The question of whether drug smuggling was a malicious act has been tested in the UK's Supreme Court.
It is widely acknowledged that trading in certain parts of the world carries with it particular risks, such as piracy, political uncertainty, social instability, corruption or drug trafficking. Colombia and surrounding countries, such as Venezuela, carry a particularly large risk in relation to drug smuggling where, despite the fact that law enforcement agencies have tightened up security to prevent smugglers from attaching drug-filled containers to ships, traffickers continue to regard ocean carriers as a cheap and relatively risk-free way to move their product internationally. All that is required is to find a way to attach the drugs to the hull of the vessel in one port and to retrieve them in the desired destination. The involvement of the captain or the crew is neither necessary nor, in fact, desired.
In August 2007, the vessel B Atlantic loaded a cargo of coal in Lake Maracaibo, Venezuela, for discharge in Italy.
As had happened to a number of other unfortunate vessels in the same period (African Future, Christopher Oldendorff, IDC-1 and Yeoman Brook, to name a few), prior to sailing, a routine underwater inspection revealed that a cache of drugs had been strapped to the ship's hull. In this case, three bags containing 132 kg of cocaine were found 10 m below the waterline.
Neither the owners nor the crew were implicated in the drug smuggling. This did not, however, prevent the Venezuelan authorities from detaining the vessel indefinitely and arresting the crew under the country's strict 2005 Anti-Drug Law, which provides that any person who illicitly traffics or transports drugs by any means will be punished with a prison sentence.
The law was implemented in such a way that crews were arrested for drug trafficking even if they themselves had alerted the authorities to the fact that drug smugglers were in the process of attaching drugs to the hold of their vessel (as in the case of IDC-1).
Eventually, in August 2010, the Venezuelan courts sentenced the master and second officer to nine years in prison for complicity in the drug trafficking. They also ordered the continued detention of B Atlantic.
In the intervening period, the owners served a notice of abandonment of the vessel on 18 June 2008 and presented their war risk insurers, Navigators, with a claim for the constructive total loss of their vessel, on the basis of the authorities' detention for longer than the six months' period provided for in clause 3 of the Institute War and Strike Clauses 1/10/83 as amended (the Institute Clauses). Navigators, however, rejected the claim on the basis that it was excluded under the terms of the policy.
The key provisions in the policy were the following:
Clause 1.5: "Subject always to the exclusions hereinafter referred to, this insurance covers loss of or damage to the vessel caused by ... any terrorist or any person acting maliciously or from a political motive."
Clause 4.1.5: "This insurance excludes ... arrest, restraint, detainment, confiscation or expropriation ... by reason of infringement of any customs or trading regulations ..."
Essentially, the Institute Clauses provide, under clause 1.5, that loss or damage caused by malicious acts are covered under the policy, and, separately, specify that loss or damage linked to customs or trading regulation infringement are specifically excluded under clause 4.1.5.
At first instance, the insurers were found liable for the owners' losses of US$22 million.
Flaux J ruled that the cause of the vessel's loss was the malicious act of unknown third parties attaching drugs to the hull. The detention of the vessel effectively resulted from the malicious act of the drug smugglers and this was an insured peril pursuant to clause 1.5.
The standard exclusion, under clause 4.1.5, which is triggered in cases of infringement of any customs regulation, was held not to apply where the infringement was no more than the "mere manifestation" of the third party's malicious act. Clause 4.1.5 was to be read subject to an implied limitation that applied where the only reason for an infringement was such a malicious act.
Court of Appeal
The Court of Appeal disagreed with Flaux J and reached the opposite conclusion. The appeal judges (Laws and Christopher Clarke LJJ, and Sir Timothy Lloyd) ruled unanimously in favour of the insurers, finding that cover was indeed subject to the exclusion, and that no basis existed for introducing an implied limitation such as Flaux J had suggested.
The shipowners' claim for constructive total loss of the vessel and sue and labour expenses resulted from both the concealment of the cocaine and the subsequent detention of the vessel by the authorities.
The act of concealment was the malicious act and therefore a covered peril under clause 1.5; however, the subsequent detention by the authorities, for infringement of customs regulations, had the effect of triggering the policy exclusion under clause 4.1.5. In the words of Christopher Clarke LJ: "If the malicious act is the concealment of drugs on the vessel and the concealment of drugs is an infringement of the customs regulations, the vessel will have been detained by reason of an infringement of the customs regulations."
The shipowners' claim failed accordingly. The case subsequently landed at the doorstep of the Supreme Court which had to decide whether the vessel had sustained a loss by an insured peril which would entitle the owners to recover the vessel's insured value from their insurers, and, at the same time, examine the effect of exclusion clause 4.1.5 on the claim.
In Atlasnavios-Navegação Lda v Navigators Insurance Co Ltd (The B Atlantic)  2 Lloyd's Rep 1, the judges (sitting in a panel comprising Lords Mance (DP), Sumption, Hughes, Hodge and Briggs) examined closely the wording of the Institute Clauses to determine the application of clauses 1.5 and 4.1.5, and their interaction.
The Supreme Court, as a starting point, decided to re-examine the parties' common ground that the third party's attempt to smuggle drugs via the vessel involved the parties acting maliciously and thereby permitting the owners to claim under clause 1.5. The judges wanted to ensure that they were not proceeding on the basis of a false premise.
Contrary to the Court of Appeal, the Supreme Court ruled that the attempt to smuggle drugs out of the country by attaching them to the hull of the vessel, was not in itself a malicious act because that act was not "motivated by malice".
The five judges unanimously held that the unidentified perpetrators' intent had been to illegally traffic the cocaine haul and not to provoke the detention of the vessel.
For the smugglers to be found to have acted "maliciously", it would have been necessary for "an element of spite, ill-will or the like" to have been present in their actions. The Court went on: "This is not a case where the attempted smuggling can be regarded as having been aimed at the detention, or constructive total loss of, or any loss or damage to the vessel or any property or person."
In fact, the discovery of the haul of cocaine, and the subsequent long-term detention of the vessel, were precisely the opposite of what the smugglers were intending to happen.
On this reasoning, no malice attached to the event. The Supreme Court concluded that clause 1.5 was not adequate to cover the claim and this was sufficient to dismiss the appeal.
Owners could have claimed under the alternative clauses 1.2 (on the grounds of restraint/detainment) and 3 (detainment leading to constructive total loss) but in any event, the detention would have resulted from the infringement of customs regulations and, on that basis, the clause 4.1.5 exclusion would have been brought into operation.
The Supreme Court went on to examine the position had the premise of a malicious act been correct and took the view that even if it had been possible to consider the loss as caused by a person acting maliciously, cover under clause 1.5 would still have been excluded by clause 4.1.5 for customs regulations infringement.
The Supreme Court, in this case, shines a light on the concept of malicious act under clause 1.5 of the Institute Clauses, as well as the interplay between insured perils under clause 1.5 and exclusion clause 4.1.5. The decision makes it clear that the constructive total loss of a vessel, resulting from its long-term detention by authorities for drug trafficking or contraband offences, is an excluded risk under the Institute Clauses.
This comes as a salutary warning to shipowners to review the terms of their war risks insurance policy and, where such cover is lacking, arrange additional insurance to protect their position – especially if their vessel is going to trade in a high-risk region such as Latin America.
This article was first published in Maritime Risk International, September 2018 issue.
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