Atlasnavios - Navegação, LDA v Navigators Insurance Co Ltd and others  EWHC 4133 (Comm)
In the recent case of Atlasnavios - Navegação, LDA v Navigators Insurance Co Ltd and others  EWHC 4133 (COMM), Flaux J was required to determine whether the owners of the vessel ‘B Atlantic’ (the Vessel) could claim against the defendant war risks insurers (the Insurers) for the constructive total loss (CTL) of the Vessel by reason of her detention in Venezuela for more than six months, following the discovery by the authorities of bags of cocaine attached to her hull.
The Court was required to consider and rule on some fundamental questions about proximate cause, the meaning of ‘acting maliciously’ and ‘from a political motive’ in the context of a war risks policy, and whether the ‘infringement of customs regulations’ exclusion was subject to any implied restrictions.
Flaux J held that the CTL claim succeeded on the basis that there was cover under the policy for malicious acts and that, as a matter of construction, the infringement of customs regulation exclusion relied on by insurers was subject to an implied limitation in respect of infringements brought about by malicious acts of third parties, and therefore did not apply to the claim in question.
The Vessel, which at the time of the incident was chartered to Bulk Trading SA, was one of a number of bulk carriers managed by Bulker Chartering and Management SA (BCM) in Lugano, Switzerland.
On August 13, 2007, upon completion of loading a cargo of coal at Lake Maracaibo, Venezuela, for carriage to Italy, the Vessel was subject to an underwater inspection by divers who discovered three bags of cocaine strapped to her hull below the waterline.
The identity of the individuals who attached the drugs (in an attempt to smuggle them to Europe) has never been discovered, but it was common ground that the Vessel’s owner did not know anything about the drugs and had no involvement in any attempted drug trafficking.
The Vessel was detained and the crew arrested for drug trafficking offences. The Vessel remained in detention until, following a jury trial, the Vessel’s Master and Second Officer were convicted in August 2010, and the court ordered the final confiscation of the Vessel.
The parties’ cases
The claimants’ primary argument was that the proximate cause of the detention of the Vessel was the malicious act of the drug smugglers who attached the cocaine to the hull, with reckless disregard as to whether the vessel would be detained as a consequence and that, either:
- upon the true construction of the policy of insurance, those circumstances did not amount to an ‘infringement of the customs regulations’ within the meaning of the exclusion; or
- that, as a matter of causation, it was the malicious act and not any ‘infringement’ which was the proximate cause of the continued detention and hence of the CTL of the Vessel;
or, in the alternative,
- that the proximate cause of the detention of the Vessel after October 31, 2007 was the decision of Judge Villalobos to detain the Vessel, which decision the claimants contended was perverse and wrong or one which was obtained by unwarranted political interference by the Venezuelan executive, in which case the claim would be covered under clause 1.5 which provided cover in respect of loss caused by ‘any person acting … from a political motive’.
The Insurers denied that the Vessel’s loss was caused by a peril insured against, relying principally on the ‘infringement of customs regulations’ exclusion contained in clause 4.1.5 of the Institute War and Strikes Clauses. In the alternative, they argued that the proximate cause of the loss was the owner’s failure to put up security for the Vessel’s release.
In response to the Insurers' reliance on the exclusion for loss arising from failure to provide security, owners argued that they could only be required to provide reasonable security and that they made efforts to provide security, but through no fault of their own, either it was not possible to do so or such security as might have been acceptable to the Venezuelan authorities was simply not reasonable.
There was also a question about the point at which the owners cease to be entitled to claim sue and labour expenses, in circumstances where notice of abandonment had been served and declined but ‘writ clause’ agreed (the effect of which was to put the owners in the same position as if proceedings had been issued on that date).
Judgment on coverage for malicious acts of third parties
Definition of ‘malice’ or ‘malicious’
The policy provided express cover for loss of or damage to the Vessel caused by ‘capture seizure arrest restraint or detainment…’, by ‘…any person acting maliciously or from a political motive’ and by ‘confiscation or expropriation’. However, there was also an express exclusion for ‘loss damage liability or expense arising from…arrest restraint detainment confiscation or expropriation under quarantine regulations or by reason of infringement of any customs or trading regulations’.
