04 Aug 2016

Atlasnavios – Navegacao Lda v Navigators Insurance



Stephenson Harwood acted for insurers on their successful appeal to the Court of Appeal in the 'B Atlantic' case (Atlasnavios – Navegacao Lda v Navigators Insurance and others, [2016] EWCA Civ 808). The Court of Appeal held that there was no cover under the standard war risks policy for vessels caught smuggling drugs.

This case will be of interest to all insurers and their insured as:

  1. It concerns the correct interpretation of the standard war risks clauses and, in particular, whether the owner is covered for detentions and confiscations of the vessel where the loss arises from a detention by reason of the vessel being caught drug smuggling; and

  2. The legal principles on the correct interpretation of insurance contracts are of broad application.

Key facts

On 13 August 2007 the vessel completed loading a cargo of coal in Lake Maracaibo, Venezuela for discharge in Italy. An underwater inspection by divers discovered three bags of cocaine weighing 132 kilograms strapped to the vessel’s hull in the vicinity of the rudder, 10 metres below the waterline. This concealment constituted a criminal offence contrary to Venezuelan law.

When exactly the drugs were attached to the vessel is unknown. There had been an inspection on 12 August 2007 when the divers noticed that an underwater grille on the hull was loose and that various objects not belonging to the vessel (a grappling hook, a saw, a rope and other tools) were inside the space behind the grille. The Master was told to have the grille rewelded because of the risk of drug smuggling. He declined to do so because the vessel was due to sail that night. But the vessel did not sail then because there had been a miscalculation of the vessel’s draft and consequently a short loading, so that 800 m.t. of additional cargo was loaded. A second inspection was carried out the next day when the drugs were found. The vessel was detained and the crew was arrested.

The Master and Second Officer were charged with complicity with drug smuggling. On 31 October 2007 a Venezuelan judge sent them for trial and ordered the continued preventive detention of the vessel pursuant to Venezuelan law. The vessel remained in detention until in August 2010, following a jury trial, the two officers were convicted and sentenced to 9 years’ imprisonment. The court ordered the final confiscation of the vessel, which the owner had abandoned to the court in September 2009.

The owner presented a claim for the loss of the vessel to their war risk insurers.


Issues in dispute

The insurers declined cover, in reliance on the standard war risk exclusion for detentions arising by reason of infringement of customs regulations, it being well established by previous cases that the customs regulations exclusion applies to cases of drug smuggling.

At the first instance trial, the owner argued that the exclusion did not apply as (i) the detention and confiscation of the vessel was due to political interference in the judicial process in Venezuela rather than due to the infringement of customs regulations; and (ii) on a correct construction of the policy the exclusion did not apply as the loss arose from the malicious acts of third parties, which was an insured risk.

Flaux J rejected the owner’s allegations of political interference, but held that the loss was covered by the policy. He decided that “upon the correct construction of the policy and reading the malicious acts cover and the exclusions together, "infringement of customs regulations" in the exclusion does not include an "infringement" which is itself no more than the manifestation of the relevant act of third parties acting maliciously and the exclusion is subject to that limitation”. The insurers appealed against Flaux J’s finding on construction to the Court of Appeal.


The Court of Appeal’s decision

Clarke LJ (with whom Sir Timothy Lloyd and Lord Justice Laws agreed) reversed the decision of Flaux J. The Court of Appeal held that:

  1. The loss was caused by a combination of (i) the malicious act (the initial concealment of the drugs), and (ii) the subsequent detention (which was by reason of the concealment, which constituted the customs infringement). Both were proximate causes because without the malicious act, there would have been no cover, but without the detention, there would have been no loss. Accordingly, the principle established by 'Cory v Burr' and 'Wayne Tank' was triggered; if you have two proximate causes, one which is covered and one which is within the exclusion, the insurers are not liable.

