Delos Shipholding SA & Ors v. Allianz Global Corporate and Speciality SE & Ors [2024] EWHC 719 (Comm)
The insured vessel (Win Win) was detained by the Indonesian authorities inside Indonesian territorial waters in February 2019 when she was at anchorage off the island of Bintan without the approval of the authorities. The infringement was one which might ordinarily lead to a fine but instead, the vessel was detained by Indonesian authorities for more than a year while her Master was prosecuted, eventually receiving a suspended sentence of seven months’ imprisonment and a fine of around US$ 7,000.
The vessel was insured under a war risk policy on the American Institute Hull War Risks and Strikes Clauses (1977). The assured claimed that the vessel became a constructive total loss under the Policy’s Detainment Clause and sought to recover the insured value of US$ 27.5 million. It was common ground that the vessel was a constructive total loss, but the insurers denied the claim on several grounds. One of those grounds was that the risk had not been fairly presented by the assured due to failing to disclose a material circumstance. This one and another issue that was recently introduced by the Insurance Act (IA) 2015 (late payment of claims)- a counterclaim raised by the assured in this case- will be deliberated in this note while other defences raised by the assured will be given a cursory mention.
Unfair presentation of the risk
The insurers argued that the assured was in breach of its duty of fair presentation of the risk under the IA 2015 by failing to disclose that the sole director of the registered owner of the vessel, Mr Bairactaris, was the subject of criminal charges in Greece. The law in this area has been reformed by the introduction of the IA 2015 and a useful clarification has been provided in the relevant provision as to whose knowledge in the assured’s company amounts to the knowledge of the assured to discharge the duty of fair presentation of the risk. Section 4(3)(a) of the IA 2015 indicates that a corporation knows or ought to know information which is known by an individual who is part of the insured corporation’s senior management or responsible for the assured’s insurance. Therefore, the key question here was whether Mr Bairactaris could be deemed to be part of senior management for the assured corporation (it was clear that he was not involved in the process of obtaining insurance). The Court answered this question in the negative on the premise that Mr Bairactaris was a shipping lawyer in private practice and merely a nominee director of the company. He was, therefore, performing merely an administrative function in signing documents on the instructions of the ultimate beneficial owners of the company. The only person aware of the charges was himself and the beneficial owners were unaware of the situation. On that basis, it was concluded that the assured company could not be deemed to have constructive knowledge of these charges.
The finding of the court on the constructive knowledge of the assured company under s. 4(6) of the IA 2015 is an interesting one. Under this provision “an insured ought to know what should reasonably have been revealed by a reasonable search of information available to the insured”. It has been speculated that the introduction of this requirement will broaden the scope of the disclosure expected of the assured company as the test is an objective one meaning that the assured would no longer be able to claim that it was not aware of circumstances due to imperfections in the reporting systems in its organization (this was raised successfully before the introduction of the IA 2015 in Simner v. New India Assurance Co Ltd [1995] LRLR 240). Be as it may, it is still a question of fact in each case whether a reasonable search within the assured company would have revealed a particular information- if so, that information is deemed to be in constructive knowledge of that company. Here, however, the judge found that it would not have been reasonable for the assured company to ask whether the holder of a nominee directorship was subject to criminal proceedings given that he was a respected practicing lawyer and his role in the company was a limited one.
Even if that was wrong, the judge found that the relevant information (the fact that Mr Bairactaris was the subject of criminal charges in Greece) was not material: it had no connection with the present insured risk, and if there had been disclosure then exculpatory material including the director’s denial of any criminality and his limited role for the claimants would also have been disclosed. This finding was adequate to dispose of the case of the insurer, but the trial judge (The Honourable Mrs Justice Dias DBE) went further holding that the insurers were not induced by the alleged non-disclosure (proof of inducement of the relevant insurer is still required under the IA 2015).
Counterclaim by the Assured- Late Payment of the Claim?