In ruling on the owners’ claim for a CTL by reason of loss of the Vessel as a result of malicious acts of third parties, Flaux J determined that the correct test for what constitutes ‘malice’ is the criminal law definition, as confirmed by Colman J in Strive Shipping Corporation v Hellenic Mutual War Risks Association (Bermuda) Ltd (‘The Grecia Express’)  EWHC 203 (Comm):
‘There is no reason why the meaning of ‘person acting maliciously’ should be more narrowly confined than the meaning which would be given to the word ‘maliciously’ under the Malicious Damage Act 1861. Provided that the evidence establishes that the vessel was lost or damaged due to the conduct of someone who was intending to cause it to be lost or damaged or was reckless as to whether such loss or damage would be caused, that is enough to engage the liability of war risks underwriters. The words therefore cover casual or random vandalism and do not require proof that the person concerned had the purpose of injuring the assured or even knew the identity of the assured.’
In The Grecia Express, Colman J also held that the scope of the phrase ‘persons acting maliciously’ had to be construed as excluding the conduct of the master and the crew amounting to barratry, since barratry was not a peril insured under the war risks policy in that case.
In the course of proceedings the Insurers accepted that the exclusion for infringement of customs regulations would not apply to so-called ‘put-up job’ scenarios where the authorities deliberately plant the drugs (or presumably engage a third party to plant the drugs) so as to detain the Vessel.
Flaux J considered that acceptance amounted to a recognition that there is an implied limitation on the scope of what constitutes an ‘infringement of custom regulations’ within the meaning of the exclusion. He saw no distinction between the hypothetical ‘put-up job’ and the present case of the drug smugglers whose deliberate and malicious act in planting the drugs leads to the vessel being detained.
Flaux J held that the owner’s claim for a CTL succeeded on the basis that the ‘infringement’ was no more than the manifestation of the malicious acts of third parties in attaching drugs to the hull, and that the exclusion for infringement of customs regulations does not, as a matter of construction, apply to exclude cover in these circumstances. It was necessary to read the malicious acts cover and the customs exclusion together to determine the true ambit.
In considering his judgment, Flaux J cited Toulson J in Handelsbanken v Dandridge (‘The Aliza Glacial’) and, in some detail, Lord Denning MR in Panamanian Oriental Steamship v Wright (‘The Anita’)  2 Lloyd's Rep 365 (Mocatta J). Both citations supported his reasoning that a limitation on an exclusion wording should be implied where necessary to ensure the spirit of the policy is adhered to.
Judgment on the infringement of customs regulations and political interference
More than half of what is an extremely long judgment by Flaux J is taken up with a detailed examination and analysis of the events leading up to - and contents of - the various hearings and judgments in Venezuela. However, given Flaux J’s ultimate conclusion that the claim was covered under the malicious acts provisions, his conclusions on the political interference aspect of the claim, while interesting in terms of discussions of proximate cause, are obiter.
Flaux J held that, if he had not already found that there was cover under the malicious acts of third parties provision, and that the exclusion for infringement of customs regulations did not, as a matter of construction, operate to exclude cover in those circumstances, then he would have found on the facts that the exclusion for infringement of customs regulations would have applied, because there was no break in the chain of causation between the infringement and the detainment of the Vessel. The decisions of the Venezuelan courts ordering such detainment were not perverse or wrong and were not procured by unwarranted political interference.
He applied the test established by Lord Denning MR in The Anita, namely that the critical question in any given case was not whether or not there had been political interference (including negative or indirect interference), but rather, whether the decision of the judge was justified or not as a matter of law, despite the alleged interference. If it was justified, then any political interference would not break the chain of causation.
Judgment for alleged failure to provide security
Flaux J held that the exclusion for failure to put up security did not apply. This was not a case where the owner was unwilling or unable to provide security, and indeed had taken reasonable steps towards the provision of security. Flaux J considered that it was an unrealistic assumption that reasonable security could and would have been agreed with the Venezuelan authorities.
