The Commercial Court today delivered its judgment in Piraeus Bank c. Antares (“The ZouZou”)  EWHC 1169 (Comm). The ruling concerns mortgagee interest insurance and standard exclusions from a war risk policy.
Guy Blackwood QC and Benjamin Coffer appeared for the successful underwriters, under Jonathan Evans, Craig Boyle-Smith and Ingrid Hu of Kennedys LLP.
The complaint stemmed from the detention of the vessel “ZouZou” in Venezuela following an allegation that the crew was attempting to smuggle diesel fuel. The vessel was detained for approximately 14 months and then released. Four crew members were later tried and acquitted. The ship’s owners claimed an implied total loss as part of their war risk cover, but the war risk insurers avoided the policy on the grounds of material non-disclosure by the owners, unrelated to the detention.
The plaintiff bank was the ship’s mortgagee and had purchased Mortgagees’ Interest Insurance (or “MII”) from the defendant insurers to protect its interests as assignees and beneficiaries of losses under the owners’ policies. Following the avoidance of the war risk policy, the bank sought to recover from the defendants under the IRM. The bank’s claim was for approximately $71 million plus interest.
The defendants successfully argued that there was no MII coverage because the loss would not have been covered by the war risk policy, apart from the escape. There would have been no coverage under the war risks policy because that policy contained exclusions for any loss”arising out of any action taken by a state or public or local authority…under the criminal law of any state…or based on an alleged violation of the laws of any state”. These exclusions are similar, though potentially broader, to the standard exclusion that appears in the War and Strikes Institute detention clauses”under quarantine regulations or due to breach of any customs or trade regulations”.
The bank’s main argument was that these exclusions did not apply because detention of the vessel was illegal under Venezuelan law. The bank argued that the Venezuelan prosecutor had an obligation to obtain the release of the ship once it became apparent that the detention was no longer necessary for the criminal investigation, and that the fact that the prosecutor did not did not make the detention unconstitutional.
Evidence from Venezuelan law occupied most of the trial, but was ultimately irrelevant: Judge Calver found, following the Court of Appeal’s decision in The Anita  1 Lloyds Rep 487, only one authentic error in Venezuelan law on the part of the prosecution would not remove the detention from the scope of the exclusions, unless the error was perverse or politically motivated (which was not alleged by the bank).
In any event, the judge considered that the detention had do not illegal under Venezuelan law. To reach this conclusion, he relied on the findings of Venezuelan law made by Flaux J in The Atlantic B. These findings were admissible as evidence of Venezuelan law under Section 4(2) of the Civil Evidence Act 1972, a rarely used provision that allows a party to rely on English decisions regarding foreign law. as a sort of precedent.
The judge also rejected the bank’s fallback argument that the war risk policy exclusions only applied when the ship’s owners were themselves charged with an offence. A similar argument had been rejected by Hamblen J in The Atlantic B in relation to the equivalent exclusion in the Institute’s war and strike clauses.
The bank argued that even though the loss would have been excluded from the war risk policy, it was nevertheless entitled to full recovery of a CTL under the MII policy. The bank’s argument was essentially that the wording of the MII provides coverage for any loss or damage caused by the owners or their servants or agents, in the event of subsequent non-payment by the owners’ insurers.
The bank relied primarily on the wording of one of the insurance clauses in the wording of the IRM, which provided coverage in the event of loss or damage”Which occurs by reason of any alleged deliberate, negligent or accidental act or omission or any knowledge or intimacy of any of [the owners or their servants or agents] including deliberate or negligent sinking or damage to the vessel or the vessel being unseaworthy or insufficiently equipped, equipped or certified (including, but not limited to, the requirements set out in the conventions and /or by class societies)“. The bank argued that the clause was applicable because the detention of the vessel was caused either by an intentional act on the part of the crew in attempting to smuggle the fuel, or alternatively by their accidental conduct. or negligent in allowing diesel to be loaded in such a way as to give the impression that they were attempting to engage in smuggling.
The judge rejected this argument. The insurance clause required an “alleged” act or omission, that is, an allegation made by the owners’ insurers. The purpose of the clause was to indemnify the bank where the owners’ insurers refuse to cover on the basis of their allegation that the loss or damage to the vessel was caused by the owners or their servants or agents – in other words , where it was the alleged involvement of the owners or their servants or agents in the loss which resulted in the owners’ lack of insurance coverage. This would be the case, for example, in a case of scuttling, where there would be no chance.
Of particular note for practitioners who deal with MII cover in practice is the judge’s ruling that it was not necessary for the bank to submit its own notice of surrender under the MII policy, separate from the Notice of Abandonment by Owners under War Risk Policy. . The judge agreed with the insurers that the interest insured by the policy is the bank’s interest in the owners’ policies as assignee and beneficiary of losses, rather than the bank’s interest in the vessel as mortgage creditor. The bank was therefore not required to abandon ship to claim an implied total loss.
As the bank’s claim was dismissed, there was no need for the court to go ahead and consider whether the bank should have credited the residual value of the vessel, which had been returned to it before the opening of the proceedings. This interesting question will have to be answered on another occasion.