Court upholds marine war risks claim, but rejects claim for damages for late payment

The decision in Delos Shipholding SA & Ors v Allianz Global Corporate and Speciality SE & Ors [2024] EWHC 719 (Comm) concerned a claim under a marine war risks policy for the detention (and subsequent constructive total loss) of a vessel. Insurers attempted to deny coverage through various means, including arguments that: (i) the vessel was not detained fortuitously, but instead through her master's intentional conduct, (ii) that the claim was excluded as the vessel had been detained by regulations 'similar' to customs or quarantine regulations, (iii) that the Claimants had breached their duty to sue and labour, and (iv) that Insurers could avoid the policy for material non-disclosure.  The Court rejected all defences and upheld the Claimants' claim, but held that a separate claim for damages under section 13A of the Insurance Act 2015 failed on the facts.

BACKGROUND

The claim arose out of what was described by the judge as the "illegal parking" of the bulk carrier "WIN WIN" (the Vessel) just inside Indonesian territorial waters off Singapore in February 2019. The Vessel's Master was unable to anchor her in the usual position and had anchored her in an alternative safe location, which until only a few days previously had been used as an anchorage by a large volume of vessels without any issues and was generally understood to be Eastern (Outside Port Limits) Singapore, and not Indonesian territorial waters.

Amidst general uncertainty and confusion regarding the apparent change in approach to the waters where the Vessel was anchored, attempts were made to engage in discussions with the Indonesian authorities to try to recover the vessel without full-blown proceedings.  Ultimately these talks were unsuccessful and, among other penalties, the Vessel was detained by the Indonesian authorities for more than a year.

The Vessel was insured under a marine war risks policy which expressly incorporated the American Institute Hull War Risks and Strikes Clause (1977) (the Policy). The Policy included a detainment clause which provided that, in the event that the Vessel was detained such that the insured lost the free use and disposal of it for a period of six months, then the Vessel would be deemed a constructive total loss (CTL) and the assured would be deemed to have been deprived of the possession of the Vessel.

The Claimants first notified Insurers just over a month after the Vessel was first detained.  After the Vessel had been detained for a period of six months, the Claimants gave Notice of Abandonment to Insurers and issued a Claim Form.  The Notice of Abandonment was rejected by Insurers, as were three more notices given subsequently.

Insurers accepted that the requirements for a CTL were established in principle, but nonetheless denied the claim on essentially four grounds:

• The detainment was not fortuitous since the Master and/or one or more of the Claimants knew or should have known that the Vessel had anchored in Indonesian territorial waters and that the detention was the consequence of their voluntary conduct in doing so;
• The claim falls within an exclusion to the Policy that cover would not be available for detainment under customs or quarantine regulations, or "similar…detainment not arising from actual or impending hostilities";
• The detainment being delayed to over six months was materially caused by the Claimants' unreasonable conduct in breach of their duty to sue and labour through their decision to engage in "commercial settlement" discussions which they knew would fail and only antagonise the Indonesian authorities; and
• Insurers are entitled to avoid the Policy for material non-disclosure, given that criminal charges against a director of one of the Claimants were not disclosed.

The Claimants asserted an additional claim for damages under section 13A of the Insurance Act 2015 on the basis that, should their clam under the Policy succeed, Insurers had failed to pay the insurance proceeds within a reasonable time.

DECISION

The Court rejected all four of the defences advanced by Insurers but the Claimants were not successful in their claim for damages for late payment.  We explore each aspect of the decision in further detail below.

Fortuitous detention

The Court held that while it was uncontroversial that cover is not available for losses deliberately caused by an insured, this only extends to loss which is bound to result in the ordinary course of events from some deliberate conduct or choice made by the assured.  There must be some awareness that a decision is being made, in order for a loss to be considered fortuitous. This required the following:

• a subjective awareness that the Master was choosing to anchor the Vessel inside territorial waters rather than in international waters; and
• the assured must subjectively appreciate that the consequences which eventuated were in fact the ordinary consequences of its conduct.

On the facts, the Master and/or the Claimants had no reason to suppose that the Vessel would be detained as a result of anchoring in territorial waters without permission.  If he had realised that he was anchoring in territorial waters, he would have moved on or not anchored there in the first place.

Further, the Court considered that the Master could not reasonably be expected to be familiar with the finer points of Indonesian law. The mere fact that he should have appreciated that anchoring without permission would expose the Vessel to the exercise of Indonesian sovereign authority in general terms does not of itself mean that he should have foreseen the risk of arrest and detention when no such actions were known to have been taken before.

In short, the arrest and subsequent detention of the vessel was not the ordinary consequence of voluntary conduct arising out of the ordinary incidents of trading.

