The New Warranty Regime Tested in A Common Law Court   

PT Adidaya Energy Mandiri v. MS First Capital Insurance Ltd [2022] SGHC(I) 14; [2022] 2 Lloyd’s Rep 381

Factual and Contractual Matrix

The assured operated an unmanned single point mooring buoy (SPM) at a gas field which was moored to seabed by nine set of chains at three locations on its skirt area. The insurance policy provided cover for physical damage to the SPM on total loss basis only with an insured value of US$ 4, 700,0000. The policy, inter alia, contained two warranties:

Clause 1- “The Insured Equipment is only to be operated by and under the supervision of suitably trained and authorised personnel…”

Clause 8- “Suitable precautions and preservation/maintenance measures to be adopted when storing, handling, transporting and operating Insured Equipment.

The policy was subject to English law as amended by the Insurance Act (IA) 2015. It also contained a clause to the effect that the assured should notify the insurer within 30 days of becoming aware of any incident giving rise to a claim which may be covered under the policy.   

Between 1 and 13 July 2018, several collisions between the SPM and a crude oil tanker (The Bratasena) occurred during loading operations leading to the flooding of the SPM’s compartments. Emergency repairs were carried out in August/September 2018 and further repairs were made in situ in December 2018. The SPM received further repairs in May/June and November 2019. The assured claimed that the SPM was a constructive total loss (CTL) by tendering a Notice of Abandonment (NoA) on 22 May 2019. The assured also claimed expenses incurred to prevent the SPM from becoming a total loss as sue and labouring expenses. The assured’s indemnity claim was rejected by the insurer on various grounds mainly due to breach of marine warranties and procedural issues. The assured’s claim for sue and labouring expenses was also rejected by the insurer. The assured brought the current proceedings against the insurer before the Singapore International Commercial Court as per jurisdiction agreement in the contract.

Breach of Warranty

Sir Jeremy Cooke IJ, was of the opinion that both of the warranties in the contract were breached. The assured was in breach of Clause 1 as no evidence was presented showing that the crew was adequately trained to operate the insured equipment. It was also held that there was a breach of cl. 8 as there was no static tow in place to ensure that The Bratasena did not surge into the SPM. Moreover, it was found that there was no 24/7 watchkeeping during loading operations which meant another failure in the provision of suitable precautions and preservation measures. It was also found that the crew’s failure to notify the assured of every contact with the SPM constituted a further breach as that prevented any corrective measure taken.

Having established that both cl 1 and 8 were breached, the trial judge held that the cover was suspended at the time of the loss by virtue of s. 10(2) of the IA 2015. It was also held that s. 11(3) of the IA 2015 could not assist the assured here as there was no prospect of the assured showing that non-compliance with the warranties did not increase the risk of the loss which actually occurred in the circumstances which it did occur.

Other Defences Raised by the Insurer

The clause requiring the assured to notify the insurer within 30 days of becoming aware of any incident giving rise to a claim which may be covered under the policy was held to be a condition precedent to the liability of the insurer. It was held that this clause was breached (which barred recovery) as the assured even though by 17 July 2018 was aware that there had been several collisions between the SPM and The Bratasena, gave no notification to the insurer until 5 September 2018.    

Agreeing with the contention of the insurer, the Court also found that the SPM was not a constructive total loss as the repair costs (estimated to be around US$ 2 million by the insurer’s expert and US$ 3.2 million by the assured’s expert) did not exceed the insured value under s. 60(2)(ii) of the Marine Insurance Act (MIA) 1906. It was also held that (even if the repair costs had exceeded the insured value of the SPM), the assured could not treat the loss as constructive total loss as it failed to tender NoA within a reasonable time (as required by s. 62(1)(3) of the MIA 1906). The trial judge stressed that NoA was not tendered until 22 May 2019 even though the temporary and permanent repairs required to preserve the vessel from being a total loss had been completed by mid-December 2018.  Sir Jeremy Cooke IJ was convinced that the assured had waived its right to abandon the SPM to the insurers as it sold the equipment in June 2019 for US$ 400,000 at an undervalued price on the premise that it was a liability, but it kept operating it following the collision and kept earning a revenue. All these inconsistent actions pointed to the Court that the assured was dealing with SPM for its own account throughout so its offer to cede its interest in the SMP to the insurer was taken to have been withdrawn.   


The assured’s claim for sue and labouring costs were mostly rejected. By virtue of s. 78(3) of the MIA 1906, to qualify as a sue and labour expense, it is necessary to show the assured that the expenses were incurred for the purpose of averting or minimising a loss to the insured property. This puts a serious limit on a policy like this one which provides cover on “total loss basis” only allowing the assured to claim costs that had been spent to prevent the insured property from an immediate risk of total loss as sue and labouring expenses. On that basis, the Court held that most of the expenses were not recoverable as sue and labouring expenses. More precisely:

  1. Replacement of the mooring hawser was not incurred to preserve the property from total loss;
  2. Inspection costs of the mooring chain, SPM riser and the pipeline end manifold, had no influence on the loss;
  3. Effecting permanent repairs (especially in 2019) did not qualify as there was no longer a risk of sinking.

The only expense recoverable as sue and labouring expense was the inspection costs and repairs to prevent further flooding immediately after the collisions in July 2018 (US$ 20,875 on the estimate of the insurer’s expert).

Comment

The Court’s findings on the CTL issue and sue and labour clause do not break any new ground. What we see here is a very good application of established legal principles to the facts of the case with the assistance of insurance experts.

However, given that this is the first case (known to the author) that gives judicial airing to the changes introduced on the traditional warranty regime by the IA 2015 (in addition to academic scrutiny carried out- see, for example, observations of the author in 3rd edition of Warranties in Marine Insurance (2017, Routledge), his contribution to Cambridge Law Journal [2016] “Risk Control Clauses in Insurance Law” pp, 109- 127, Professor Clarke’s observations published in The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law (Informa Law, 2017), pp. 54-59 comments of R. Merkin and Ö. Gűrses, “The Insurance Act 2015: Rebalancing the Interests of the Insurer and the Assured” (2015) 78 MLR 1004), it is worth commenting on that aspect of the case.

The case is a very good reminder that when dealing with a warranty that requires the assured to adopt safety standards and practices (such as cl 8 here),  when such standards are not maintained by the assured, it will be very difficult (if not impossible) to convince the Court that non-compliance with such warranty could not have increased the risk of loss which actually occurred in the circumstances in which it occurred (s. 11(3) of the IA 2015). From the way the arguments were presented to the judge, it is also evident that (as predicted by academics) the effect of s. 11(3) is to introduce a test of causation from the backdoor! Inevitably, the courts will be drawn into an enquiry as to whether the loss would have happened in the manner it did, had the safety standards been appropriately adopted.    

