When is a peril a piracy? Was there an attack on the vessel? Were there persons acting maliciously? Was there an act of vandalism? What there a "sabotage" of the vessel?

Facts 

Whilst drifting in the High Risk Area, about 10miles off Aden, MT BRILLANTE VIRTUOSO was approached by a small, unlit boat containing seven armed men wearing masks. Owners alleged that the vessel was attacked by Somali pirates, but it was later discovered that the crew was privy to the conspiracy to destroy the vessel, and assisted the alleged pirates to set fire to the vessel. The vessel was declared a constructive total loss and the dishonest Owners made a claim against their war risk insurance policy. 

The claim against the war risk underwriters was brought in the names of Owners and Owners' Mortgagee Bank. Owners' claim was struck out for repeated and dishonest refusals by Owners to comply with disclosure orders, but the bank continued with the claim in its own name as assignee, loss payee and co-assured.

Given Owners' willful misconduct, the war risk underwriters had a valid defence to the Bank's claim as assignee and loss payee.  Nevertheless, the Bank argued that even if Owners had scuttled the vessel, the bank still had a good claim as co-assured because,  a) Owners' willful misconduct did not provide a defence to the claim pursuant to section 55(2)(a) of the Marine Insurance Act 1906 (Samuel v Dumas [1924] AC 431), and b) scuttling was an insured peril.  

The Bank relied on the following insured perils under the Institute War and Strikes Clauses Hull-Time (1.10.83): 1) piracy, 2) any person acting maliciously, 3) vandalism, 4) sabotage, 5) capture or seizure, 6) arrest, restrain, or detainment. 

Judgement

The case went before Mr Justice Teare in the Queen's Bench Division of the Commercial Court. The court found that the Bank was entitled to bring a claim as co-assured. Owners' willful misconduct did not provide a valid defence to that claim. Nevertheless after considering all the six insured perils the court concluded that the damage occurred for reasons other than the insured perils and as such the Bank's claim failed. 

For the peril to be categorized as piracy all of the below factors need to be present:
1) an attack or the use or threat of force (The "Andreas Lemos" [1982] 2 Lloyd's Rep. 483); 
2) there must be a piratical purpose (needs to be an element of robbery or ransom); and
3) the act would have to be considered as piracy in a popular and business sense (Republic of Bolivia v Indemnity Mutual Marine Assurance Co. [1909] 1KB 785). 
 
In relation to piracy the court concluded that there was no attack on the vessel but there was instead an arranged rendezvous at sea pursuant to which the Master was willing to let armed men onboard to assist the Owners in scuttling the vessel.  There was no piratical purpose. The armed men did not board the vessel to steal or ransom the vessel or the crew, but to assist the Owners in committing fraud upon their war risk underwriters. A businessman would never say that the Owners were pirates but that they were shipowners seeking to defraud their insurers.  

Following the Supreme Court's decision in the B Atlantic [2018], for the court to conclude that the armed men were "persons acting maliciously" there would need to be an element of "spite, ill will or the like" in their actions. The judge found that the vessel was not lost or damaged because the armed men desired to harm the vessel or Owners but the vessel was lost because the armed men desired to make money from their actions. Scuttling of a vessel or cargo for purely financial gain would not fall under the peril of "persons acting maliciously". The peril is not simply intentional damage to property but something more is required. 

The Court also dismissed Owners' argument that the incident could be considered an act of vandalism as "vandalism" implies wanton or senseless damage to property. It does not include the causing of damage for a defined purpose, namely to defraud insurers. 

The Court further found that given that "sabotage" is the disabling of property to frustrate the use of that property for its intended purpose and Owners' intended purpose was to render the vessel a CTL to collect on the war risk policy, the armed men were giving effect to Owners' intended use of the vessel, not sabotaging it. 

Comments

This case provides a useful guidance on the factors that need to be present for an insured peril of piracy i.e. person(s) acting maliciously, vandalism, sabotage, capture or seizure, or arrest, restrain, or detainment, to exist under the Institute War and Strikes Clauses Hull-Time (1.10.83).  The Court found Owners' claim to be fraudulent and as such the Court's decision was not surprising. 

The Club takes this opportunity to remind Members that the Club is entitled to exercise its right to terminate the contract of insurance in respect of the Owner and all insureds in the event that a fraudulent claim is submitted by or on behalf of the Owner and/or any Group Affiliate, Rule 5L of the Club's Rules.