Christopher Crane Partner
Court construes scope of indemnity under Mortgagees’ Interest Insurance Policy
Piraeus Bank A.E. v Antares Underwriting Limited and others (The ZouZou)  EWHC 1169 (Comm)
This was a claim by Piraeus Bank A.E. (“the Bank”), the mortgagee of the ZouZou (“the Vessel”) under a Mortgagees’ Interest Insurance Policy (“the MII Policy”) placed with the defendant insurers for 2015.
The Owners of the Vessel had entered her for war risks (“the War Risks Policy”) with the Hellenic Mutual War Risks Association (“the Club”) on 22 December 2014. The Bank was an Assignee and Loss Payee under the War Risks Policy and it was this interest that was insured under the MII policy.
The Vessel had a combined insured-value/increased value of US$ 55million. The War Risks Policy was stated to be subject to the Marine Insurance Act 1906 (“MIA 1906”).
The Vessel was detained in Venezuela by the local authorities for about 14 months, from 22 August 2015 until 17 October 2016, following an allegation that some of the crew were attempting to smuggle diesel oil. Ultimately, the crew members were acquitted. The Vessel was returned to her owners on 12 November 2016.
The preamble to the Bank’s claim
The War Risks Policy included cover for seizure, arrest, and detention and the consequences thereof. In addition, it included a provision that if the Vessel was detained for more than 12 months, the Owners would be deemed to have been deprived of possession without any likelihood of recovery, thereby entitling them to bring a claim for a total loss. However, Rule 3.5 of the Club Rules excluded losses that arose out of action taken by state authorities in connection with the criminal law of any state.
The Owners had made claims for actual total loss (ATL) and constructive total loss (CTL) under the War Risks Policy, but these were rejected by the Club which ultimately avoided the policy on the grounds of non-disclosure. The Owners did not pursue the claims and in any event the Vessel was returned to them shortly thereafter.
The notional claim under the War Risks Policy
The Bank brought a claim under its MII Policy. As the Bank’s interest was defined by the War Risks Policy, the primary question was whether or not the Owners had a valid claim under that Policy. The MII insurers argued that they did not, on the basis that any claim would have been caught by the exclusion in Rule 3.5.
The Court clarified that the burden was on the insurers to show that the exclusion applied. The burden on the Bank was to demonstrate that the detention was caused by an insured peril – as opposed to an excluded peril.
The Bank’s primary position was that the detention of the Vessel had been unlawful and as such the exclusion in Rule 3.5 did not apply. On the factual and expert evidence, the Court found that the detention was by order of the Venezuelan Criminal Court and pursuant to Venezuelan criminal law. Consequently, any claim by the Owners would have been excluded by Rule 3.5.
The Court also held that:
- The Vessel had not been unlawfully detained at any point;
- There was no CTL under the detainment clause; and
- There was no CTL within the meaning of s.60(2) MIA 1906.
As assignee or loss payee, the Bank would not therefore have been entitled to an indemnity under the War Risks Policy.
The claim under the MII Policy
The question then arose as to whether the Bank was nevertheless entitled to an indemnity under the MII Policy.
Clause 1 of the Policy set out the coverage terms. It provided for an indemnity in the event of loss, damage to, or liability, arising in connection with the Vessel:
- 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
- Which occurred because of “any alleged deliberate, negligent or accidental act or omission…of any of the Relevant Parties.”
The Bank argued that the war risks claim would have been payable but for the deliberate act(s) of the crew-members engaging in alleged smuggling. Alternatively, it argued that Clause 1(ii) of the MII Policy made no reference to other policies and hence was a stand-alone provision giving cover entirely independent of the War Risks Policy. The loss resulted from the alleged deliberate act of the crew (to engage in smuggling) and hence was covered.
The Court rejected these arguments. In relation to clause 1(i), there was no prima facie recovery under the War Risks Policy because the loss was specifically excluded by Rule 3.5 of the Club’s Rules. In the Court’s view, “prima facie” was not intended to refer to the cause of loss without regard to any policy exclusions. The phrase takes both into account.
In relation to clause 1(ii), this could not be construed in isolation and was dependent on the War Risks Policy. The Court stated:
“The MII Policy is not intended to, and does not, cover losses which would not have given rise to a loss covered by the Owners’ Policies, because, for example, there was no CTL under the Owners’ Policies or the loss was excluded thereunder.” (para. 232)
The Court took a restrictive view of the meaning of “Relevant Parties” and concluded that it referred to the Owners’ or their employees/agents etc. acting in the context of the insurance contract and claim only. As the Court stated:
“The purpose of MII Insurance is to protect the Bank against the risk of non-payment under the Owners’ policy. The coverages in Clause 1 are typical of the types of cover that a mortgagee seeks under mortgagees’ interest insurance in protecting itself against the Owners’ insurers denying liability by reason of the Owners’ misconduct in regard to the loss; non-disclosure of material facts; breach of the duty of utmost good faith; breach of warranty; failure to prove that the loss was caused by an insured peril, and so forth[ Clause 1(ii) is of the same type in that it expressly includes misconduct such as scuttling and barratry as a result of Samuel v Dumas  AC 431, which established that a loss by sea water which has been deliberately let into a ship is not a loss by perils of the sea, on account of the absence of the element of fortuity.” (para. 251)
The Court thought that departing from this contextual construction of the Policy would have led to outcomes which would be wholly uncommercial. For example:
- The Bank recovering losses which would never have been covered under the Owners’ Policies because they would have been excluded;
- The Bank recovering sums far in excess of anything recoverable under the Owners’ Policies, even if covered;
- The Bank recovering from the MII underwriters even where the loss had already been paid under the Owners’ Policies.
The case gives useful guidance to the approach to be adopted when looking at deeming provisions regarding detention and construing MII policies at a time when assureds and banks alike are carefully considering their insurances on vessels detained by the war in Ukraine. In this instance, the Court took a restrictive view of the meaning of the relevant clauses.
The decision confirms the secondary nature of MII and that one must consider the position under the primary insurance policy in the light of the provisions in the MII policy.
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