Judgment for sue and labour costs
The Judge held that the owners were entitled to recover sue and labour expenses, including after the notice of abandonment and agreement of the writ clause on June 18, 2008. The Judge rejected the Insurers’ submissions that sue and labour expenditure was not recoverable beyond the date of notice of abandonment. Although he accepted that sue and labour costs could not be recovered after proceedings had been issued, he did not accept submissions by the Insurers that the agreement of the writ clause, for these purposes, meant that the duty to sue and labour or the right to recover sue and labour costs came to an end at that point.
The matter is listed for appeal before the Court of Appeal in the second half of this year. Those interested should watch this space.
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Western Trading Ltd v Great Lakes Reinsurance (UK) plc  EWHC 103 (QB)
This case, arising out of a fire insurance claim, provides a rare example of judicial consideration of the defence of lack of insurable interest. Judge Mackie QC was asked also to determine questions of misrepresentation/material non-disclosure, breach of warranty and reinstatement.
The Court held that the claimant’s claim should succeed and granted a declaration that it was entitled to an indemnity in the terms sought.
The claim relates to two neighbouring buildings (the Property), destroyed by a fire in July 2012. The Property was owned by a property investor, Mr Singh, and the claimant existed to hold and manage Mr Singh’s property portfolio. The claimant company was owned largely by Mr Singh.
Between 2010 and 2013, the claimant’s broker arranged insurance for the Property via an underwriting agency which had a binder with a Lloyd’s syndicate in 2010/11 and with the defendant in 2011/12 and 2012/13. The claimant submitted a proposal form in respect of the 2010/11 year only, though it confirmed at renewal in 2011 and 2012 that there had been no change in occupancy since the 2010/11 proposal form.
The fire insurance claim was notified to the 2012/13 policy, and was resisted by the defendant on the grounds of lack of insurable interest, material non-disclosure/misrepresentation and/or breach of warranty. The claimant issued proceedings, seeking a declaration from the Court that it was entitled to an indemnity for the costs of reinstatement of the Property.
The defendant argued that:
- Insurable interest: the claimant did not own or have a tenancy over the Property, and it had no interest in the preservation of the Property or exposure to any prejudice should it be damaged or destroyed. Accordingly, there was no insurable interest and no insurance contract.
- Misrepresentation: the claimant misrepresented various facts at renewal, including that the Property was in use for commercial purposes, was regularly occupied and that there had been no change in occupancy since the previous insurance policy year.
- Material non-disclosure: the claimant failed to disclose the alleged misrepresentations, as well as the fact that there was no tenancy arrangement between Mr Singh and the claimant, and that the claimant had no immediate plans to develop the Property because it would be uneconomical to do so.
- Breach of warranty: the claimant was in breach of warranty, having stated in its 2010/11 proposal form that the Property was regularly occupied and that there were three tenants.
- Reinstatement: the claimant should not, in any event, be entitled to an indemnity for the costs of reinstatement of the Property because it had not taken any steps to reinstate (and the insurance policy provided that no payment would be due ‘until the cost of reinstatement shall have been actually incurred’ and was conditional upon the claimant carrying out the reinstatement ‘with reasonable dispatch’).
- Relief: the claimant’s case was that the defendant had wrongfully avoided the insurance policy, and therefore the correct remedy (if the claimant’s claim was to succeed) would be damages for breach of contract, not a declaration.
The Court found that the claimant did have an insurable interest. Notwithstanding that the Property was owned by Mr Singh, the Court accepted that the claimant paid rent to Mr Singh, granted leases over the Property to third parties, took responsibility for any rates liability in relation to the Property, and obtained insurance cover and paid premium over a number of years. The Court found that, on the facts, the claimant was under an obligation to reinstate the Property. The Court also considered that, if the claimant had not had an insurable interest, some other entity within the family business would have assumed the role of insured.
