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Smuggling – check your cover!

Smuggling check your cover | BDM Blog | BDM Law

A recent ruling of the Supreme Court, in the B Atlantic (1), has highlighted the importance for owners to check their insurance coverage when calling at places where smuggling is a high risk.

In August 2007, Venezuelan customs authorities (presumably as a result of some sort of tip off) decided to inspect the hull of the B Atlantic.  They discovered a large quantity of drugs.    Once the vessel had been detained for more than six months the Owners abandoned her and made a claim on their war risks insurance.

The vessel was covered on the basis of the Institute War Strikes Clauses Hulls-Time 1/10/83 (the Institute Clauses) and the relevant provisions were as follows:

“Clause 1: PERILS

Subject always to the exclusions hereinafter referred to, this insurance covers loss of or damage to the Vessel caused by…

1.2          capture seizure arrest restraint or detainment, and consequences thereof or any attempt thereat…

1.5          any terrorist or any person acting maliciously or from a political motive…

1.6 confiscation or expropriation.

Clause 3: DETAINMENT

In the event the Vessel shall have been the subject of capture seizure arrest detainment confiscation or expropriation, and the Assured shall thereby have lost the free use and disposal of the Vessel for a continuous period of 6 months then for the purpose of ascertaining whether the Vessel is a constructive loss the Assured shall be deemed to have been deprived of the possession of the Vessel without any likelihood of recovery.

Clause 4.1.5 EXCLUSIONS

This insurance excludes… arrest restraint detainment or expropriation… by reason of infringement of any customs or trading regulations…”

The insurers argued that arrest/confiscation arising from the lawful act of a sovereign government was not a peril that was intended to be covered by the policy.  They denied the claim under the Clause 4.1.5 exclusion “detainment… by reason of infringement of customs or trading regulations”.

In the Commercial Court, Mr Justice Flaux held the owners were entitled to recover under the policy as the attempted smuggling of drugs was a malicious act falling under Clause 1.5 of the Institute Clauses and that the Clause 4.1.5 exclusion did not apply.  The Court of Appeal disagreed holding that, even if the claim fell within Clause 1.5, it was still excluded under the Clause 4.1.5 exclusion. The Court held that the loss had been caused both by the concealment of the drugs and the detention by the authorities. The latter fell within the exclusion and for that reason the claim failed.

The owners appealed to the Supreme Court which unanimously upheld the Court of Appeal’s decision. The Supreme Court, citing The Mandarin Star(2) and The Salem(3), held that in order for a person to be acting maliciously an element of spite or ill will, usually in relation to the property insured, is required. Merely acting in a reckless manner was not enough.   Lord Mance, with whom the other Justices agreed, commented “…the smugglers were not intending that any act of theirs should cause the vessel’s detention or cause it any loss or damage at all.  In my opinion, they were not acting maliciously within the meaning of clause 1.5.”

As the vessel had not been detained as a result of a malicious act(s) within Clause 1.5 of the Institute Clauses it was academic as to whether the Clause 4.1.5 exclusion for infringements of customs regulations would apply.

This ruling provides some welcome clarity on what is meant by “acting maliciously”.  It is also a reminder that owners cannot rely on war risk insurance if their vessel is detained due to drug smuggling issues.   Owners with vessels trading regularly in areas where smuggling is considered to be a high risk may need to consider taking additional cover for those risks and/or beefing up their security/due diligence to ensure that their vessels are not used as drug mules.

  1. Navigators Insurance Company Limited and others (Respondents) v Atlasnavios-Navegacao LDA (Formerly Bnavios-Navegacao LDA) (Appellant) [2018] UKSC 26.
  2. The Mandarin Star [1968] 2 Lloyd’s Law Rep 47
  3. The Salem [1982] 1 QB 946

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