Mortgagee interest insurance and war risk losses: Oceanus Capital v Lloyd’s Insurance Company

In a significant decision for the London marine insurance market, the Commercial Court has considered - for the first time - the standard Institute Mortgagees' Interest Clauses Hulls (1/3/97 CL337-97) wording, ruling in favour of a mortgagee whose claim arose from a mine strike in Ukrainian waters. 

The Oceanus Capital SARL v Lloyd’s Insurance Company judgment addresses three important questions: what constitutes the proximate cause of loss in the context of an MII policy; what "privity" requires of an assured; and whether a loss procured by fraud on the mortgagee can be considered fortuitous. 

Background

The M/V Vyssos was a cargo ship owned by Lyra Mare Limited and managed by Nava Shipping Limited. At all material times, Lyra Mare’s interest in the vessel was insured under a marine war risks policy ('War Risks Policy'), which provided cover for trading worldwide. 

It was subject to trading warranties prohibiting the vessel from entering Ukrainian waters unless otherwise agreed by underwriters in return for an additional premium.

Oceanus Capital SARL, acting as mortgagee, had provided USD$3m in financing to Lyra Mare, which was secured by a first preference mortgage over the vessel. Lloyd’s Insurance Company SA underwrote a Mortgagee’s Interest Insurance policy (the 'MII Policy') in favour of Oceanus covering its interest as mortgagee (using the standard London wording of the Institute Mortgagees’ Interest Clauses Hulls (1/3/97 CL337-97)).

In December 2023, Oceanus was informed that the vessel was to trade into Ukrainian waters in breach of the trading warranties. Oceanus insisted on proof of valid additional war risks cover. On 26 December 2023 it was provided with what appeared to be a cover note evidencing such cover. 

On 27 December 2023, the vessel was damaged by a mine strike in Ukrainian waters and was subsequently declared a constructive total loss. It later emerged that the cover note was a forgery and no additional war risks insurance had been put in place.

Oceanus sought an indemnity of USD$3.6m under the MII Policy, either for loss resulting from the loss of the vessel due to the mine strike, or alternatively, for damages for breach of the MII Policy. 

Lloyd’s declined the claim on three grounds:

1. the proximate cause of the loss was the forged cover note rather than an insured peril;
2. Oceanus was privy to the breach of the trading warranties; and
3. the loss was not fortuitous.

The Court's analysis

Causation and proximate cause

The Court held that the proximate cause of Oceanus’ loss was the damage to the vessel from the mine strike. The forged cover note never existed as a matter of fact and could not be treated as part of the owner’s policies. The relevant policy in existence was the War Risks Policy, and the non-payment under that policy resulted from Lyra Mare’s breach of the trading warranties, which was an insured peril under the MII Policy.

Privity

The Court held that privity requires knowledge and consent or concurrence, not just knowledge alone. Oceanus consented to the voyage to Ukraine only on the condition that appropriate additional insurance had been arranged. Contrary to what Oceanus was told, no such insurance had in fact been arranged. Oceanus never validly consented to or concurred in the breach of the trading warranties therefore any consent was obtained by fraud and vitiated by it.

Fortuity

The Court was satisfied that the loss was fortuitous. The mine strike was not an inevitability and the loss was not bound to result from conduct voluntarily entered into by Oceanus’ choice. Moreover, Oceanus was fundamentally deceived by the forged cover note into allowing the vessel to trade in Ukrainian waters.

The Court therefore found in favour of Oceanus, awarding USD$3.6m plus interest and Lloyd’s was ordered to pay Oceanus’ costs. 

What can we take away from this decision? 

The Court affirmed that the overriding purpose of an MII policy is to protect a mortgagee against a loss which it reasonably expects to be covered by the owner’s insurances, and which is not ultimately covered due to some misconduct on the part of the owner for which the mortgagee is not responsible. This provides important reassurance to lenders that MII policies will respond where owner misconduct is involved, provided the mortgagee has not genuinely consented to the relevant breach.

It was common ground between the parties that there is no direct authority on what privity means in the context of an MII policy, and in particular whether the word requires mere knowledge or knowledge and concurrence or consent on the part of the assured. This judgment resolves that question for the first time, holding that privity demands genuine consent, not mere awareness. Underwriters will now face a higher hurdle in relying on the privity proviso to decline claims.

If insurers’ arguments were to succeed, Oceanus would be in a worse position because it was positively lied to, than it would have been if it had simply been kept in the dark, and the Court found it difficult to see the commercial sense in that. Courts will be reluctant to penalise prudent monitoring by mortgagees, and insurers should not benefit from an assured’s diligence being exploited by fraud.

The Court granted permission to appeal, noting that this was the first time the Courts had been called upon to construe the standard London Institute Mortgagees’ Interest Clauses Hulls (1/3/97 CL337-97) wording. We will be keeping track of this appeal to see whether the Court of Appeal agrees.