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Cathryn Houston, trainee solicitor at CMS, considers the case of Navigators Insurance Company Ltd & Ors v Atlasnavios-Navegacao LDA (formerly Bnavios-Navegacao LDA), which is due to be heard by the UK Supreme Court on Tuesday 20 March 2018:

On 20 March 2018, the UK Supreme Court (sitting in a panel comprising Lord Mance, Lord Sumption, Lord Carnwath, Lord Hughes, Lord Briggs) will hear this appeal relating to the interpretation and interplay between clauses of the standard form Institute War and Strikes Clauses 1/10/83. The Supreme Court will consider whether the exclusion clause 4.1.5 for loss arising from detainment by reasons of infringement of customs regulations, operates to exclude cover where the infringement of customs regulations occurred due to an insured peril.

The facts

The owners of a vessel named the “B Atlantic” took out insurance with war risk insurers on the Institute War and Strikes Clauses 1/10/83 with additional perils (“the Policy”). On 13 August 2007, in a Venezuelan port, an underwater inspection of the vessel uncovered 132kg of cocaine strapped to its hull by an unknown person. This contravened Venezuelan law and as a result, the local authorities detained the vessel and convicted the Master and Second Officer. The owners eventually abandoned the vessel and brought a claim under the Policy for the constructive loss of their vessel due to detention for longer than 6 months under clause 3.

The insurers accepted that the vessel constituted a constructive loss, but denied coverage arguing that clause 4.1.5 excluded loss or damage arising from detainment by reason of infringement of customs regulations. As seen from previous case law on the point, the orthodox position in insurance law is that the customs regulation exclusion has held for drug smuggling cases.

Initially, the owners advanced two arguments in support of the inapplicability of the exclusion clause. First, the detention and confiscation of the vessel was due to political interference in the judicial process in Venezuela, not due to an infringement of customs regulations. Second, on a proper construction of the policy clause 4.1.5 did not exclude loss or damage arising from the malicious acts of third parties, which was an insured peril under clause 1.5. The task for the trial Judge, the Court of Appeal and now the UK Supreme Court is how to square these two clauses.

Preliminary hearing

In March 2012, Hamblen J heard a trial of preliminary issues. Amongst other matters, Hamblen J ruled that the exclusion contained in clause 4.1.5 is capable of applying equally against all insured perils. The owners had argued it applied exclusively to the insured peril contained in clause 1.2, which covered loss or damage caused by detainment. The Court of Appeal confirmed Hamblen J’s decision and dismissed the owners’ cross appeal on this point.

Decision at first instance

In the High Court ([2014] EWHC 4133) Flaux J rejected the owners argument alleging political interference, but decided that the loss was covered by the Policy. He held that:

“[U]pon the correct construction of the policy and reading the malicious acts cover and the exclusions together, “infringement of customs regulations” in the exclusion does not include an “infringement” which is itself no more than the manifestation of the relevant act of third parties acting maliciously and the exclusion is subject to that limitation”.

Flaux J resolved the tension between the clauses by way of construction rather than causation. He adopted a holistic approach, which took account of the “spirt of the policy” [256]. In effect, Flaux J assigned a hierarchy of priority between the relevant clauses, so that any exclusion clause based upon infringement of customs regulations must be deferred to the “spirit” of the insuring cause.

It was common ground between the parties that the concealment of cocaine in the vessel’s hull constituted a malicious act. Further, there was no suggestion by the Insurer that the owners and crew were complicit in the smuggling. The litigation proceeded on that basis. Indeed the Insurer conceded that in the situation of a ‘put-up job’, where the authorities deliberately planted the drugs in order to confiscate the vessel, the exclusion would not apply [232]. In principle, Flaux J could see no reason for limiting the exclusion in that instance and not the present case [257]. Flaux J held that the exclusion clause was subject to an implied limitation that it did not apply where the infringement was no more than the manifestation of the malicious acts of third parties.

As Flaux J preferred construction to a causative analysis, so he did not need to make a finding on the proximate cause of loss. In his obiter remarks, he commented that the Owner’s alternative argument (that the exclusion does not apply where the proximate cause of loss is the malicious act) had “considerable force”. Nevertheless, he acknowledged the difficulty in distinguishing the case from the authorities on the point, which do not support liability [261].

The Court of Appeal

In the Court of Appeal ([2016] EWCA Civ 808) the insurers appealed against Flaux J’s finding on construction. In his leading judgment, Clarke LJ (with whom Sir Timothy Lloyd and Lord Justice Laws agreed), overturned the decision and held that there was no cover under the Policy.  Clarke LJ favoured a causative analysis that did not require implication of a limitation. He stressed that the court should be reluctant to “do some form of writing in” clauses that are drafted for use in global insurance contracts [47].

The court held that exclusions must be given a ‘business-like’ interpretation in the context in which they appear. The court unpacked this term noting, “the question of what is business-like depends on whose business is being considered”. The court added that “there is nothing unbusinesslike in the insurers’ position event though it is favourable to them”. In short, the literal application of the clause was not sufficiently unbusinesslike to justify the court departing from it.

In reaching his conclusion, Clarke LJ focused instead on identifying the proximate cause of the loss. He concluded that the loss was caused by a combination of (a) the malicious act (the smuggling) and (b) the subsequent detention of the vessel (which was due to the malicious act and constituted a customs infringement). He held both were proximate causes, as they each needed to operate for the loss to occur. Without the detention, there would be no loss, but without the malicious act, there would be no cover [32]. Clarke LJ held, applying the principles in Cory v Burr (1883) 8 App Cas 393 and Wayne Tank and Pump Company Ltd v Employers Liability Assurance Corporation Ltd [1974] 1 QB 57, where there are two proximate causes, one that is covered and the other subject to an exclusion, liability will not arise.

Clarke LJ gave three key reasons in support of his conclusion:

  1. The structure of the Policy expressly stated that the insured perils were subject always to the exclusions. The exclusions and perils must be read together to express the ambit of cover. Clarke LJ rejected the notion of a hierarchy between clauses, as “you do not start from the premise that one [clause] has primacy over the other [34]”.
  2. Following on from Hamblen J’s preliminary ruling, that the exclusion clause is capable of applying equally to all insured perils, there was no reason to conclude that the parties cannot have intended that cover for malicious acts would be excluded, if the malicious act in question constituted a customs infringement [35].
  3. Although detention does not always involve smuggling, it is the “paradigm case” in which detention occurs by reason of customs infringement. Clarke LJ referred to a number of cases where no distinction had been made between smuggling and an infringement of customs regulations [36].

The UK Supreme Court’s task

The Supreme Court will have to consider whether the Owner does is in fact have a successful case for construction or implication into the Policy. Further, the court will have an opportunity to assess Clarke LJ’s foregoing analysis on the proximate cause of loss. In respect of the later, the body of case law predominantly supports the applicability of the exclusion clause. The UK Supreme Court must consider whether this would be an opportune time to develop the law or reconfirm that smuggling drugs is not a war risk under the standard form Institute War and Strikes Clauses 1/10/83.