One should also bear in mind that the effect of s. 11(3) could be negated altogether (i.e., the assured could be prevented from arguing that the breach of warranty did not contribute to the occurrence of the loss so that it should not have any detrimental impact on coverage) if it is drafted in a way that serves the purpose of describing the limits of the cover as a whole. A warranty of that nature is excluded from the application of s. 11(3) on the premise that such a term will have a general limiting effect not linked to a specific risk (s. 11(1) stipulates: “This section applies to a term (express or implied) other than a term defining the risk as a whole,…”). Unfortunately, this matter was not deliberated by the trial judge in depth, but it could be plausibly argued that cl. 1 is such a term as it requires the insured equipment to be operated only by and under the supervision of suitably trained and authorised personnel. On that basis, it can be viewed as going to the definition of the insured risk rather than simply being a term designed to reduce the risk of a particular type of loss. If so, regardless of whether breach of cl. 1 has contributed to the loss, the risk is suspended the moment the insured equipment is operated by personnel who are not adequately trained until that situation is rectified (as long as, of course, the breach does have a lasting impact on the risk (s. 10(2) of the IA 2015). Lack of discussion on the nature of cl. 1 did not here have any impact on the outcome as the judge was convinced that non-compliance with the warranty did, in fact, increase the risk of loss which actually occurred in the manner in which it occurred but such an analysis would have helped us to see how judges actually deal with the issue of identifying whether a warranty is one that “describes the risk” (which is excluded from the application of s. 11(3) of the IA 2015) or is one which is designed to reduce the risk of “loss of a particular kind” or “loss at a particular location” or “loss at a particular time”.     

New “Consumer Duty”- Would It Affect Insurers Utilising AI and Algorithms?

By 31 July 2023, all retailers in the UK must comply with a new “Consumer Duty” when selling new and existing products and services to their customers (the date of implementation is 31 July 2024 for firms offering closed products and services). This Duty has been introduced by the Financial Conduct Authority (FCA) with an amendment to existing Principles for Business (PRIN) and intends to impose a higher standard of behaviour for firms interacting directly or indirectly with retail customers. The scope of the duty has been extended to the regulated activities and ancillary activities of all firms authorised under the Financial Services and Markets Act 2000 (FSMA), the Payment Services Regulations 2017 (PSRs) and E-money Regulations 2011 (EMRs), and on that basis applies not only to insurers but also to insurance intermediaries (e.g., insurance brokers).

What Does the New “Consumer Duty” Entail?

In a nutshell, the new “Consumer Duty” requires retailers to take a more proactive approach and put their customers’ needs first. It should, however, be noted that the duty is neither a “duty of care” nor a “fiduciary” one. It also does not require retailers to provide advice to customers.  Although the Duty does not give customers a private right of action, it enables the FCA to investigate any allegation of breach and the FCA could accordingly issue fines against firms and secure redress for customers who have suffered harm through a firm’s breach of the Duty.

More specifically, the Duty introduces:

  1. An overarching customer principle that firms must act to deliver good outcomes for retail customers.
  1. This overarching principle requires firms: i) to act in good faith; ii) to avoid causing foreseeable harm; and iii) to enable and support customers to pursue their financial objectives. No firm definition of the term “good faith” in this context has been provided but the FCA put forward some examples where a firm would be judged not be acting in good faith. Accordingly, an insurance firm will not be acting in good faith if it sells insurance to a customer by taking advantage of his/her vulnerability. Similarly, an insurance company will not be acting in good faith if it exploits its customers’ behavioural bias- i.e. renewing a policy automatically without reviewing the details of any revised terms or endorsements as well as any changes to excess or premiums introduced by the policy.    
  1. The Duty focuses on four outcomes (products and services, price and value, consumer understanding and consumer support) and requires firms to ensure consumers receive communications so that they can understand products and services that meet their needs, offer fair value and the support needed to consumers.

The Duty, therefore, will require insurers to reflect on how they assemble, sell, market insurance products to their customers and what kind of support they provide to customers who make inquiries. The insurers are now under a statutory duty to act in good faith, avoid causing foreseeable harm and support their customers in the process of delivering these outcomes.      

Specific Implications for Insurance Companies- Especially Those Using AI and Algorithms

The insurers are already reflecting on how they present their policies and various terms in their policies. They will be expected to inform customers fully of the limits of cover (especially policy excesses). Similarly, any proposed changes to cover at renewal stage should be made clear to customers so that they are aware of the changes to their policy and scope of cover. Many insurers would tell you that these are the good practices that they have been implementing for some time anyway.

One area that insurers need to pay careful attention is the standard questions they expect potential customers to answer in cases where they utilise automated computer underwriting systems through which applications for insurance are evaluated and processed without the need for individual underwriter involvement. In some recent cases, the vagueness of such questions has raised legal issues (see, for example, Ristorante Ltd T/A Bar Massimo v. Zurich Insurance Plc [2021] EWHC 2538 (Ch)). For example, if a consumer had a “declined to quote” decision from a pervious insurer, how would s/he be expected to respond to a standard question on such an automated system asking him/her to specify whether s/he has been refused insurance previously? Would a standard customer expected to appreciate that “decline to quote” might not necessarily mean refusal of insurance? The insurers need to think how they phrase such questions, and it would be advisable in the light of the new Duty to provide additional explanation on such a question posed on an automated underwriting platform. 

However, more interesting questions might arise in cases where insurance companies utilise AI and algorithms for pricing, risk assessment and consumer support purposes.

Naturally, there is an expectation on any insurance firm that utilise AI in risk assessment process to ensure that the system in use does not inadvertently lead to discriminating outcomes and the new Consumer Duty amplifies this. That is easy to say but difficult to achieve in practice. It is well-known that it is rather difficult, if not impossible, when algorithms are used for risk assessment purposes to know what data has been used by the algorithm and what difference any factor made in such risk assessment (commonly known as the ‘black-box problem’). Insurers rely on programmers, designers and tech experts when they employ AI for risk assessment purposes and as much as they expect such experts to assist them in fulfilling their “Consumer Duty”, it is ultimately something they have very little control over. More significantly, it is rather doubtful that the FCA will have that degree of expertise and technical knowledge to assess whether an algorithm used could deliver good outcomes for the customers. To put differently, it is not clear at this stage whether the new Consumer Duty will in practice enhance the position of consumers when underwriting decisions are taken by AI and algorithms.

Another advantage that algorithms could provide to insurers is to differentiate in price not simply based on risk related factors but other factors (such as the tendency of an individual to pay more for the same product). If allowed or left unchecked, an algorithm by taking into account factors (i.e. number of luxury items ordered by an individual online), might quote a higher premium to an individual than it would have quoted for another individual with a similar risk portfolio. We have a similar problem here- could the algorithm be trained not to do this and more significantly how can a regulator check whether this is complied with or not?

Also, today many insurance companies use chatbots when interacting with customers. Given that the Customer Duty requires insurance companies to provide adequate support to consumers, it is likely that an insurer might fall short of this duty by employing a chatbot that could not deal with unexpected situations or non-standard issues. Checking whether a chatbot is fit for purpose should be easier than trying to understand what factors an algorithm has utilised in making an insurance decision. I suppose the new Consumer Duty would mean that insurers must invest in more advanced chatbots or should put in place alternative support mechanisms for those customers who do not get adequate or satisfactory answers from chatbots.

