Supplementary Nature of Mortgagees’ Interest Insurance Affirmed

Piraeus Bank A.E. v. Antares Underwriting Ltd (The ZouZou) [2022] EWHC 1169 (Comm) 

 In practice mortgagee’s interest policies (MIPs) provide financiers (e.g. banks) a supplementary cover to the shipowner’s policies (marine and war risks) to ensure that the mortgagee will still have cover in the event of the cover is declined under owners’ policies for an insured risk by reason of: a) misrepresentation or non-disclosure; b) breach of a promissory warranty, c) the failure to exercise due diligence insofar as it is required under the owners’ policies d) the expiry of a time limitation period; and, even in case of a total loss where there is a judgment or award holding that the shipowner’s claim is not recoverable under the owner’s hull or war risk policies on the grounds that the loss has not been proved to have been proximately caused by a peril insured against, but is not otherwise excluded by any exclusion or provision. However, on the last point it needs to be stressed that there will be no cover under MIPs, if the loss is proximately caused by a peril excluded from cover under owners’ policies.   

In the present case, the mortgaged ship was detained in Venezuela in late August 2015 on the suspicion that the crew had attempted to smuggle part of a cargo of high sulfur diesel oil by diverting it from the cargo tanks nominated for loading to other tanks through the cargo lines. Four members of the crew allegedly involved in this smuggling attempt were tried and acquitted. The ship was detained for about 14 months and two weeks before its release, the owners tendered a notice of abandonment (NOA) and sought indemnity under its war risk policy for constructive total loss. The vessel’s war risk insurer (Hellenic Club) declined indemnity on the basis that an excluded peril (cl. 3.5 which excluded cover for losses arising out of steps taken “under the criminal law of any state”).

The mortgagee bank turned to mortgagees’ interest insurer, which insured the risk under a standard MIP, and claimed their net loss (indemnity quantified by reference to the outstanding indebtedness).  The mortgagee’s interest insurer declined the claim on various grounds which will be briefly discussed below.                   

The cause of loss is an excluded peril under the war risk policy

Whilst providing cover for seizure, arrest and detention and the consequences thereof, there was an exclusion in the policy stipulating that loss arising out of action taken “under the criminal law of any state” would not be covered under the policy. The mortgagee bank claimed that this exclusion did not apply as detention was unlawful. Relying on the expert advice, the Court was able to find that the detention was carried out in line with Venezuelan criminal law by the order of the Venezuelan Criminal Court and was accordingly lawful. Therefore, the exclusion certainly was relevant in this context.

The alternative argument of the bank was that the exclusion did not apply as the owners themselves were not guilty (or alleged to be guilty) of the offence. The Court, rightly, in the opinion of the author, rejected this alternative argument stating that the exclusion in question did not draw such a distinction (i.e. excluding losses arising out of steps taken under the criminal law of any state only when the assured themselves are involved in the criminal activity and not so when this is not the case). This is in line not only with literal wording of the clause but also the decision of Hamblen J in Atlasnavios-Navegação v. Navigators (The B Atlantic) [2014] EWHC 4133 (Comm) in connection with the equivalent exclusion in the Institute War and Strikes Clauses.

Additional coverage provided by the MIP in question?

When setting out the coverage terms, clause 1 of the policy provided for an indemnity in the event of loss, damage to, or liability, arising in connection with the vessel:

  1. Which prima facie would have been covered by the Owners’ policies but for any act or omission by the Owners (amongst others and/or their servants and/or their agents- referred to as the “Relevant Parties”; or
  2. Which occurred because of “any alleged deliberate, negligent or accidental act or omission … of any of the Relevant Parties”.    

The Bank’s alternative argument was that it was entitled indemnity under cl 1(ii) as the wording of this clause did not expressly cross-refer to the owners’ insurance policies thus providing wide coverage for any loss or damage to the ship as a consequence of any act of omission by any of the crew or any other servant or agents of the owners or charterers or by any allegation of such and act or mission. The Court rejected this argument as well stressing that cl 1(ii) could not be construed in isolation and was dependent on the war risk policy. Put differently, it was held that the words “relevant party” in this clause referred to the owners’ or their employees/agents acting in the context of the relevant insurance contract (war risk insurance) and claim only. This means that this clause only applies in a case where the loss of the ship is prima facie covered by the owners’ insurances and the owners’ insurers refuse to pay by alleging involvement of the owners or agents in the loss.

As highlighted by the Court, a contrary interpretation would have led to outcomes which would have been wholly uncommercial, such as:

  1. The bank recovering losses which would have never recovered under the owners’ policies as they would have been excluded;
  2. The bank recovering sums far in excess of anything recoverable under the owner’s policies, even if covered; and
  3. The bank recovering from mortagees’ interest insurers even where the loss had already been paid under the owners’ policies.

Was there a loss under the war risk policy in any event?

Most war policies contain a detainment clause, and the owner’s war policy here was no exception, which provided that the vessel will be deemed to be a constructive total loss (CTL) when the owner is deprived of possession of the insured vessel for a period of 12 months. Although, the vessel in question was detained by Venezuelan authorities more than 12 months in the present case, given that the detention was lawful and this was an excluded peril under the relevant war risk policy, there can be no prospect of claiming CLT unless it was found that the detention was in fact unlawful. The Court’s finding that the vessel had not been detained unlawfully at any point meant that there was no CLT under the detainment clause.   

What is the key message coming out of the case?

From the perspective of the application of principles of legal construction, the outcome of the case makes sense and does not break any new ground. However, the judgment reiterates the point that MIPs are secondary in nature and issues a stark warning to financiers that there might be several instances where they might fail to recover under their MIPs. Where, for example, drugs placed by criminal carters on board of a ship which eventually lead to detention of the vessel in question, even if the owners are not involved in this criminal activity, the resulting loss will be excluded from most war risk policies given that there is often an exclusion for loss resulting from “detainment… by reason of infringement of any customs or trading regulations in standard war policies (see The Kleovoulos of Rhodes [2003] 1 Lloyd’s Rep 138) and The B Atlantic [2018] UKSC 26). This would mean that any claim of a bank under a MIP will also fail. Similarly, claims airing out of any detention for alleged breach of government sanctions are likely to be excluded from war risk policies as there is an exclusion for loss, damage, cost or expense arising out of “ordinary judicial process” (see cl 4.1.6 of the Institute War and Strikes Clauses- Hulls- Time (1/10/1983). The banks, therefore, need to appreciate the limitations of standard MIPs and consider negotiating tailor-made coverage clauses in their policies.            

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