Key takeaways
MII Policy
This required a loss by the Mortgagee, “resulting from a loss or damage to or liability of the Mortgaged Vessel” and a claim which would have been payable under the Owners’ policies, but for an insured peril referred to in the MII Policy.
Proximate cause
The Mortgagee’s loss was caused by the mine strike itself, not the invalidity of the fraudulent Additional Cover.
Mortgagee’s consent for the vessel sailing to Ukraine
This was not “privity” in the context of an MII Policy, because that consent was obtained by fraud. No valid consent or concurrence to the breach of the Trading Warranties was provided, so there was no privity.
Oceanus Capital SARL -v- Lloyd’s Insurance Company SA (M/V Vyssos) [2025] EWHC 3293 (Comm)
This interesting judgment arises from a Mortgagee’s Interest Insurance dispute between a lender and the market and is the first time the English Court has been called upon to construe and interpret a standard London wording (Institute Mortgagees' Interest Clauses Hulls (1/3/97 CL337-97).
In the course of addressing matters such as the purpose of MII Insurance (in terms of what it insures and the proximate cause by which it is triggered) and the concept of privity within MII Insurance, the Court found in the favour of the assured lenders but leave to appeal has been granted.
The background facts
MV VYSSOS (the Vessel) was owned by Lyra Mare (Owners) and insured under a marine war risks policy on terms equivalent to current Institute War and Strikes Clauses Hulls (the War Risks Policy). The War Risks Policy provided cover for trading worldwide subject to warranties, including a warranty excluding sailing in the territorial waters of Ukraine (the Trading Warranties), unless agreed by War Risks underwriters in return for payment of an additional premium.
Oceanus Capital Sarl (Oceanus) provided US$ 3m in financing to Owners, secured by way of a first preference mortgage. Oceanus took an assignment of all rights and interests of every kind which Owners had in relation to insurances of the Vessel.
Oceanus also took out Mortgagee’s Interest Insurance (the MII Policy), which typically, protects lenders if the borrowers’ primary insurance over the insured asset fails to respond, due to issues like warranty breaches or unseaworthiness, usually requiring the lender to have no privity in that issue (broadly understood to mean knowledge, including blind eye knowledge, and concurrence).
In November 2023, the Vessel’s Charterers obtained additional war risk cover for a trip to Ukraine, which completed without incident, and in December 2023 declared an intention for further trading in Ukraine.
Oceanus knew that this would be a breach of the Trading Warranties and would again require additional war risk cover. Oceanus pressed the Vessel’s Charterers a number of times during December 2023, and finally, late on 26 December 2023 a purported Additional War Risks Cover document was provided by WhatsApp (the December Cover). The December Cover was a forgery, but Oceanus did not know this.
The Vessel was damaged by a mine strike in the morning of 27 December 2023 and later declared a constructive total loss. Insurers denied Oceanus’ claim under the MII Policy.
The Parties’ arguments
Oceanus claimed that its loss falls squarely within the MII Policy on the wording of the policy, and the debatable elements, privity and fortuity, should be determined in its favour.
Oceanus’ position was that the MII Policy provides for the Insurer to indemnify Oceanus against loss if:
Oceanus has suffered loss resulting from loss of or damage to the Vessel;
the loss of or damage to the Vessel would, in the absence of an insured peril, prima facie be covered by Owners' Policies;
there is a non-payment or reduced payment in respect of the loss of or damage to the Vessel;
the non-payment or reduced payment is a result of an insured peril under the MII Policy; and
the insured peril occurred or existed without the privity of Oceanus and was fortuitous.
The Commercial Court decision
What was the proximate cause of Oceanus’ loss?
Oceanus’ position
Oceanus’ position was that the proximate cause was the mine strike, alternatively Owners’ breach of the Trading Warranties. Oceanus’ claim did not hold the December Cover as a proximate cause.
Oceanus’ attractively simple argument was that it is insured under the MII Policy for losses it suffers resulting from loss or damage to the Vessel, and protected against the contingency that there is damage to the Vessel to which the War Risks Policy does not respond, so long as that is because of an insured Peril, in this case the breach of the Trading Warranties.
