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Insurance Cover Excluded in Maritime Cocaine Smuggling Case

Many times I have written about how I feel insurance companies will do anything possible to avoid making payment on a claim. The case below is a good example. I believe in fact, the Court of Appeal has erred in their Judgment on this and a further appeal to the Supreme Court may be in the pipeline.

Putting this to one side, any business involved in the shipping industry should look at this case carefully. Through no fault of their own, the ship owners were not insured for losses following on from a customs seizure. The terms of any policy need to be checked - as smuggling is on the increase and any shipping owner could fall foul of this.

In a decision with vital implications for the shipping industry, the Court of Appeal has ruled that – despite the complete innocence of her owners – a merchant vessel that was seized in a Venezuelan port after more than 130 kilos of cocaine were found strapped to her hull was not covered by insurance.

The ship was loading with coal when the drugs were concealed close to her keel by persons unknown and were discovered by divers during an underwater customs inspection. She was detained for three years before her confiscation was ordered by a Venezuelan court. Her owners, who had by then already abandoned her, claimed on their insurance on the basis that she was a constructive total loss.

There was no suggestion that the owners were complicit in the attempt to smuggle the drugs into Europe and the case was decided on the basis that the ship’s master and second officer, who were sentenced to nine-year jail terms in Venezuela after being found guilty of involvement, had been wrongly convicted.

The relevant policy extended cover for losses caused by malicious third parties, but incorporated an exclusion clause in respect of detention or confiscation of the vessel arising from infringement of any customs or trading regulations. The insurers refused cover in reliance on that clause, but the High Court found that that did not accord with the spirit of the policy and ruled them liable to indemnify the owners for their loss.

In upholding the insurers’ challenge to that ruling, however, the Court of Appeal expressed reluctance to read additional words into an exclusion clause that was drafted for use in insurance contracts throughout the world. It found that, on a true construction of the clause, it was unnecessary to show that the owners were complicit in or privy to the smuggling operation. The vessel had been detained by reason of an infringement of customs regulations and the clause therefore operated to exclude liability.

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