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Supreme Court dismisses appeal in Venezuela drug saga

News / / Supreme Court dismisses appeal in Venezuela drug saga

The Supreme Court held that the Vesselrsquos loss was not caused by the peril relied upon by the Assured (ldquoany person acting maliciouslyrdquo) but simply by detainment by reason of breach of customs regulations, which was a risk expressly excluded by the insurance policy (the ldquoPolicyrdquo)The background factsnbspOn 16 August 2007, the Vessel was detained and the crew arrested after an underwater inspection of the Vessel in Lake Maracaibo revealed cocaine strapped to her hull below the waterlineDuring an underwater survey on 12 August, divers had noticed various objects not belonging to the Vessel inside a space behind a loose grille on the hullnbspThe Master had been told to have the grille re-welded because of the risk of drug smuggling He failed to do so because the Vessel was due to sail that nightnbspIn the event, the Vessel did not sail as scheduled because there had been a miscalculation of her draft and consequently a short-loading During a second underwater inspection the following day, the divers discovered three bags of cocaine weighing 132 kg strapped to the Vesselrsquos hullThe presence of drugs constituted a breach of the Venezuelan 2005 Anti-Drug Law and the Master and Second Officer were charged with drug offences The Vessel was detained In August 2010, the two officers were convicted and sentenced to nine years imprisonment, andnbspthe court then ordered the final confiscation of the Vessel The Owners brought a constructive total loss claim after expiry of the six month period agreed in the amended detainment clause in the policyThe Insurers did not suggest that the Owners were implicated in the activities in any way and the case in the London litigation proceeded on the basis that the Master and Chief Officer were wrongly convicted in VenezuelaThe Policy notably provided cover against loss of, or damage to, the Vessel caused by any person acting maliciously or detainmentnbspIt however excluded loss, damage, liability or expense arising from detainment or confiscation by reasonnbspof infringement of any customs or trading regulations (the ldquoExclusionrdquo)The Commercial Court decisionIt was common ground between the parties that the act of concealing the large quantity of cocaine was a malicious act, but the Insurers declined the claim on the basis that the confiscation was caused by breach of customs regulations and thus excludedThe Court held that the words of the Exclusion were subject to an implied limitation As a matter of construction of the Policy terms, the Exclusion was not engaged where the infringement was, as in this case, merely a manifestation of malicious actions of third parties that were covered by the PolicynbspAs a result, the Insurers were liable for the loss, although it was conceded that if this construction of the Policy was wrong, the Exclusion would apply to exclude the lossThe Court of Appeal decisionOn appeal, the Court of Appeal held that both the malicious act, which was common ground, and the resulting customs breach were proximate causes of the loss As a result, subject to the construction argument, this was a simple case of a loss caused by a covered peril and an excluded peril As to that construction argument, the Court of Appeal concluded that the first instance court had been wrong to decide that the Exclusion did not operate to exclude liability because (1) the perils and exclusions together expressed the ambit of cover (2) they had to be construed together (3) each had to be looked at in light of the other and (4) it was wrong to start from the premise that one has primacy over the otherConsequently, following the established principle that a loss will not be covered by a policy of insurance if the loss is proximately caused by a covered peril and an excluded peril, the Insurers were not liableThe Supreme Court decisionDuring the course of the hearing, the Supreme Court decided to re-examine the premise upon which the parties had proceeded so far, namely that the attempted use by unknown third parties of the Vessel for smuggling involved the third parties ldquoacting maliciouslyrdquo, and invited the parties to make submissions on this pointContrary to the common ground between the parties at First Instance and in the Court of Appeal, the Supreme Court held that the Vesselrsquos loss was not caused by ldquoany person acting maliciouslyrdquo The court held that an element of spite, ill-will or the like was required for a ldquomalicious actrdquo to be established but the concept was not otherwise limited to conduct directed towards the insured interest Based upon the leading authorities on the meaning of ldquomalicious actrdquo available to the draftsman of the 1983 Institute War and Strikes Clauses, which the Policy incorporated, the intention must have been for this expression to apply to persons whose actions were aimed at causing loss of or damage to the insured property, or other property or persons as a by-product of which the insured property was lost or damaged Although the risk that concealed drugs may be detected was foreseeable, their detection and any consequent loss of the Vessel were, in the words of the court, ldquothe exact opposite of the unknown smugglersrsquo aimrdquo, which was to avoid detection Therefore, in the courtrsquos view, the proximate and only cause of the loss was the detainment of the Vessel by reason of infringement of the customs regulations, which was a risk expressly excluded under the Policy, thereby rendering the Insurers not liable for the total lossAlthough it was not necessary for the court to do so, it went on to consider what the outcome would have been had the ldquomalicious actrdquo peril been established on the facts In this respect, the Supreme Court arrived at the same result as the Court of Appeal, holding that the loss would still have been excluded as arising, at least concurrently, from detainment due to breach of customs regulations, an expressly included perilCommentThis is a welcome decision from the Supreme Court, which reinstates the meaning of the ldquomalicious actrdquo peril to that established by the jurisprudence which the drafters of the 1983 War Clauses must have had in mind Through re-examination of what was a common ground between the parties, the court avoided the risk of setting a precedent based on a false premise derived from a broader approach adopted in more recent case law, albeit in a fact-specific context The remainder of the decision, which is obiter, is relatively uncontroversial and in line with the Court of Appealrsquos findings

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