In reaching this decision, and mindful of the Court’s usual inclination to find in favour of an insured on the question of insurable interest (Stock v Inglis  1 QBD 564 cited), the Court was persuaded by the fact that the defendant had neither taken an interest in the question of insurable interest nor alerted the claimant to the importance of the issue until a claim was notified to the insurance policy.
The defence of misrepresentation/material non-disclosure failed on the basis that, to the limited extent to which anything material was misrepresented to the defendant, it was not relied upon by the defendant in writing the risk. The Court found that the only information relied upon by the defendant had been a survey of the Property carried out in 2011. Based on the survey, the defendant had agreed to insure the Property in 2011/12 and 2012/13 on the proviso that certain ‘risk improvements’ were made. There was no evidence that anything else induced the defendant into the insurance contract and it formed no part of the defendant’s case that any of the ‘risk improvements’ were not carried out.
Breach of warranty
The Court dealt with this point only briefly, finding that (although the 2010/11 proposal form had stated incorrectly that there were three tenants at the Property) this proposal form did not form the basis of the 2012/13 policy to which the claim was notified, and therefore there had been no breach of warranty.
The Court was unpersuaded by the defendant’s case that the right to reinstatement costs under the insurance policy was subject to prompt reinstatement of the Property by the claimant. Citing with approval an extract from MacGillivray (at 20-022), the Court found that the requirement to reinstate cannot arise until an insurer has confirmed that it will indemnify.
The Court confirmed that this principle should apply not just to impecunious insureds who cannot pay for the reinstatement without insurance funds, but also to successful businesses.
The Court rejected also the defendant’s argument that the correct remedy was damages, not a declaration, remarking that it is common for the Court to be asked to make a declaration in insurance cases (and, indeed, that insurers often issue proceedings to obtain declarations of non-liability). The Court observed that a declaration (unlike an award for damages) would negate the defendant’s liability should the claimant decide not to reinstate the Property.
The judgment provides an interesting overview of the circumstances in which insurers might raise the defence of lack of insurable interest (although, interestingly, the Court does not appear to have considered Macuara v Northern Assurance  AC 619, the leading case on insurable interest for property risks). The rarity with which this defence is raised reflects a reluctance on the part of insurers to rely on such a technical objection, and the Court’s propensity to lean in favour of insureds on this issue.
The judgment clarifies also the principle that insurers cannot rely upon a breach of policy condition to reinstate promptly in circumstances where they have sought to decline cover, and reaffirms the importance of reliance/inducement in relation to a defence of misrepresentation/material non-disclosure. The Court highlighted the importance of testing this subjective evidence thoroughly before seeking to rely upon such a defence at trial.
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Value added tax: cross border supplies between a company’s head office and its branches
The UK has published a business brief confirming its views as to the implications of the decision of the Court of Justice of the European Union (CJEU) in Skandia (Case C-7/13) (which held that services provided by a head office in the United States to a branch in Sweden which had been brought within a VAT group should be subject to VAT). This decision sent shockwaves through international groups, particularly those in the financial and insurance sectors for whom irrecoverable VAT can be a significant cost.
Where services are supplied between a head office and a branch, FCE Bank (Case C-210/04) confirms that there is no supply for VAT purposes because the branch and the head office are the same person. The CJEU distinguished this in Skandia by holding that where services are supplied by a head office to its Swedish branch which is a member of a VAT group, there was a supply on which VAT should be charged. This decision relied on two fundamental propositions – first, only the Swedish branch was a member of the VAT group (the head office was not) and second, the head office and the Swedish branch were given separate identities for VAT purposes (on the basis that a VAT group has a separate identity to its members).
Her Majesty’s Revenue and Customs (HMRC) has recognised this distinction by seeking to limit the application of the Skandia judgment to those branches which are VAT grouped in a Member State, which allows only the branch (and not the company in its entirety) to join the VAT group (so-called ‘establishment only’ groupings). The UK does not have ‘establishment only’ grouping – an entire company, including head office and any branches, join a VAT group together. HMRC has indicated that they will publish a list of the jurisdictions which they consider have ‘establishment only’ grouping.
