In Oceanus Capital v Lloyd’s Insurance Company [2025] EWHC 3293, the Commercial Court was for the first time called upon to construe a standard London wording of the Institute Mortgagees’ Interest Clauses Hulls (1/3/97 CL337-97). David Bailey KC and Emma Franklin acted for Lloyd’s Insurance Company.
The case raises important points about the nature of the loss insured under this MII policy wording, and the meaning of the proviso in the insuring clause that the insured peril “occurs or exists without the privity of the Assured”.
The facts
The case concerned a cargo vessel, the M/V Vyssos, which was damaged by a mine strike in Ukrainian Waters, and ultimately declared a constructive total loss. The Claimant (the “Mortgagee”) provided financing to the owners of the Vessel, (the “Owners”), which was secured under a first-preference mortgage over the Vessel and endorsements of the Mortgagee’s interests on the Owners’ policies and club entries. The Defendants underwrote cover of the Mortgagee’s interest by a Mortgagee’s Interest Insurance (the “MII Policy”).
The Owners’ interest in the Vessel was insured at the time of the Mine Strike under a marine war risks policy (the “War Risks Policy”). The War Risks Policy provided for cover for trading worldwide, subject to certain warranties, including a warranty that the Vessel would not enter, sail for or deviate towards the territorial waters of Ukraine (the “Trading Warranties”), unless otherwise agreed by the underwriters in return for payment of an additional war risk premium.
In December 2023, Owners informed the Mortgagee that the Vessel would be trading in Ukraine. The Mortgagee insisted to the Owners that appropriate additional war risks cover be put in place to cover the voyage. The day before the trade to Ukraine, the charterers sent the Mortgagee a copy of what appeared to be a cover note evidencing additional war risks cover for the further voyage to Ukraine (the “December Additional Cover”). In the event, the cover note purporting to contain the terms of the December Additional Cover was a forgery. No additional war risks cover had been put in place and no AWRP paid to cover the voyage. The mine strike took place in Ukrainian Waters, outside the limits defined in the Trading Warranties.
The Mortgagee sought an indemnity from Underwriters of the MII Policy. The Mortgagee claimed that the failure of the War Risks Policy to respond to the Mine Strike was an insured peril in respect of which it was entitled to an indemnity under the MII Policy for its net loss.
The arguments / issues
Underwriters disputed the claim on three grounds, which formed the three key issues at trial:
Causation: the proximate cause of the Mortgagee’s loss was the Mortgagee’s inability to recover under the December Additional Cover due to it being a forgery. This loss was not insured under the MII Policy or otherwise caused by a peril insured against under the MII Policy.
Privity: even if the Mortgagee’s loss was its inability to recover under the War Risks Policy as a result of an insured peril as alleged, the Mortgagee’s claim was excluded by the express proviso in Insuring Clause 1.1 of the MII Policy i.e., the Mortgagee was privy to the occurrence and/or existence of the breach of the Trading Warranties.
Fortuity: even if the proviso in Insuring Clause 1.1 was inapplicable and the loss was caused by an insured peril per clause 2.1.2.3 of the MII Policy, the existence and/or occurrence of the insured peril was not fortuitous. The circumstance (i.e. that the War Risks Policy would not respond, because of the breach of the Trading Warranties) was a known certainty to the Mortgagee and, accordingly, was not fortuitous.
The Mortgagee’s case in response was that:
The Mortgagee’s loss resulting from the damage to the Vessel was the loss of the Mortgagee’s interest in the Vessel, alternatively the loss of the indemnity under the War Risks Policy. The proximate cause of that loss was the damage to the Vessel, alternatively the breach of the Trading Warranties.
The Mortgagee was not privy to the breach of the Trading Warranties because its consent was conditional on appropriate additional cover being put in place, and that condition was never satisfied; and
The loss was fortuitous as it resulted from the damage to the Vessel, which was not bound to happen.
The decision
Sue Prevezer KC (sitting as a Deputy High Court Judge) found that Oceanus was entitled to recover under the MII Policy. On the three main issues:
Causation: the Judge considered that the proximate cause of the Mortgagee’s loss was not the forged December Additional Cover, but rather the Mine Strike. The loss which the Mine Strike caused would in the ordinary course have been covered by the War Risks Policy, but for the breach of the Trading Warranties thereunder.
On a proper construction, the insuring clause was found to require a loss “resulting from a loss of or damage to or liability of the Mortgaged Vessel” and a claim which would have been prima face payable under the Owner’s policies and club entries, but for an insured peril referred to in the MII Policy (i.e., the breach of Trading Warranties). Those two requirements were found not to be affected by the question of whether the interest insured is regarded as being the interest in the Vessel or in the proceeds of the underlying policies (see [44] – [52]).
Privity: although there was no direct authority on the meaning of the phrase “without the privity of the Assured”, the Judge considered that the meaning of “privity” from s39(5) of the Marine Insurance Act 1905 was highly persuasive. Accordingly, the question was whether the Mortgagee “consented to or concurred in” the breach of the Trading Warranties. The Judge found that the Mortgagee consented to the Vessel sailing into Ukrainian waters on condition that appropriate additional insurance had been arranged. However, the Mortgagee’s consent was vitiated because it was obtained by fraud and it would therefore be wrong to say that the Mortgagee was privy to the breach of the Trading Warranties
The purpose of an MII Policy would be upended, the Judge found, if the Mortgagee was left without cover because the Owner’s / charterer’s misconduct extended to fraudulently obtaining the Mortgagee’s consent to act in a way that was in fact in breach of its insurance (see [70] – [76]).
Fortuity: the Judge was satisfied that the loss suffered was fortuitous, on the basis of the well-established principle that losses which are the inevitable consequence of voluntary or deliberate conduct by the insured will not be covered. The Mine Strike was not an inevitability and the loss that was incurred by the Mortgagee was not bound to result from conduct voluntarily entered into by its choice (see [82]).
Permission to appeal to the Court of Appeal was granted by the Judge, recognising that this wording has not been interpreted before, and that the Court of Appeal may take a different view on the construction.
David and Emma were instructed by Patrick Foss and Fae Maskrey of Kennedys.
