Marine war risk exclusions rejected and sue and labour expenses discussed where insured is faultless

An English court recently dealt with a case which brought marine war risk exclusions into the spotlight. In 2007 an underwater inspection of a vessel in Venezuela resulted in the discovery of 132kgs of cocaine strapped to its hull. The drugs were attached by unknown third parties. The vessel was immediately detained and eventually abandoned to a Venezuelan court in 2009.

The owners claimed against the war risk insurers for constructive loss of the vessel as a result of her detention for more than 6 months.

The court held that the standard marine war risk exclusion for infringement of any customs or trading regulations was not applicable where the malicious act of a third party caused the infringement because this would be contrary to the spirit of the policy. The court compared these acts to “put-up” jobs where authorities deliberately plant drugs to detain a vessel.

The other exclusion relied on by the insurer pertained to the insured’s failure to furnish security or pay a fine or penalty. The court refused to allow the insurer to rely on this exclusion stating that the insurer’s assumption that reasonable security could have been agreed with the Venezuelan authorities was unrealistic. This was not a case where the insured was unwilling or unable to provide security.

The court went further to clarify issues regarding sue and labour expenses. It was held that the position between the insurer and insured is crystallised on the date of issue of the claim form. Therefore, ordinarily, the obligation or right to sue and labour ceases on that date. However, where the vessel is ‘still in the grip’ of the insured peril, it is in the interests of both parties that expenses continue to be incurred to mitigate the loss. Where the same legal expenses are incurred for two purposes, and one does not fall within the definition of sue and labour expenses, there is no basis to apportion the expenses between the purposes. The full expense will be construed as a sue and labour expense. Any expenses incurred to ensure that the vessel is manned and maintained after the issue of the claim form will be a sue and labour expense as this too would go towards mitigation of the loss.

In South African law the insured has a duty to minimise the loss and can, in some circumstances, claim the costs reasonably incurred as part of the claim. It often depends on the particular policy wording.

[The case is Atlasnavios -Navegacao, LDA v Navigators Insurance Company Ltd & Ors]

First posted by: Financial Institutions Legal Snapshot