Section 13A of the Insurance Act 2015 implies a term in every contract of insurance that the insurer must pay any sums due under the policy within a reasonable time. The key issue here was whether the insurer was in breach of this implied term given that some of the defences raised were questionable. Under s. 13A(4) the key question is whether the insurer had “reasonable grounds” for disputing claims. The mere fact that a defence fails does not mean that it was unreasonably taken and the judge acknowledged this point in her judgment (this point also has emerged in the judgment of the Court in Quadra Commodities S.A. v XL Insurance & Ors [2022] EWHC 431 (Comm)). The trial judge also expressed serious doubts as to whether it was reasonable for insurers. in the present case to rely on their fortuity, customs, and quarantine exclusion and sue and labour defences. She, however, considered it reasonable to defend the claim on the grounds of unfair presentation of risk. However, she, in the end, concluded that she did not need to decide the question of the reasonableness of defence since the assured in this case had not made out their alleged loss from the delayed settlement.
In determining whether the actions of the insurer were reasonable, some guidance has been provided by the Law Commissions’ Report and the Explanatory Notes to the legislation and a detailed discussion on this matter would have helped to clarify the scope of this recently introduced obligation. However, this opportunity has been missed here. The insurers had serious concerns when this provision was introduced on the basis that it could trigger counter-claims of this nature from assured every time insurers raise defences under an insurance policy. Surely, it can hardly be the case that in a litigation where the judge ends up writing 111 pages when disposing of the defences raised to regard all those defences raised as unreasonable. In every litigation, some points taken are stronger than others- the fact that some of the defences raised were easier to dispose of does not necessarily mean that the insurer acted unreasonably by defending the claim. One fears that the decision of the judge not to provide any guidance on this issue might be seen by lawyers as an invitation to take this point up more frequently in the future.
Other Defences Raised By the Insurer
Lack of Fortuity
The insurer alleged that the detainment was not fortuitous in the present case as the master and/or the claimant assureds knew or should have known that the vessel had anchored in the territorial waters of Indonesia, the arrest was the consequence of their voluntary conduct in doing so. This was a relatively easy defence to dispose of on the basis that there was a long history of vessels anchoring in the same location without any permission from the Indonesian authorities and it was not until 2019 that the Indonesian Navy initiated the campaign of detention of vessels anchored in its territorial waters. Therefore, neither the master nor the owners had reason to suppose that the vessel would, in fact, be detained.
Customs and Quarantine Exclusion
The American Institute Hull War Risks and Strikes Clauses (1977) contained a clause that excludes loss caused by, resulting from, or incurred as a consequence of “Arrest, restraint or detainment under customs or quarantine regulations and similar arrests, restrains or detainments not arising from actual or impending hostilities.” The insurers alleged that the arrest of the insured vessel under the Indonesian Shipping Law was a similar arrest, restraint, or detainment to one under customs or quarantine regulations. This was also rejected on the premise that the detention of vessels at the relevant time was not a customs or quarantine matter, but the result of a decision prompted by a change of policy on the part of the Indonesian Government to assert sovereignty over its territorial waters.
Breach of Sue and Labour Obligations
Another contention of the insurer was that the detention of the vessel in Indonesia was materially caused by the claimants’ unreasonable conduct in breach of their duty to sue and labour. To advance this contention, they relied upon a series of contacts between the assureds and the Indonesian authorities after the detention, to explore a “settlement” with the Navy, on a “commercial” basis, or by paying “fines” without going through an official court process. It was argued that any such payment, had it been made, would not have been an official or lawfully imposed fine, but would have been a bribe or similar, a fact of which the assureds were aware. The trial judge found that the assured’s conduct was not unreasonable (the assured’s contact in this context can be deemed unreasonable so that the chain of causation between the insured peril and the loss could be broken if it can be shown that he acted in a way no prudent uninsured would have done so (see in particular the judgment in ABN Amro Bank NV v Royal & Sun Alliance Insurance plc [2021] EWHC 442 (Comm)). The judge concluded that it was perfectly acceptable for the assured to explore all possibilities and she also found that there was no suggestion that they had any intention of paying a bribe. Having held that there was no breach, it was not strictly necessary to consider whether the assureds’ conduct was, in any case, causative of or contributory to the loss suffered, but in any event, the Judge concluded that it was not.