Applicable exclusion

The Policy excluded loss caused by, resulting from or incurred as a consequence of "Arrest, restraint or detainment under customs or quarantine regulations and similar arrests, restraints or detainments not arising from actual or impeding hostilities."

Insurers argued that the arrest of the Vessel under Indonesian shipping law was a "similar arrest, restraint, or detainment" to one under customs or quarantine regulations. It was argued that both related to national safety or security, or to the upholding of national sovereignty.

The Court rejected this defence, ruling in favour of the Claimants' proposed construction of the exclusion. An arrest, restraint or detainment is "similar" for the purposes of the exclusion if the underlying purpose and objective of the arrest is materially the same as the underlying purpose and objective of an arrest under customs or quarantine regulations.  Insurers had asserted similarity at "far too high a level"; similarity depended on drawing inferences based on what the each regulation was directed towards.  On the facts no reliable inference could be drawn.

Sue and Labour

The Court set out that a breach of the duty to sue and labour is not independently actionable, but that an insurer will have a defence to a claim where the breach breaks the chain of causation between the operation of the insured peril and the loss.  As with the duty to mitigate, this requires a breach of contract analysis.  The question here was whether a prudent uninsured would have made the same error in judgment while attempting to discharge the duty that the insured made.

Insurers' argument was that the Claimants being side-tracked into discussions with the Indonesian Authorities was a breach of their duty to sue and labour and that the detention of the Vessel was materially caused by the Claimants' conduct in this regard. 

The Court reached the conclusion that the initiation of discussions was reasonable in the circumstances, particularly given the Claimants' initial confusion.  As to the continuation of the negotiations, ultimately the Court considered that the Claimants could not be criticised for pursuing all lines of enquiry and further that importantly there was no indication that the Claimants would have been worse off had discussions failed. The Claimants were therefore not in breach of their duty to sue and labour.

Mrs Justice Dias made further obiter comments that, although given there was no breach of the duty to sue and labour the question of causation did not arise, in any event she did not consider that the Claimants' conduct "comes anywhere near the degree of unreasonableness that would be required to break the chain of causation".

Duty of Fair Presentation

Insurers' argument that the Claimants breached the duty of fair presentation under the Insurance Act 2015 by failing to disclose that the sole director of the registered owner of the Vessel was the subject of criminal charges was denied on the basis that the Claimants did not have actual or constructive knowledge of the criminal cases. Those involved in the decision making and insurances had no knowledge of the charges to disclose, and the facts were not material to the risk.

Accordingly, the Claimants' claim for an indemnity under the Policy for the CTL of the Vessel succeeded in full.

Late payment under the Insurance Act 2015

In addition, the Claimants made a claim for damages under section 13A of the Insurance Act 2015.  Section 13A implies into every insurance contract a term that insurers must pay claims within a reasonable time.  Under section 13A(3), what is 'reasonable' depends on all relevant circumstances, including the type of insurance and the size and complexity of the claim.

It was common ground that while the burden of proof of showing that insurers failed to pay within a reasonable time was on the Claimants, it would then be open to Insurers to show that there were reasonable grounds for disputing the claim. 

Mrs Justice Dias considered that while insurers continued reliance on some of the defences was arguably unreasonable and what the judge described as "lawyer points", given the late notification and Insurers' dependence on disclosure to ascertain detailed knowledge of relevant discussions, it was difficult to conclude whether it was reasonable for Insures to have disputed the claim.  However, she held in any event that on the facts the Claimants had failed to establish the alleged loss, as they were not able to prove on the evidence available that they would have bought and sold a replacement vessel at a profit. 

As the claim failed on the facts, Mrs Justice Dias stated that she did not need to decide the question of whether a claim under section 13A would be limited to cases of unreasonable failure to pay prior to the commencement of proceedings, noting that there was no authority on the point to guide her reasoning.

COMMENT

Although the Insurance Act 2015 has now been in force for some years, it is only the second time that the court has considered section 13A and again the policyholder was not successful in claiming damages for late payment of its claim (see also our blog post on Quadra Commodities S.A. v XL Insurance Company SE and Others [2022] EWHC 431 (Comm)).  It is clear that a Claimant wanting to pursue a claim under section 13A must robustly evidence its loss due to any late payment.

This case also leaves various questions surrounding section 13A unresolved: notably, Mrs Justice Dias sidestepped the question of whether a section 13A claim is limited to cases of unreasonable failure to pay prior to commencement of proceedings and whether initiating proceedings effectively crystallises the position, thereby confining the regulation of Insurers' conduct thereafter to the remedies available under the usual court rules.  Future decisions may address this question, but it remains unanswered in this instance.