authority …”

 

The B Atlantic was detained and subsequently confiscated by the Venezuelan authorities. Thus, it follows the loss caused by the detention/confiscation of the vessel is excluded and falls outside the scope of the Hull & Machinery insurance. The question is thus whether a Norwegian court would find that the intervention or detention by the state falls within the War Risks insurance.

 

Contrary to the Hull & Machinery insurance, the War Risks insurance builds on the named perils principle, see clause 2-9. The scope of cover comprises, inter alia, losses by:

“… capture at sea, confiscation and other similar interventions by a foreign State power”

(clause 2-9(1)(b)).

The Venezuelan government is a “foreign State power“, and its confiscation of the B Atlantic pursuant to the court’s order falls within the wording in clause 2-9(1)(b). Confiscation of a vessel following smuggling would, in theory, be recoverable as a total loss under the War Risks insurance.

 

However, in the Nordic Plan’s commentary, it is suggested that a loss incurred due to a confiscation arising from a breach of a state’s customs legislation, falls outside the risks covered. The question then is whether the exclusion applies to all cases where the state has confiscated a vessel as a result of customs legislation, or whether there is a distinction between bona fide customs enforcement and something more contrived which actually arises from political reasons or an abuse of authority.

 

Considering relevant awards

There are no authoritative sources which help draw the line between these kinds of interventions, however, some guidance can be found in arbitration awards where vessels have been detained.

 

The Germa Lionel (1985) concerned an English flagged vessel which called at Tripoli, at a time when the relations between the UK and Libya were tense and it was boarded by military troops for unknown reasons. The crew members were physically abused with one tragically losing his life. After about two months, the vessel was released against compensation for the authorities’ expenses related to the detention. The detention here clearly exceeded what could be called enforcement of the state power’s ordinary legislation and the tribunal held that the loss was covered by the policy.

 

This is contrasted with the decision in the Chemical Ruby award (1988), where the detention claim was not covered. In that case the vessel arrived at Lagos to discharge a parcel of soybean oil. On board was a separate parcel of oil due to be to be discharged elsewhere which was contaminated. The Nigerian authorities suspected that the contaminated oil would be discharged in any event and took pre-emptive action against the vessel. The master and officers were arrested, and the passports of the crew were confiscated. Two months after the detention, representatives of the civil and military authorities commenced inspection of the vessel’s cargo. Finally, after almost six months, the vessel was allowed to depart.

 

The problem for the owner was that there was no overt political motive to what was happening. Instead the vessel was subject to a lengthy bureaucratic and overly administrative process. The tribunal reluctantly found that the lack of political motive meant that the War Risks policy did not apply even if the detainment of the vessel was due to overly ineffective bureaucracy and administration, as in the Chemical Ruby, or in cases where the detainment was due to corrupt practices such as excessive fines or demands for bribes. However, there was enough uncertainty in the conclusions reached to suggest that in any future case where the facts show the state to have acted unreasonably and in contravention of international legal principles then that may be enough to allow a claim under the Nordic Plan’s War Risks insurance. This approach is supported by legal commentary.

 

Applying the Scandinavian view on the B Atlantic

Turning to the case of the B Atlantic, the owners claimed that the decisions of the Venezuelan judges were “perverse and wrong”, and that they were a result of political interference. This was dismissed by the English Court.

 

The prolonged detention of the B Atlantic thus seems to fall outside the scope of cover reflecting the decision in the Chemical Ruby. Even if it is assumed that the crew were innocent, no political motive on the part of the authorities could be ascertained. Further it does not seem that the Venezuelan authorities can be said to have abused their authority. The vessel was confiscated according to Venezuelan customs law.

 

Conclusion

The Nordic Hull Plan’s War Risks cover and the Institute War Risk Clauses are both based on the named perils principle. The ambit of cover for loss due to the authorities’ detention/confiscation of the vessel in connection with enforcement of customs legislation is expressed differently. Nonetheless, the result in the B Atlantic would have been the same regardless of which policy terms had been in place.

 

This article was produced jointly with Wiersholm in Oslo.

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Partner Erik Blaker

 

 

 

 

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Associate Ignazio Azzari Støen