  2. As a matter of construction or implication, Flaux J was wrong to read the 'mere manifestation' limitation into the exclusion and, as a result, arrive at the decision that the exclusion did not operate to exclude liability. In summary, Clarke LJ's key reasons were as follows:

    (A) The structure of the policy was that the risks covered were the perils, subject always to the exclusions. The perils and exclusions together express the ambit of cover.
    (B) There was no reason to think that the parties cannot have intended that cover for malicious acts would be excluded, if the malicious act constituted the infringement.
    (C)  Detention of vessels for infringement of customs regulations does not always involve smuggling (see 'The Wondrous'), but smuggling is the "paradigm case" in which detention occurs because of such infringement, which brings it squarely within the exclusion. Arguments in support of such a conclusion included:
    (i) Clarke LJ's finding in the 'Kleovoulos of Rhodes' that he could see "…no distinction between smuggling and the infringement of customs regulations", which echoed the words of Fenton Atkinson LJ in 'The Anita'
    (ii) The fact that in the unamended version of the Institute War Clauses, 12 months (amended to 6 months in this case) have to elapse before a detainment is treated as giving rise to a constructive loss. In light of this, it is much more likely that some form of smuggling activity, rather than some less heinous breach of regulation, will be what has given rise to the detainment for that length of time. It would therefore be strange if the one detention to which the exclusion did not apply was detention on account of smuggling. 
    (iii) The exclusion manifests an intention to exclude from cover any detainment attributable to breach of customs laws. This forms part of the "spirit of the policy" as per 'The Anita' in which the Court of Appeal recognised that prima facie the exception means that underwriters will not pay for loss caused by reason of the crew being caught smuggling.
    (iv) There is nothing unbusinesslike in the insurers' position that all smuggling falls outside the scope of the Institute War Clauses. When considering what is business-like the Court of Appeal approached the issue by noting that "the question of what is business-like depends on whose business is being considered". The Court of Appeal went on to say that "…it is sufficient to state that there is nothing unbusinesslike in the insurers’ position even though it is favourable to them. The construction for which they argue is not therefore one from which the court should instinctively resile." 
    (D) The proposition that 'infringement' cannot be taken to include an infringement which is itself no more than the manifestation of the relevant malicious act involves writing in words which are not there, which the court should be reluctant to do in clauses drafted for use in insurance contracts throughout the world. Arguments in support of this conclusion included:
    (i)  There was no good reason or necessity arising from the language of the clause to justify interpreting the exclusion as inapplicable in the case of a third party malicious act which amounts to an infringement. 
    (ii) This interpretation might have force if all malicious acts were caught by the exclusion, but they are not. Examples include sabotage, the explosion of goods secreted on the vessel, the killing or wounding of a crew member or the smuggling of illegal immigrants, none of which involve any customs infringement. 
    (E) If the 'mere manifestation' interpretation of Flaux J was correct, the application of the exclusion will be anomalous. Assume that the drug laden vessel sails and is arrested in Venezuelan waters, there would, on Flaux J's interpretation, be no cover, since the infringement (i.e. the transportation) would be more than a mere manifestation of the malicious act. If the vessel is detained before it sets sail then there would be cover. Such an application of the exclusion would be anomalous and therefore cannot be correct.     
    (F)  Flaux J's construction does not tally with the previously decided cases of 'Cory v Burr' (House of Lords) or 'The Kleovoulos of Rhodes' (Court of Appeal).     


The Court of Appeal's decision reconfirms that smuggling of drugs or contraband is not a war risk. If owners would like cover for detentions due to smuggling they should discuss this with their insurance brokers and purchase the additional cover that is available.

The Court of Appeal's decision also reconfirms principles of interpretation that are of broad application:

(A) The courts should be reluctant to imply additional language into the express language of insurance policies.
(B) Exclusions must be given a business-like interpretation in the context in which they appear. When considering what is business-like the Court of Appeal approached the issue by noting that "the question of what is business-like depends on whose business is being considered". The Court of Appeal went on to state that "…it is sufficient to state that there is nothing unbusinesslike in the insurers’ position even though it is favourable to them. The construction for which they argue is not therefore one from which the court should instinctively resile." Accordingly, insureds seeking to avoid the literal application of a clause by arguing it is unbusinesslike will need to prove it is unbusinesslike from both parties' perspectives.

Stephenson Harwood LLP's marine insurance group acted for the insurers; it was led by Simon Moore, who was assisted by associates Paul Hofmeyr and Jide Adesokan. Clyde & Co, Ross & Co and W Legal acted for the owner.



Simon Moore

Simon Moore

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