There is no doubt that the objective of the new Consumer Duty is to create a culture change and encourage retailers, and insurers, to monitor their products and make changes to ensure that their practices and products are “appropriate” and deliver good outcomes for customers. This will also be the motivating factor when insurers utilise AI and algorithms for product development, underwriting and customer support. However, it is also evident that the technical expertise and knowledge within the insurance sector is at an elementary level, and it will probably take some time until the insurers and regulators have the knowledge and expertise to assess and adapt AI and algorithms in line with the consumers’ needs.              

PAPERLESS TRADE: ANOTHER STEP FURTHER

Charles Darwin had a point. It was not, he said, the strongest of the species that survived, nor the most intelligent, but that most adaptable to change.  So too with law and digital transformation. The government recognises this well. As G7 President, the UK has been actively leading the process to achieve the legal environment for the full digitisation of trade documents. It has now put its money where its mouth is, with its swift introduction in the Lords (on 12 October, only five months after it appeared) of the Law Commission’s draft Electronic Trade Documents Bill.  

The Bill is the outcome of consultations and a later report on how to achieve the digitisation of trade documents and thereby enhance paperless commerce. It aims to cement the legal recognition of electronic trade documents, including most importantly bills of lading, mate’s receipts, ship’s delivery orders, warehouse receipts, marine insurance policies and cargo insurance certificates. (It also includes provisions dealing with commercial paper such as bills of exchange and promissory notes, though these today are a good deal less important.)

Quite right too. Digitisation is an inevitable part of today’s global economy, with big data and cloud-based computing the driving force of industry and its supply chains and the smooth running of trade dependent not only on commercial operations but also to a great extent on the instantaneous turnaround and exchange of the relevant documents. Yet a huge number of the underlying processes and operations still rely “on practices developed by merchants hundreds of years ago.” This matters for us: under the latest statistics from the Department of Trade, international trade is worth around £1.266 trillion annually to the UK.

The problem arises in particular with the paper documentation traditionally used for proving shipment of the goods and their quality, and for their handover while in transit. Pre-eminent among these are bills of lading which not only act as receipts and furnish parties with  significant data about the goods, but also serve as documents of title. The problem is a big one: the Digital Container Shipping Association has estimated that ocean carriers issued 16 million original bills of lading in 2020, more than 99% in paper form, quite apart from the myriad other documents that accompany goods in transit. The exercise in paper-shuffling that this involves is mind-blowing; its threat to the smooth operation of commerce was thrown into stark relief by COVID-19 lockdowns that forced the paper-shufflers to be sent home.  No wonder this accelerated digitisation across the world. As the Law Commission observed, it was partly in response to the complexities brought by the pandemic that the International Chamber of Commerce asked governments to take immediate steps remove legal requirements for hard-copy trade documentation, and to consider longer-term plans for establishing legal frameworks applicable to electronic documents.

The Bill is commendably brief, consisting of only seven clauses. It starts (cl.1) with definitions of “paper trade document” and “qualifying electronic document” before presenting a non-exhaustive list of trade documents affected by it (excluding some more exotic instruments subject to the Uncertificated Securities Regulations 2001, and curiosities such as bearer bonds). Further provisions relate to what is to be regarded as possession, transfer and indorsement of electronic documents (cl.3), and deal with the change of a paper form to an electronic one or vice versa (cl.4).

The nub of the problem is, of course, possession: in English law you cannot in any real sense “possess” a mere stream of electrons. Therefore, in order for an electronic trade document to have similar effects and functionality as its paper equivalent, the Bill in cl.2 lays down gateway criteria. These consist of content requirements, and stipulations about the reliability of the underlying digital system, the “integrity” of an electronic trade document as regards originality and authenticity, the possibility of exclusive control, divestibility of that control, and the reliable identification of the persons in control of a document at any time.

The Commission were rightly aware of the possible impact of the latest innovations and emergent technologies brought by the fourth industrial revolution. In Appendix 6 to its report, it assessed the use of distributed ledger technology (“DLT”) to support trade documents in electronic form. Indeed, it points out that DLT, involving distribution of data among nodes accessible only by secured keys in order to render it effectively tamper-proof, offers very significant possibilities for the acceptance, validity, and functionality of electronic documents in international trade equivalent to that accorded to their paper counterparts. 

These reforms can only be welcomed. If passed, the Bill will undoubtedly facilitate cross-border commerce by cutting unnecessary costs and reducing processing times and delays. Digitising documentation also contributes to sustainability, eco-efficiency, and environmental values by mitigating harmful carbon emissions, quite apart from boost the UK’s reputation as a global centre for international commerce and trade.

If there is a criticism of the Bill, it is its lack of detail. It does not contain any provisions on the procedural aspects of digitisation of documents, the use and exploitation of digitised documentation, or the mechanics of changing its form. In addition, the effectiveness of the gateway criteria might be achieved only upon the adoption of the specific protocols regarding the digital systems, their control mechanisms, and accreditation standards. One suspects in practice that if the bill becomes law, a detailed commentary will become essential for its practical application. This matters: unless such matters are satisfactorily sorted out, an electronic trade document that is effective in one jurisdiction might not be treated in the same way in another. 

Moreover, while trade documents are being transferred across borders, cross-border disputes are at least to some extent inevitable. This means that we will need to give attention to the private international law rules specific to such documents: even if they contain an English choice-of-law clause, this will not necessarily ensure the application of English law to all their aspects. The Law Commission, to its credit, has recognised this. It has already launched a follow-up project on the Conflict of laws and emerging technology to ensure the rules of applicable law and jurisdiction in an increasingly digitised world. This issue is still at the pre-consultation stage – this might mean that unless private international law rules applicable to the related matters are achieved, the current Bill might not be operable or practically effective.

Some other tidying up may also be necessary. There may be a need, for example, to clarify matters by a few further amendments to the Carriage of Goods by Sea Act 1992 and the Bills of Exchange Act 1882 over and above those in cl.6 of the Bill. which are not in line with the latest technological and legal developments and in particular, the new Bill. But even if there is some way to go the Bill is a very important development. We, for one, welcome it.

Professor Andrew Tettenborn

Dr Aygun Mammadzada

The ILO adopts a Resolution on Financial Security in cases of the Abandonment of Seafarers 

In one of our previous posts ( https://iistl.blog/2022/04/13/financial-security-in-cases-of-abandonment-a-four-month-limit-for-unpaid-seafarers-wages%ef%bf%bc/ ), we considered some of the issues that emerge from the operation of Standard A2.5.2 of the Maritime Labour Convention (MLC), 2006, as amended, on financial security in cases of the abandonment of seafarers. In particular, we looked at paragraph 9 of this Standard which requires that the coverage provided by the financial security system when seafarers are abandoned by shipowners shall be limited to four months of any such outstanding wages and four months of any such outstanding entitlements. In this regard, we highlighted, inter alia, the inadequacy of the fourth month limit to accommodate the needs of seafarers when a case of abandonment is not resolved in time.  