The effect of this approach is that supplies made between a head office and a branch or between two branches can have VAT implications in the UK where:
- A company has an overseas branch which is a member of a VAT group to which the company does not belong and that overseas branch supplies services either to a UK branch or the UK head office of the same company.
In this situation, the UK VAT rules provide that the supply is made in the UK and will require the company to account for VAT under the reverse charge mechanism. Where the company can recover UK VAT in full, this should have little practical impact. However where the company is unable to recover the VAT in full, this will result in a real cost to the company.
- A company has an overseas branch which is a member of a VAT group to which the company does not belong and that overseas branch receives services either from a UK branch or the UK head office of the same company.
In this scenario, it will be necessary to look at the nature of what is being supplied to the overseas branch, and to take that supply into account in determining how much VAT the company can recover.
These changes to the way VAT is imposed will apply in the UK to services performed on or after January 1, 2016. Businesses have the opportunity to opt to implement this treatment at an earlier date. It is expected that other tax authorities will publish their views shortly. The German revenue is due to confirm its position in March 2015. Given that the CJEU’s decision is consistent with the views of the European Commission, which were published in 2009, it is likely that some changes could be adopted across Europe. Affected organisations will need to consider how to structure internal supply arrangements. One possible approach might be to use cost sharing arrangements. Such arrangements need careful consideration as the requirements for VAT exemption are strict and direct tax issues can also arise.
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Federal Court of Justice confirms calculation of surplus by life assurance company
In a highly anticipated decision the German Federal Court of Justice, on February 11, confirmed the method of calculation of surplus and policyholder participation in such surplus in life insurance by a German insurer for endowment life insurance. Consumer protection agencies had called the calculation methods ‘intransparent’ and ‘trickery’. The decision confirms the application of the statutory rules by the life insurance industry which otherwise could have faced substantial claims.
A policyholder of Allianz had brought a claim to obtain detailed information on the calculation basis for the surplus of his endowment life policy entered into in 1987 at the end of the term and an amended (higher) payment. He had claimed that the hidden reserve in assets and the surplus participation had been set-off against each other instead of added and that such a calculation was wrong. The Federal Court of Justice rejected the entire claim.
In Germany, the policyholder of an endowment life policy has the right to participate in the surplus generated. The calculation of the surplus is subject to statutory rules. In summary, the policyholder shall participate in such surplus (during the term and at the end of the term) in proportion to the contributions made to the surplus by way of premium payments.
Until reform of insurance contract law in 2007 the participation was a flat amount. Since then, following a decision by the Federal Constitutional Court, the surplus in hidden reserves of assets (i.e. the difference in purchase value and market value of assets) will be considered with 50 per cent into the complex calculation of the surplus. The resulting amount is paid at the end of the term of the life insurance. This calculation has been modified by the Life Insurance Reform Act 2014 which introduced numerous changes to statutory assessment and calculation rules in light of the low interest rate environment. Life insurers can only pay the surplus from, for example, the market gain as long as the guaranteed interest and surplus of all other policyholders is not jeopardised. The focus it would appear is on safe guarding the interest of all insureds as a collective in a stressed interest situation rather than awarding an individual policyholder.
As an alternative approach, a base participation will stabilise the participation in surplus during the entire term of the life insurance product to avoid the policyholder facing an ‘incidental’ low market value which may be cyclic or driven by external factors at the end of the term.
The decision to choose either of the above options is on the life insurer and is made at the end of each year and will vary greatly in the market. Unsurprisingly the consumer protection agencies maintain that the calculation is a ‘black box’ and argue that a new decision the Federal Constitutional Court is needed. In early April the policyholder, backed by the Association of Insureds (Bund der Versicherten), raised a constitutional complaint against the ruling of the German Federal Court of Justice.
