Owners of the aptly named vessel mv “WIN WIN” were successful in the Commercial Court against their War Risk Insurers, who had rejected a declaration of Constructive Total Loss following the vessel’s lengthy detention for illegally anchoring in Indonesian territorial waters. Article by Simran Keightley, Associate and Helen McCormick, Director.

Owners “Win Win” Against Hull Insurers for Constructive Total Loss of Vessel in Indonesia

Delos Shipholding SA & Ors v Allianz Global Corporate and Specialty SE & Ors [2024] EWHC 719 (Comm)

Following the lengthy detention of the vessel “WIN WIN” for illegally anchoring in Indonesian territorial waters, the Insurers argued that the incident was not fortuitous as the loss arose from Owners’ voluntary decision to risk arrest. Insurers also argued that Owners had failed in their duty to sue and labour by continuing to negotiate with the Indonesian Navy for the early release of the vessel even after they ought to have been aware that the Navy were seeking a bribe.

These arguments were rejected, and other defences regarding policy exclusions and material non-disclosure also failed.

The judgment should provide some comfort to vessel owners who are faced with an unexpected vessel arrest and must make difficult decisions quickly about how best to procure its release, particularly where there is a higher risk of bribery and corruption. The “WIN WIN” acknowledges such difficulties and confirms that Owners’ decisions should not be judged with the benefit of hindsight.

Background

The mv ‘WIN WIN’ was one of around 19 ships which were detained by the authorities in February 2019 for illegally anchoring in Indonesian territorial waters. ‘Eastern OPL Singapore’ had been used as an anchorage for many years without any problems, but a change in the policy of the Indonesian government resulted in the Indonesian Navy arresting a large number of ships for anchoring in territorial waters without permission.

Once the Vessel had been detained for more than 6 months, the Owners declared a Constructive Total Loss. Insurers broadly accepted that the requirements for a CTL were met but defended the claim on the grounds that:

1. the detention was not fortuitous because the Master and/or the Owners knew or should have known that the vessel had anchored in territorial waters and the arrest was therefore the consequence of their voluntary conduct; and

2. the delay was caused by the Owners’ unreasonable failure of their duty to sue and labour;

There were also arguments regarding a policy exclusion for detention under customs or quarantine regulations, and material non-disclosure of criminal charges which had been brought against a nominee director of the owner in an unrelated case.

All of these defences were rejected by Mrs Justice Dias.

1. Fortuity

A loss must be fortuitous in order to be covered by insurance.

Insurers argued that the decision to anchor in Indonesian territorial waters was entirely voluntary, and that her consequent arrest and detention, being entirely lawful, were not only foreseeable, but simply an ordinary consequence of that voluntary conduct. Therefore, it was not an insured risk but arose out of ordinary trading.

The Owners referred to section 55(2) of the Marine Insurance Act 1906, which provides that an insurer shall not be liable for losses attributable to the wilful misconduct of the assured but is liable for any loss proximately caused by a peril insured against, even if the loss would not have happened but for the misconduct or negligence of the master or crew.

However, Mrs Justice Dias determined that the Owners might have been negligent in failing to check but had not been subjectively aware that they were choosing to anchor inside Indonesian territorial waters.

She said, “if an assured is unaware that it is making a choice which carries legal significance, then even if it ought to have known, that is at most mere negligence and it would be contrary to the spirit of section 55(2)(a) to deny recovery on grounds of fortuity in those circumstances.” She also drew a distinction between consequences that were inevitable and which were merely possible or foreseeable.

Taking a course of action knowing (or being reckless as to whether) the vessel would be detained would constitute wilful misconduct. However, that was not the case here.

2. Sue and Labour

Breach of the duty to sue and labour breaks the chain of causation between the insured peril and the loss and provides a defence to the insurer. The Insurers argued that the Owners continued negotiations with the Indonesian Navy for the early release of the vessel, even when it was clear that early release would not be possible without the payment of a bribe, and that their ongoing negotiations had antagonised the authorities prolonging the detention. They said this was unreasonable conduct and a breach of the Owners’ duty to sue and labour, but for which the vessel would have been released before she became a constructive total loss.

The judge considered that it was natural for the Owners to rely heavily on their P&I Club to guide and co-ordinate any attempts to release the vessel. The Owners were not expected to be experts in the Indonesian criminal justice system, and so their appointment of local lawyers was entirely appropriate. She also found that it was not unreasonable to continue discussions until they were sure of the position, even if they had considered it possible they might be asked for a bribe.

Mrs Justice Dias emphasised that the Owners ought not to be criticised for pursuing all lines of enquiry to release the vessel early and noted, with respect to those assisting the Owners with this process, that if they had not explored every option, they would not have been doing their job properly. She found, therefore, that the Owners had not breached their duty to sue and labour.

3. Exclusion

The policy excluded detention under customs or quarantine regulations or ‘a similar arrest, restraint or detainment not arising from actual or impending hostilities’. The judge found that an arrest, restraint or detainment would be ‘similar’ if the underlying purpose and objective of the arrest was materially the same as the underlying purpose and objective of an arrest under customs or quarantine regulations. She found that, on the facts, this was not the case here.

4. Material Non-Disclosure

The Insurance Act 2015 (the “Act”) imposes a duty on an assured to make a fair presentation of the risk to the insurer before the contract is entered into. By virtue of section 3(4) of the Act, a fair presentation includes “disclosure of every material circumstance which the insured knows or ought to know.”

Section 4(3) of the 2015 Act provides that for the purposes of discharging its duty of fair presentation, a corporate assured knows:

“only what is known to one or more of the individuals who are -

(a) part of the insured’s senior management, or

(b) responsible for the insured’s insurance.”

The Insurers took issue with the non-disclosure of unrelated criminal charges which had been brought against a nominee director of the owing company.

On the facts it was determined that the nominee director, who was an external lawyer who had been appointed to execute company documents, did not fall within the definition of ‘senior management’ under the Act. The judge accepted that he was discharging an administrative function and exercised no independent judgment in relation to the operation of the company and had no decision-making power.

As the Insurers had failed to successfully satisfy the ‘knowledge’ limb of the test, this defence also failed.

CJC Comment

It is not an uncommon occurrence for vessels to be seized by government authorities in circumstances where the reason for the detention is initially obscure or where criminal activity by the vessel or its crew is alleged and hotly disputed. There may also be ulterior, less legitimate motives for an arrest. In these circumstances, decisions will need to be made, often quickly and with limited information, as to how best to respond. Guidance will be sought from War Risk and P&I insurers and local lawyers and correspondents, with all parties working to achieve a prompt release of the vessel and crew. However, interests may diverge as the detention continues, particularly as vessel owners will need to decide whether to declare a CTL and underwriters will need to decide whether to accept or reject the declaration.

Although much of this case turned on its specific facts, this judgment provides useful guidance for both owners and insurers dealing with an unexpected, lengthy detention of a vessel by government authorities, particularly when the suspicion arises that a bribe in being sought, should disputes arise regarding the cause of the arrest (and whether it was a fortuity) and owners’ duty to sue and labour.