Only a few months ago, during the second part of the fourth meeting of the Special Tripartite Committee, the possibility of extending the minimum coverage afforded by the current financial security system from four months to eight months was considered following a proposal from the seafarers’ group of representatives. While the proposal was not supported by the representatives of the shipowners’ group and the representatives of the Governments’ group, mainly because of the risks faced by the insurers, a joint resolution was adopted. The latter called for the establishment of a working group under the auspice of the Special Tripartite Committee to discuss the financial security system required under Standard A2.5.2 of the MLC, 2006, as amended, with a view to making recommendations on potential improvements that would make the system more effective and sustainable, as well as ensure a greater degree of protection and assistance for abandoned seafarers.  

Insurance and P&I: life in Europe just got easier

Whatever you think of Brexit, there can be little doubt that English P&I Clubs have reaped a substantial dividend from it when it comes to jurisdiction. A discreet bottle or two will no doubt be cracked open as a result of Foxton J’s judgment today in QBE Europe SA v Generali España de Seguros y Reaseguros [2022] EWHC 2062 (Comm).

The facts will be entirely familiar to any P&I claims handler. The Angara, a small superyacht insured against P&I risks by QBE UK under a policy later transferred to QBE Europe, allegedly damaged an underwater cable linking Mallorca and Menorca to the tune of nearly $8 million. The cable owners’ underwriters Generali brought a subrogated claim in the Spanish courts against QBE, relying on a Spanish direct action statute (Arts. 465-467 of the 2014 Ley de Navegación Marítima). QBE pointed to a London arbitration clause requiring disputes between insurer and assured to be arbitrated in London, said that if Generali wanted to enforce the policy they had to take the rough with the smooth. This being a post-Brexit suit, they sought an ASI.

Generali resisted. They argued that they were enforcing a direct delictual liability under Spanish law, and that in any case since the arbitration clause merely referred to assured and insurer (and indeed the whole policy excluded any third party rights under the Third Parties (Rights against Insurers) Act 1999) they were unaffected by it.

Pre-Brexit, QBE’s position would have been fairly hopeless: intra-EU ASIs were banned, and furthermore the effect of Assens Havn (Judicial cooperation in civil matters) [2017] EUECJ C-368/16 (noted here in this blog) would have largely pre-empted the matter in the Spanish courts.

But in this, one of the first post-Brexit P&I cases to come to the English courts, QBE won hands down. Solid first instance authority had extended the rule in The Angelic Grace [1995] 1 Lloyd’s Rep 87 (i.e. that very good reasons had to be shown for not granting an ASI to halt foreign proceedings brought in blatant breach of contract) to cases where the person suing was enforcing transferred rights, as where a subrogated insurer sought to take advantage of contractual provisions between its insured and the defendant. That line of decisions applied here: and Foxton J duly followed it, confirmed it and lengthened it by one.

He then asked whether, properly characterised, Generali’s suit was a tort claim or in substance a claim to piggy-back on the policy QBE had issued. His Lordship had no doubt that it was the latter. True, the Spanish direct action provisions disapplied certain limitations in the policy, such as pay to be paid provisions and a number of defences based on misconduct by the assured; but the matter had to be viewed in the round, and overall the cause of action arising under the 2014 Spanish law, being based on the existence of a policy and limited to sums assured under it, was clearly contract-based. It remained to deal with Generali’s further point based on the limited wording of the arbitration clause. Here his Lordship accepted that parties could provide that an arbitration clause in a contract did not apply to those suing under some derivative title, but said that much more would be required to demonstrate such an intent: the mere fact of reference to the original parties to the contract was not nearly enough.

And that was it: having failed to show any substantial reason why the ASI should not go, Generali were ordered to discontinue the Spanish proceedings.

What messages can P&I clubs and other insurers taker away? Three are worth referring to. One is that the enforcement of jurisdiction and arbitration clauses in a European context is now fairly straightforward. Another refers to the specific case of Spain, which altered its direct action statute in 2014: the QBE case has confirmed that under the new dispensation, as much as under the old, an attempt to use direct action as a means of getting at insurers abroad will continue to be be regarded as essentially an attempt to enforce the insurance contract. And third, judges in the UK are unlikely to be very receptive to attempts by claimants desperate to litigate at home to give arbitration or jurisdiction clauses an unnaturally narrow meaning.

Life, in short, has got a good deal easier for P&I interests. Now, where’s that bottle of cava?

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.            

Financial Security in Cases of Abandonment: A Four-Month Limit for Unpaid Seafarers’ Wages?

Introduction

The International Labour Conference (ILC) at its 103rd session approved the first group of amendments to the Maritime Labour Convention (MLC), 2006. The amendments were agreed by the Special Tripartite Committee at its first meeting at the International Labour Organisation (ILO) in Geneva in April 2014 and entered into force in January 2017. The amendments concerned Regulations 2.5 and 4.2 which deal with the right to repatriation and the shipowners’ liability for sickness, injury or death of seafarers occurring in connection with their employment. In brief, the amendments inter alia set out requirements for shipowners to provide financial security to provide support for abandoned seafarers and to assure compensation in the event of death or long-term disability of seafarers due to occupational injury, illness or hazard. While an exhaustive overview of such amendments is beyond the scope of this blogpost, this blogpost aims to shed light into the operation of Standard A 2.5.2. of the MLC, 2006, as amended, paragraph 9 of which stipulates that the coverage provided by the financial security system when seafarers are abandoned by shipowners shall be limited to four months outstanding wages and four months of outstanding entitlements.

Issues

Let’s take a hypothetical case of seafarers being abandoned for 10 months. Seafarers contact the P&I Club for assistance, providing all the necessary documentation to substantiate their claim. The P&I Club’s claims handlers acknowledge receipt of the claim, check the validity of the financial security system, and investigate whether the shipowners have in fact failed to pay wages to seafarers. If the P&I is satisfied that the financial security system is valid and that the seafarers’ wages are outstanding, the P&I Club will pay four months of outstanding wages and take immediate action to repatriate the affected seafarers. Now, assuming that all the outstanding wages are of the same rate, no further questions arise. But what if the outstanding wages are not all of the same rate? If, for example, after the first four months, there has been a pay rise under the seafarers’ employment agreement.

In such cases, a further question can potentially arise as to how the limit of four months outstanding wages will be calculated. Should it be calculated based on the first four outstanding wages? Or is there a right to pick and choose which of such outstanding wages to form the basis for the calculation of such limit? If the latter is true, seafarers will be keen on calculating such limit based on the higher rate of such outstanding wages. On the other hand, the P&I Club will attempt to calculate such limit based on the lower rate of such outstanding wages. In the next section, this blogpost will explain what the relevant provisions of the MLC, 2006, as amended, provide.