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Deepwater Horizon redefines the scope of additional insured coverage under Texas law
On February 13, 2015, the Texas Supreme Court handed down its decision in the closely-watched In re Deepwater Horizon, No. 13-0670 (Tex. 2014) case. The case arose out of the massive damages caused by the 2010 offshore well blowout in the Gulf of Mexico involving British Petroleum (BP) and its drilling contractor, Transocean. The issue was whether British Petroleum (BP) was entitled to $750 million in insurance proceeds as an additional insured under Transocean’s liability policy. The answer was ‘no’.
The additional insured provision in Transocean’s policies extended coverage to “[a]ny person or entity to whom the ‘Insured’ is obliged by oral or written ‘Insured Contract’...to provide insurance such as afforded by [the] Policy.” The policies further defined ‘Insured Contract’ as “any written or oral contract or agreement entered into by the ‘Insured’...and pertaining to business under which the ‘Insured’ assumes the tort liability of another party to pay for ‘Bodily Injury’ [or] ‘Property Damage’...to a ‘Third Party’ or organisation’. The drilling contract at issue also contained an insurance provision under which Transocean agreed to name BP “as additional insureds in each of [Transocean’s] policies, except Worker’s Compensation for liabilities assumed by [Transocean] under the terms of [the drilling contract]”.
The parties did not dispute that BP agreed in the drilling contract to be responsible for all subsurface pollution while Transocean agreed to assume liability for all above-surface pollution. The blowout and ensuing oil spill occurred below the surface of the water.
BP sought coverage, arguing that the scope of its coverage under Transocean’s policies as additional insured could be determined only by the four corners of Transocean’s policies. More specifically, BP argued that: (1) the drilling contract was an ‘Insured Contract’; (2) the drilling contract obligated Transocean to provide additional-insured coverage; (3) BP was therefore an additional insured under the additional insured provision in Transocean’s policies; (4) there were no limitations on the scope of coverage in Transocean’s policies; and (5) BP therefore was covered for all liabilities (including subsurface pollution liabilities) in connection with the well at issue under Transocean’s policies.
In response, Transocean and its insurers argued that Transocean’s policies incorporated the drilling contract by reference and thereby limited the scope of BP’s coverage to only those liabilities Transocean agreed to assume in the drilling contract, i.e. above-surface pollution liabilities.
The Supreme Court of Texas held for Transocean and its insurers. The Court first noted that Texas cases, including Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008), require courts to consider the terms of an underlying ‘Insured Contract’ to the extent the policy language directs courts to do so. The Court then opined that, because BP’s status as an additional insured was predicated on the drilling contract, the scope of BP’s coverage under Transocean’s policies required reference to the drilling contract’s insurance provisions. Relying on the drilling contract’s requirement that Transocean only add BP as an additional insured ‘for liabilities assumed by [Transocean] under the terms of [the drilling contract]’, the Court then held that the additional insured provision only extended coverage to BP for the above-surface liabilities assumed by Transocean in the drilling contract. Because the liability here was related to subsurface pollution and Transocean only agreed to assume liabilities for above-surface pollution, the Court held that BP was not an additional insured for the Deepwater Horizon claim.
This holding is intriguing, because while the Court quite logically notes that courts must consider the terms of an underlying ‘Insured Contract’ to the extent the policy language directs courts to do so, the Court did not explain at length how Transocean’s policies directed the Court to consider the terms of the drilling contract in relation to limitations on the scope of coverage.
While it is clear that Transocean’s policies directed the Court to consider the drilling contract to determine whether BP was an additional insured by virtue of being an “entity to whom [Transocean was] obliged by oral or written ‘Insured Contract’...to provide insurance such as afforded by Transocean’s Policy,” Transocean’s policies did not explicitly state that the coverage afforded under the additional insured provision was limited in scope such that it matched the scope of Transocean’s obligation to procure insurance for BP as stated in the drilling contract. Instead of relying on an explicit textual ‘hook’, the Court relied on the interrelated nature of Transocean’s policies and the drilling contract to find that a limitation on the scope of coverage Transocean agreed to provide to BP in the drilling contract necessarily limited coverage under Transocean’s policies.
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