Case reading of Oceanus Capital SARL -v- Lloyd’s Insurance Company SA (M/V Vyssos) [2025] EWHC 3293 (Comm)

Factual Background

The vessel “Vyssos” (“the Vessel”) was insured under a marine war risks policy which provided cover for trading worldwide subject to warranties. One of the trading warranties excluded entering, sailing for or deviation towards the territorial waters of Ukraine, unless expressly agreed by War Risks underwriters at an additional war risks premium (“AWRP”).

The Claimant Oceanus Capital Sarl (“the Mortgagee”) provided USD 3 million in financing to the Owners of the Vessel, secured under a first-preference mortgage. The Mortgagee also obtained a Mortgagee’s Interest Insurance (“MII Policy”), designed to protect lenders where the borrowers’ primary insurance fails to respond - commonly due to breaches of warranty - provided the lender has no privity in the breach.

In December 2023, the Charterers indicated an intention to trade in Ukraine. The Owners informed the Mortgagee of this plan. The Mortgagee insisted that the Charterer obtain Additional War Risks Cover (the “December Additional Cover”). On 26th December, the Mortgagee received the documentation purporting to evidence such cover; however, as unknown to the Mortgagee, the document was a forgery and no AWRP had been paid to the War Risks underwriters.

The Vessel was damaged by a mine strike in the morning of 27th December 2023 and later declared as a constructive total loss. The War Risks underwriters rejected the claim for breach of warranty. The Mortgagee sought indemnity from MII policy, but the MII insurers denied the policy liability.

Vyssos– Court Construes Mortgagee’s Interest Insurance Policy In Assured’s Favour (Cont’d)

The Disputes

The MII Policy was based on a standard London wording – Institute Mortgagees’ Interest Clause –Hulls (1/3/97 CL 337-97). The Mortgagee argued that the War Risks Policy’s failure to respond to the mine strike constituted an insured peril under the MII Policy, entitling it to indemnity for its net loss. The MII insurers denied liability on three grounds, which crystallised into three issues at trial.

Issue 1: Causation - Whether the proximate cause of the Mortgagee’s loss was the damage to the Vessel or the forged December Cover.

The Mortgagee submitted that the proximate cause was the mine strike, or alternatively the Owners’ breach of the trading warranty, and the purpose of the MII Policy was to protect the Mortgagee against the risk of a lawful non-payment by the underwriters of Owners’ Policies (in this instance, War Risks Policy). It did not hold the forged December Additional Cover as a proximate cause, as this cover never existed and could not be causative of any loss.

The MII insurers’ position was that, the relevant loss insured against the MII Policy should be the net loss proximately caused by a named insured peril as defined by the Clause 2.1 of the MII Policy. In this case, they submitted the proximate cause was invalidity or nullity of the forged December Additional Cover as a result of dishonesty of the Vessel’s Charterers. Fraud, deception, or circumstance like in this case where it was represented the December Additional Cover existed but in fact not, is not an insured peril under Clause 2.1.

Vyssos– Court Construes Mortgagee’s Interest Insurance Policy In Assured’s Favour (Cont’d)

The Disputes (Cont’d)

Issue 1: Causation - Whether the proximate cause of the Mortgagee’s loss was the damage to the Vessel or the forged December Cover. (Cont’d)

The Court ruled in favour of the Mortgagee.

The Clause 1.1 of the MII Policy which provided: “This insurance will indemnify the Assured for loss resulting from loss of or damage to or liability of the Mortgaged Vessel which, in the absence of an insured Peril set out in Clause 2.1 below, would be prima facie be covered by the Owners’ Policies and Club Entries, and not excluded therein, but in respect of which there is subsequent non-payment … by any of the underwriters of Owners’ Policies and Club Entries as a result of Insured Peril, provided always that such Insured Peril occurs or exists without the privity of the Assured.”

The judge agreed with Mortgagee that the December Additional Cover never existed and could not be treated as part of the Owners’ Policies for the purpose of Clause 1.1. The operative policy that existed at the time of the mine strike was the War Risks Policy. The judge found that the Mortgagee’s loss resulted from the loss of the Vessel by reason of the mine strike, which would have been covered by the War Risks Policy but for the breach of warranty, and that specific breach constituted an insured peril under Clause 2.1.2 of the MII Policy.

Vyssos– Court Construes Mortgagee’s Interest Insurance Policy In Assured’s Favour (Cont’d)

The Disputes (Cont’d)

Issue 2: Privity - Whether the breach of the trading warranties in the Owners’ War Risks Policy occurred or existed “without the privity” of the Claimant.

MII insurers argued that, even if the loss is caused by an insured peril under the MII Policy, the Mortgagee’s claim was excluded by Clause 1.1 as it was privy to the breach of warranty. They contended that knowledge, including blind-eye knowledge, coupled with passivity on the part of Mortgagee (its failure to object the voyage) was sufficient to constitute privity.

The Mortgagee maintained that privity required both knowledge and consent. Its consent to the voyage was expressly conditional upon appropriate additional cover being arranged, a condition that was never satisfied. It further argued that, as a lender, it was unlikely to exercise significant control over the Vessel’s trading activities.

Based on the evidence, the Court held for the Mortgagee, that it never validly consented to the breach-of-warranty voyage. Any consent on the part of Mortgagee was obtained by fraud, and it did not know the true position as regards the War Risks Policy. Accordingly, it was held that the Mortgagee was not privy to the existence of the insured peril under the Clause 1.

Without any prior authorities directly on the meaning of “privity” in MII insurance, the judge in his dicta construed that the concept could not be more favourable to insurers than the general meaning established under Section 39(5) of the Marine Insurance Act 1906 (which concerns privity to unseaworthiness). He stated that privity requires “a relatively high degree of connivance or blame worthiness required and that an assured cannot be fixed with knowledge through negligence; it must know or have deliberately ignored signs.”

Vyssos– Court Construes Mortgagee’s Interest Insurance Policy In Assured’s Favour (Cont’d)

The Disputes (Cont’d)

Issue 3: Fortuity - Whether the loss suffered by Mortgagee was fortuitous.

MII insurers argued that the Mortgagee’s loss - namely, the non-payment by the War Risks insurers—was not fortuitous. They contended it was the inevitable consequence of the Mortgagee’s voluntary conduct in failing to restrain, or even attempt to restrain, the Vessel from undertaking the voyage.

Having already determined under Issue 1 that the proximate cause of the Mortgagee’s loss was the mine strike rather than the War Risks insurers’ non-payment, the Court rejected the insurers’ defence. The judge held that the mine strike was obviously fortuitous, and the Mortgagee’s loss was not inevitable consequence of its own voluntary or deliberate conduct.

Comments

This judgement is friendly to mortgagee assureds insofar because it makes clear that a lender (the mortgagee) isn’ t automatically treated as consenting to ship owner’s breaches of insurance policies just because the lender knows about them and don’t take every possible step to stop them.

Despite a mortgagee’s limited control on mortgaged vessels, if no additional cover is arranged to address breaches, the MII insurers may still argue that the mortgagee assureds should act prudently – for example, by trying to stop the voyage, or placing their own additional cover, or even attempting to take possession of the ship. Without making such efforts, the mortgagee assureds may find it harder to defend allegation of privity.

Permission to appeal to the Court of Appeal was granted, recognising that this was the first time in court to interpret the Institute Mortgagees’ Interest Clauses.