The law

The relevant provision is Standard A 2.5.2 of the MLC, 2006, as amended. Paragraph 9 of this Standard states that:

‘Having regard to Regulations 2.2 and 2.5, assistance provided by the financial security system shall be sufficient to cover the following: (a) outstanding wages and other entitlements due from the shipowner to the seafarer under their employment agreement, the relevant collective bargaining agreement or the national law of the flag State, limited to four months of any such outstanding wages and four months of any such outstanding entitlements; […].’

If one looks at the wording of this provision, it can easily be ascertained that the actual text of the Convention does not give an answer to this question. Certainly, the use of the words ‘limited to four months of any such outstanding wages and four months of any such outstanding entitlements’ gives ample of space for arguments suggesting that the four months limit can be calculated by reference to any such outstanding wages, and not necessarily the first four outstanding wages.

However, it is not clear whether the specific wording was used with such flexibility in mind. The draft text of the amendments of Standard A 2.5.2. of the MLC, 2006, was based on the principles agreed at the Ninth Session (2-6 May 2009) of the Joint IMO/ILO Working Group on Liability and Compensation regarding Claims for Death, Personal Injury and Abandonment of Seafarers. During the negotiations, it was considered whether links should be drawn between paragraphs 2 and 9 of this Standard. Although this discussion took place in respect of the duration of the limitation period (it may be worth noting here that, initially, a limit of three months wages was suggested), it can still be instructive. In this respect, it was explained that the purpose of paragraph 2 is to identify when abandonment takes place, whereas paragraph 9 defines the scope of financial security to be provided in case of abandonment. Thus, it was concluded, it is necessary to allow for a time lapse between the recognition of the abandonment situation and the limitation of financial security.

Against this backdrop, it can be argued that the purpose of the said limit is to ensure that seafarers’ wages are fully paid up for the first four months since their abandonment. Bearing in mind that it is the seafarers who have to initiate the process with the P&I Clubs, it may also be worth noting here that such interpretation can assist with avoiding cases, although rare, where seafarers intentionally allow wages to continue to accrue.

Conclusion

In practice, it is highly unlikely that seafarers are owed only four months’ wages when they are abandoned by their shipowners. Thus, the possibility of different rates for wages or other entitlements cannot be precluded. Given the uncertainty of the wording of Standard A 2.5.2. paragraph 9 (a) of the MLC, 2006, amended, any conflicting arguments can easily be avoided if the purpose of this provision is clarified in future amendments.

Insurable Interest in Cargo Insurance Context and First Late Payment of Claim Assertion in English Law


Quadra Commodities SA v. XL Insurance and others [2022] EWHC 431 (Comm)

The assured was a commodities trader who entered into various contracts with Agroinvest Group for the purchase of grain. On receipt of warehouse receipts confirming that the relevant quantities of grain were held in common bulk in stipulated warehouses or “Elevators”, the assured paid for the grain. However, it later transpired that Agrionvest Group and the warehouses were involved in a fraudulent scheme whereby the same parcel of grain or seeds may have been pledged and/or sold many times over to different traders. The fraud unravelled when buyers sought to execute physical deliveries against the warehouse receipts and it became clear that there was not enough grain to go around.


The assured sought to recover its losses under a marine cargo policy claiming that the insured goods were lost either because they had been misappropriated or because there was a loss by reason of the assured’s acceptance of fraudulent warehouse receipts. The relevant clauses in the policy stipulated as follows:

Misappropriation
This insurance contract covers all physical damage and/or losses, directly caused to the insured goods by misappropriation.

Fraudulent Documents

This policy covers physical loss of or damage to goods and/or merchandise insured hereunder through the acceptance by the Assured and/or their Agents and/or Shippers of fraudulent shipping documents, including but not limited to Bill(s) of Lading and/or Shipping Receipts and/or Messenger Receipt(s) and/or Warehouse Receipts and/or other shipping document(s).

Insurable Interest Issue

The insurers denied cover on the basis that the assured did not have insurable interest in any of the goods which were lost and/or there was no physical loss of the property, only pure financial loss, which was not insured. The basis of the insurers’ case on insurable interest was that this was not an insurance on property but instead an insurance of an adventure, including the success of storage operations. The judge (Butcher, J) was quick to dismiss this submission by referring to various terms in the contract pointing strongly to the direction that this was indeed an insurance on the property (grain) which the assured was purchasing from the buyers. The alternative argument of the insurers was interesting and raised issues whether the assured had insurable interest in the goods. It was essentially argued that even if the insurance was on the cargo purchased, the assured had no insurable interest in the present case as the cargo in question never existed. With this argument the insurers were primarily encouraging the court to adopt a strict approach to insurable interest following the spirit of the reasoning of Lord Eldon in Lucena v. Craufurd (1806) 2 & P.N.R. 269 which suggested that only those who stand in a “legal and equitable relationship to the property” have insurable interest in the context of property insurance.
The judge was able to dismiss insurers’ argument by holding that the assured was successful, on a balance of probabilities, in showing that goods corresponding in quantity and description to the cargoes were physically present at the time the Warehouse Receipts were issued. This meant that this was not an insurance policy on goods that never existed and accordingly the assured had insurable interest on the grounds that:

• The assured had made payment for goods under purchase contracts, and such payment for unascertained goods of the relevant description was valid ground for establishing an insurable interest irrespective of whether there were competing interests in the grain. The assured, therefore, stood in a “legal or equitable relation” to the property by virtue of the payment.

• The assured was able to show on the balance of probabilities that it had an immediate right to possession of the grain and this coupled with its economic interest in the grain can give rise to an insurable interest.

This outcome in the case is in line with authorities on the subject and is not too controversial. However, the curious point is whether the court would have reached the same conclusion on insurable interest, had it decided that on balance of probability the assured failed to show that goods corresponding in quantity and description to the cargoes were physically present. There is authority to the effect that an assured has no insurable interest in insuring property that it does not own although it might have a factual expectation of loss related to that property (Macaura v. Northern Assurance Co Ltd [1925] AC 619). However, a different stance has taken on the matter in other common law jurisdictions (in particular by the Supreme Court of Canada in Constitution Insurance Company of Canada v Ksmopoulos [1987] 1 SCR 2). Also, there is a marked shift in attitude of English courts towards a more flexible approach to insurable interest (especially in cases like National Oilwell Ltd v Davy Offshore (UI) Ltd [1993] 2 Lloyd’s Rep 582 and The Moonacre [1992] 2 Lloyd’s Rep 501). It should be at least arguable that a person who is led to believe by a fraudster to purchase goods (that never existed) and paid for them under a sale contract, should have an insurable interest if s/he enters into a contract of insurance to protect his/her interest against the risk of not getting what s/he paid for.

Late Payment Issue

The Insurance Act (IA) 2015 implies a term into insurance contracts to the effect that the insurer must pay any sums due in respect of a claim within a “reasonable time” (s. 13A of the IA 2015). However, by virtue of s. 13A(4) the insurer is not in breach of this implied term if it shows that there were reasonable grounds for disputing the claim merely by failing to pay while the dispute is continuing. The assured in the present case contended that the insurers’ conduct of the claim was “wholly unreasonable, and its investigations either unnecessary or unreasonably slow” and resulted the assured suffering losses by reference to the return on shareholders’ equity. Conversely, the insurers argued that a reasonable time was “a considerable time” and extended beyond the time by which proceedings were commenced. In any event, the insurers argued that by virtue of s. 13A(4) there was no breach of this implied term as they had reasonable grounds to dispute the claim.

Given that this was the first case on the matter, in considering whether there was any breach of the implied term, the judge apart from the guidance provided by s. 13A(2) of the Insurance Act, also turned to the Law Commissions’ Report and the Explanatory Notes to the legislation before ultimately deciding that there was no breach of the implied term. In reaching this conclusion, the judge made reference to a number of factors:


i) That although the case was relating to a dispute that arose in relation to a property insurance cover (which according to the Explanatory Notes such claims usually take less time to value than, for example, business interruption claims), the cover in question applied to transport and storage operations of different types and involving or potentially involving many different countries and locations, and claims under such a cover, could involve very various factual patterns and differing difficulties of investigation);
ii) The size of the claim was substantial;
iii) The fraud, uncertainty as to what happened, the destruction of documents, existence of legal proceedings in Ukraine and the fact that the assured elected to swap from French law to English law during the investigation were all significant complicating factors; and
iv) Relevant factors outside insurers’ control, included the destruction and unavailability of evidence and the legal proceedings in Ukraine.

On the point raised by the insurer, s. 13A(4) of the IA 2015, it was held that the insurer bears the burden of proof but here they had reasonable grounds for disputing the claim stressing that although the grounds for rejecting the claim were wrong, this did not mean that they were unreasonable. Although the judge considered elements of the insurers’ investigations were delayed, the investigations occurred in what was considered to be a reasonable time and they were part of the reasonable grounds for disputing the claim that existed throughout.

This is the first judgment on s. 13A of the IA 2015. When first introduced, there was some concern especially among insurers that this section might fuel US type of bad-faith litigation against insures. However, the parameters for such a claim are well-defined in s. 13(A) and guidance is provided to courts as to how they should judge whether a claim is paid/assessed within a reasonable time. The manner in which the trial judge made use of such guidance in this case is a clear indication that late payment claims will not go down the path that has been taken by some US courts and in England & Wales an assertion of late payment of an insurance claim will only be successful in some extreme cases. There is no doubt that insurers will take some comfort from the judgment given that it is clear now that an insurer’s decision to refuse payment for a claim will not automatically amount to breach of this implied term even if it is found that the grounds for disputing the claim are wrong.

Cyber warfare: Are you protected?

Beware of the war exclusions!

Following the Lloyds Performance Management Supplemental Requirements & Guidance, published July 2020, all insurance and reinsurance policies written at Lloyd’s must exclude all losses caused by war and nuclear, chemical, biological or radioactive risks (NCBR), except in limited circumstances.[1] This reinforces the exclusion of war and NCBR in hull and cargo and most cyber policies. Both cyber  security data and privacy breach (CY) and cyber security property damage (CZ)[2] polices are among the exempted class of business which would be allowed to write war risks. However, when writing these cyber policies, the terms and scope of the cover must be unambiguously stated. If there is an extension of the policy to include war, that extension must not override any NCBR exclusions contained within the cyber policy. It is customary to follow local law or regulation on how coverage should be provided for in policy documentation and for the exempted classes of business, it is recommended to follow local market practice. In light of these guidelines several war exclusions in varying degree of liability were developed to be endorsed on or attached to commercial cyber policies. It is not yet clear if the same clauses are or will become applicable to non cyber policies but the discussion is relevant considering current geopolitical conflicts and imminent threats to businesses and states.

The exclusions (LMA5564, LMA5565, LMA5566, LMA5567)[3] are very similar in terms of the language used and excludes loss of any kind directly or indirectly occasioned by, happening through or in consequence of war or a cyber operation.  The burden is on the insurer to prove that the exclusion applies. An obvious difference is the causal language used in each clause. ‘Happening through’ is not language commonly used in the marine sector, as such its meaning and what needs to be established to fulfil this causal effect requires clarification. Clauses 3-5 of each exclusion refer to the attribution of a cyber operation to a state and the definition of war and cyber operation are both related to the acts of a state against another state. War is defined as the ‘use of physical force by a state against another state’ thus excluding cyber incidents / attacks which may have the same effect but without physical use of force and not by a state against another state. Cyber operations means ‘the use of computer system by or on behalf of a state to disrupt, deny, degrade, manipulate or destroy information in a computer systems of another state’.[4] The emphasis on ‘states’ means that the exclusion would not be applicable to private acts of civilians who are not acting on behalf of their government or another state. Furthermore it is doubtful whether cyber operation would extend to the damage loss of cargo, vessel or financial losses since the subject of a cyber operation is the ‘information in a computer system’.

In attributing cyber operation to a state, the primary but not exclusive determinant is whether the government of the state in which the computer system affected is physically located has attributed the cyber operations to another state or those acting on its behalf. Pending a decision, the insurer may rely on an inference which is objectively reasonable as to attribution of the  cyber operation  but no loss shall be paid during this time. If the  government of the state in which the affected computer system is located takes too long to decide, or is unable to declare or does not determine attribution, the responsibility shifts to the insurer to determine attribution by using other evidence available to it. There are several problems with the terms of LMA5564, there is no explanation of the type and source of information the insurers should rely on to develop an inference and what will qualify as objectively reasonable and importantly who will sit as ‘objective person’. Furthermore,  the reference to the insurer using ‘such other evidence as is available’ suggest that the insurer is permitted to rely on any source, type / quality of evidence available that will support his position that the exclusion does apply. In other words, the acceptable standard of evidence to support the insurer’s ‘inference’ and to discharge his burden that the exclusion does apply is low and therefore prejudicial to the assured.

The second war, cyber war and cyber operation exclusion (LMA5565) differs from LMA5564  in that LMA5565 clause 1.1 to 1.3 list the conditions under which war and cyber operations are excluded. These are war or cyber operation carried out in the course of war and or retaliatory cyber operations between any specified state (China, France, Germany, Japan, UK or USA) and or a cyber operation that has a detrimental impact on the functioning of the state due to the direct or indirect effect of the cyber operation on  the availability, integrity or delivery of an essential service in that state and or the security or defence of a state. Clause 3 introduces the agreed limits recoverable in relation to loss arising out of one cyber operation and a second limit for the aggregate for the period of insurance. If the limits are not specified, there will be no coverage for any loss arising from a cyber operation. Noteworthy is the fact that similar limits have not been introduced for loss arising from a war or cyber war, so the limit would be based on the insured value of the subject matter insured. The definition of essential service creates uncertainty because what is categorised as ‘essential for the maintenance of vital functions of a state’ may vary across states. While examples are provided which includes financial, health or utility services, unless the parties stipulate and restrict this category to only the services named in the policy, there is potential contention between the parties over what will qualify as an essential service and what is a vital function to a state. It is expected that the marine sector will be among the list of essential services, however it is unlikely that an attack on a commercial private vessel or onshore facilities would qualify as harm to an essential service, vital for function of the state.

A third form of the war, cyber war and cyber operations exclusion LMA5566 is identical to LMA5565 except that there is no equivalent to the clause on limits of liability for each cyber operation or aggregate loss in LMA5566. The fourth form of exclusion LMA5567 expounds on the conditions mentioned in LMA5565 and LMA55666, particularly the exclusion or loss from retaliatory cyber operations between any of the specified states leading to two or more of those states becoming impacted states. The exclusion of cyber operation that has a major impact an essential service or the security of defence of a state shall not apply to the direct or indirect effect of a cyber operation on a bystanding cyber asset. LMA5567 introduces the concepts of impacted states and bystanding asset, thus expanding the effect of the exclusion clause. Impacted states means any state where the cyber operation has had a detrimental impact on the functioning of that state due to its effect on essential services  and or the security or defence of that state. The bystanding cyber assets are computer systems used by the insured or its third party provider that is not located in the impacted state but is affected by the cyber operation. As an exemption to the exclusion, the consequence is that the insurer will be exposed to liability for loss to assets that are not owned by the insured or its third party providers. The only requirement being that these bystanding cyber assets / computer systems are used by the insured or its third party providers which could be an extensive list of unidentified assets and liabilities. Another problem with the definition of bystanding cyber asset is it does not declare for what purpose the said asset should be used by the insured or by the third party provider. The presumption is the use should be related to the subject matter / business of the insured but without clarification, there are doubts about the scope and limits of the term.  Interestingly and of concern is the use of the words ‘cyber war’ in the title of each exclusion but is not repeated in any of the four clauses nor is there a description of the meaning of a cyber war and how it differs from a cyber operation and war as defined in the clauses.

A guidance on the correct interpretation of the exclusion clauses was not published and given their deficiencies, the effectiveness of each exclusion clause is reduced. In terms of their application to marine activities, the insurer will find that he is liable to indemnify the assured for his loss from cyber-attack unless there is evidence to attribute the cyber act to a state. The exclusions will be more effective in scenarios where terrorist or political groups are involved. War is limited to acts between states and significant emphasis is placed on damage to essential services of a state. Despite the deficiencies discussed above, the importance and take up of any variation of the exclusion clause will increase as the political security of nation states and businesses continue to be of concern to insurers. The constant threats and warning  in the news of cyber-attacks being used as weapons of war will affect market response and which will sometimes be reflected in strictness of language / variations of the war exclusions used in insurance policies. Other stakeholders must be proactive and ensure that they have adequate insurance protection against cyber war risks and war risks generally and mitigate their risks of loss by implementing and maintaining good cyber hygiene based on industry specific best practices.  


[1] Lloyd’s, ‘Performance Management – Supplemental Requirements & Guidance’ (July 2020) 41 <https://assets.lloyds.com/assets/performance-management-supplemental-requirements-and-guidance-july-2020highlighted/1/Performance%20Management%20Supplemental%20Requirements%20and%20Guidance%20July%202020Highlighted.pdf> accessed 22 March 2022. War and NCBR policies can only be provided where: the exclusion of war is prohibited by local legal or regulatory requirements but this is not inclusive of the writing non-compulsory war risks; where the type of business is within the exempted class and where the syndicates have the express agreement from Lloyds through business planning process.

[2] Lloyd’s, ‘Cyber Risks & Exposures : Market Bulletin Ref : Y4842’ (25 November 2014)

<https://assets.lloyds.com/assets/y4842/1/Y4842.pdf > accessed 22 March 2022.

[3] LMA, ‘Cyber War and Cyber Operation Exclusion Clauses’ (LMA21-042-PD, 25 November 2021)  

<https://www.lmalloyds.com/LMA/News/LMA_bulletins/LMA_Bulletins/LMA21-042-PD.aspx> accessed 22 March 2022.

[4] Michael N Schmitt,  ‘The Use of Force’ in Tallin Manual 2.0 on the International Law Applicable to Cyber Operations ( 2nd edition Cambridge University Press 2017)The Tallin Manual is nonbinding legal source which explains how international law applies to cyber operations. It is in the process of a five (5) year review for the launch of Tallinn Manual 3.0.

Cryptocurrencies and Ransomwares – Are they Recoverable?

Cyber criminals have been exploiting the ‘privacy’ features of crypto-assets to target businesses and individual accounts to steal and unlawfully demand the transfer of crypto-currencies through ransomware attacks. In addition to the distinctive features of cryptocurrencies which gives cyber criminals a false sense of anonymity, the rapid rise in cryptocurrency fraud and ransomwares are also the product of very lax or non-existent international regulation. In 2020, 57.9% of the organizations in the UK and 78.5% in the USA were affected by a ransomware.[1] The targets of major ransomware attacks in 2021 included Colonial Pipeline and JBS meat processing in the US,  Health Services Executive in Ireland and Hackney Borough Council in England. The business types targeted is an indication of the threat to critical national infrastructure. Some ransom demands are made in fiat currency while others are in cryptocurrencies.  The average ransom paid by medium sized organizations was US$170,404 and the average costs to rectify and respond to a ransomware was US$1.85 million.[2]

International and Government Response

Prior to the creation of the Ransomware Task Force in December 2020[3], there was no coordinated effort among states and the private and public sector to tackle the serious and growing threat from ransomware attacks.

Equally problematic is the lack of clarity on the legality of paying ransom / ransomware demands.

England and Wales

The payment of a ransom is not illegal in England and Wales provided they are not paid to or have any association with terrorist groups (s. 15 (3) Terrorism Act 2000), persons subject to economic sanctions or used to finance a criminal act[4] and there is nothing illegal about the contracts between the parties.[5] The National Cyber Security Centre in their guidance on mitigating malware and  ransomware attacks emphasised that law enforcement does not encourage, endorse or condone the payment of ransom demands.[6]

United States of America

The US has not outlawed the payment of ransoms but have issued an advisory on potential sanctions risks for facilitating ransomware payments.[7] The advisory warned that companies including insurance firms, financial institutions and  those specialising in digital forensics and incident response that facilitates the payment of ransom may risk breaching OFAC[8] Regulations. These companies are encouraged to contact the relevant government agencies if they reasonably believe that the person making the ransom demand may be sanctioned or in connection with sanctioned individual or entity.

France has unofficially declared their refusal to pay ransomware demands. Consequently, AXA insurers in France announced they would temporarily halt writing cyber insurance with a clause to indemnify customers for ransom paid.[9]

Efforts to recover cryptocurrency?

  1. Seizure / Recovery of cryptocurrency

Bitfinex: The authorities in the US have been able to successfully trace and recover crypto-assets stolen or paid for ransom. The most recent is US$5bn worth of stolen bitcoin seized by the US Department of Justice reported on Tuesday (08/02/2022).[10] The bitcoin was stolen in 2016 after hackers breached the Bitfinex cryptocurrency exchange. The money was then transferred to digital wallets said to  be operated by a couple in New York. At the time, the bitcoin valued about US$71 million but its current value is upwards US$5 billion. Various methods were employed by the couple to launder about US$25, 000 of the bitcoins. The couple will be charged for federal crimes of conspiracy to defraud the US and conspiracy to commit money laundering.

The length of the probe (5yrs) and the coordinated efforts of investigators from across the U.S and Germany highlights the resources governments and private investigators are willing to invest to ensure cyber criminals are not allowed to steal and launder cryptocurrencies gained unlawfully.

Colonial Pipeline: The authorities were also able to recover some of the cryptocurrencies paid as ransom by Colonial Pipeline Company following a ransomware attack in 2021. Colonial paid the cyber-criminals US$4.4 million in cryptocurrency to release the system, which they made a claim to recover from their cyber insurers. The U.S authorities recover US$2.3 million of the ransom.[11]

  1. Injunctions

AA v Unknown and others[12] :The claimants were UK insurers whose customer, a Canadian insurance company computer system was hacked and encrypted. A ransom demands of US$950,000 in bitcoins to a specific address was made by the hackers. The Claimants agreed to pay the ransom. Some of the money was transferred into fiat currency while 96 bitcoin was sent to  an address linked to an exchange operated by the 3rd and 4th defendants. The first Defendant was the persons unknown who made the demand. The second Defendant was the owner / controller of the 96 Bitcoins. The insurers retained the services of an incident response company that specialises in the negotiation of crypto currency ransom payments to negotiate with the hackers to regain access to the customer’s data and systems. The ransom was paid but further investigations were carried out by the insurers with the assistance of Chainalysis Inc, a blockchain investigations company who also provides software to track the payment of cryptocurrency.[13] The investigations successfully revealed the location of the Bitcoins, 96 of which was found at an address operated by the 3rd and 4th Defendants while some was transferred to a fiat currency account. The insurers successfully made an application to the High Court for a proprietary injunction over the cryptocurrency. It was held by the court that cryptocurrencies  are ‘property’ and could be the subject of a proprietary injunction as they met the four criteria of property; ‘being definable, being  identifiable by third parties, capable in their nature of assumption by third parties and having some degree of permanence’.[14] The decision was an adoption of points presented in the Legal statement on cryptoassets  and smart contracts by the UK Jurisdiction Taskforce.[15]

ION Science Ltd v Persons Unknown and others[16]: The case concerned the fraudulent inducement of the claimants to make an investment  equivalent to 64.35 bitcoin and pay for commission to receive profits from the said investment. The company referred by the Respondent was operating without Swiss authorisation. The bitcoins were transferred to two cryptocurrency exchanges each located in the US and Cayman Islands. The court granted orders against the first Respondent (Persons Unknown) in the form of a proprietary injunction, a worldwide freezing order and an ancillary disclosure against persons unknown. There was also a Bankers Trust order which could be served on two cryptocurrency exchanges outside of the Jurisdiction.

Remarks: These  cases are examples of the instances where cyber-criminal are held responsible for the theft of or laundering of cryptocurrencies. Cyber criminals are subject to the application of money laundering and Terrorism. Crypto-assets illegally acquired can be the subject of an injunction, a worldwide freezing order and seized even if the investigation takes years to complete. Cyber insurance and incident response companies do have an obligation to ensure they are not facilitating the payment of ransoms to terrorists, sanctioned person or governments and their affiliates. The abovementioned orders are methods victims of a cryptocurrency fraud or ransomware attack can use in their effort to recover their crypto-assets. However while these methods have been successful for traceable currencies (Bitcoins and Ethereum), the same may not be very effective to recover non-traceable cryptocurrencies (Monero).


[1] CyberEdge, ‘2021 Cyberthreat Defense Report’ (2021), 23 < (1) New Messages! (imperva.com)> accessed 09 February 2022.

[2] SOPHOS, ‘ The State of Ransomware 2021’ (April 2021) < sophos-state-of-ransomware-2021-wp.pdf> accessed 09 February 2022.

[3] Institute for Security and Technology, ‘Combating Ransomware A comprehensive Framework for Action: Key Recommendations from the Ransomware Task Force’ (Ransomware Task Force, 2021) < Combating Ransomware – A Comprehensive Framework for Action: Key Recommendations from the Ransomware Task Force (securityandtechnology.org)> accessed 09 February 2022.

[4] Serious Crime Act 2007, ss 45- 46.

[5] Masefield AG v Amlin Corporate Member Ltd [2010] 1 Lloyd’s Rep. 509; [2011] 1 Lloyd’s Rep. 630 CA

[6] NCSC, ‘Guidance: Mitigating malware and ransomware attacks’ ( Version 3.0, 09 September 2021) < Mitigating malware and ransomware attacks – NCSC.GOV.UK> accessed 07 February 2022.

[7] The U.S. Department of the Treasury’s Office, ‘ Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments’ (OFAC, 01 October 2020) < *ofac_ransomware_advisory_10012020_1.pdf (treasury.gov)> accessed 09 February 2022.

[8] The U.S Department of the Treasury’s Office of Foreign Assets Control.

[9] Frank Bajak, ‘ Insurer AXA halts ransomware crime reimbursement in France’ (AP News, 06 May 2021) < Insurer AXA halts ransomware crime reimbursement in France | AP News> accessed 07 February 2022.

[10] BBC News, ‘ Record-high seizure of $5bn in stolen Bitcoin’ (08 February 2022) < Record-high seizure of $5bn in stolen Bitcoin – BBC News> accessed 08 February 2022.

[11] Josephine Wolff, ‘ As Ransomware Demands Boom, Insurance Companies Keep Paying Out’ (Wired, 12 June 2021) < As Ransomware Demands Boom, Insurance Companies Keep Paying Out | WIRED> accessed 09 February 2021.

[12] [2019] EWHC 3556 (Comm); [2020] 2 All ER (Comm) 704.

[13] [2019] EWHC 3556 (Comm); [2020] 2 All ER (Comm) 704, paras [12-13] per Bryan J.

[14] [2019] EWHC 3556 (Comm); [2020] 2 All ER (Comm) 704, paras [55-61] per Bryan J; National Provincial Bank Ltd v Ainsworth [1965] 2 All ER 472, 494 per Lord Wilberforce.

[15] UK Jurisdiction Taskforce, ‘  Legal statement on cryptoassets and smart contracts’ (November 2019) <The LawtechUK Panel (technation.io)> accessed 05 February 2022, paras 15 and 71- 85.

[16] (unreported, 21 December 2020).