There was no dispute that there was a breach of the Trading Warranties, that was the sole reason the War Risk Policy did not pay out. Therefore, Oceanus said, it had cover under the MII Policy. The forged December policy simply did not exist, and so effectively did not matter.
Insurers’ position
Insurers sought to frame the loss as being caused by the dishonesty of the Vessel’s customers or Charterers, which is not the purpose of MII insurance.
Insurers’ position was that the proximate cause was that the main policy which was supposed to cover the position (i.e. the December Cover) did not (because it was forged), and that this is not an insured peril under the MII Policy. Insurers said that the insured perils in the MII Policy do not include fraud or deception, or circumstances where it was represented the December Cover policy existed where it in fact did not.
Insurers sought to paint the forged December Cover document as a “valid” document (in the sense it had real causal impact and was not a nullity) which did not respond, rather than being a nullity owing to being forged.
Insurers further argued that the cause of Oceanus’ loss was what was important, not the Vessel’s loss. The Vessel would still have been lost even if the forged December Cover which ‘allowed’ it to trade in Ukraine had been legitimate – so that was not the cause of Oceanus’ loss. The cause of Oceanus’ loss was that the December Cover was not genuine, as had it been genuine Oceanus would not have faced a loss despite the mine strike, as Owners’ H&M insurance would have paid out.
The Court’s finding
The Court agreed with Oceanus, based upon a straightforward reading of the MII Policy, finding that on that wording, the loss was prospectively covered. The Court did not adopt Insurers’ position on the ‘existence’ of the forged December cover.
A highly interesting debate on the nature of the interest insured under an MII Policy arose from the pleadings but was not ruled on by the Court, owing to its findings on proximate cause. However, the Court agreed obiter with Oceanus that MII insurance covers the assured as mortgagee and not merely as assignee, as it has defences not available to vessel owners, such as lack of privity in an underlying breach, as long as it can demonstrate its own innocence (as the Court found Oceanus could here).
Did the breach of the Trading Warranties take place with the privity of Oceanus?
Oceanus’ Submissions
There was no direct authority on the meaning of “without the privity” in the MII context. Based upon the indirect authorities (including The Eurysthenes [1976] 2 Lloyd's Rep 171 and Versloot Dredging BV -v- HDI Gerling [2016] UKSC 45), Oceanus argued that privity required both knowledge and consent. Oceanus argued that knowledge could not equal consent, as it had no control over the Vessel’s activities. Further, wording elsewhere in the MII policy distinguished between knowledge and privity.
In any event, Oceanus had at all times required the Additional Cover to be in place before consenting to trading in Ukraine and believed it was.
Insurers’ Submissions
Insurers argued Oceanus was privy, as it knew there was to be a breach of the Trading Warranties, and consented to it – Oceanus did not try to hold the Vessel back. It did not matter that the consent was conditional as the condition was collateral rather than essential, so does not vitiate the consent. Insurers also raised arguments concerning ‘blind eye’ knowledge.
The Court’s finding
The Court agreed that knowledge and consent/concurrence was required. Citing the test from The Eurysthenes, the Court found that Oceanus had not turned a blind eye to the existence of cover.
The Court, therefore, had to consider whether Oceanus knew and consented to the breach of the Trading Warranties, and found Oceanus had never validly consented. The consent it provided was obtained by fraud, so Oceanus was not privy to the breach.
It is also noted in the judgment that if Insurers’ argument was correct, Oceanus’ position had been made worse by Oceanus’ efforts to monitor the Vessel’s trading and its compliance with the policies. If Oceanus had been kept in the dark by Owners, if it had no idea about the entry into Ukrainian waters, and had not sighted the forged document, the MII Policy would have responded.
Comment
Leave has been granted to appeal on this judgment, on the basis that it is the first time the Court has been called upon to construe and interpret a standard London wording (Institute Mortgagees' Interest Clauses Hulls (1/3/97 CL337-97). The Court therefore noted that the Court of Appeal may take a different view on the first instance constructions.
If only because the Court of Appeal will benefit from a panel with multiple justices upon it, consideration by the Court of Appeal will add value.
The market’s opposition is entirely understandable, given that the market might fairly have viewed Oceanus as prominent in the causative chain which led to a loss under the MII Policy.
Nonetheless, the first instance judgment deals neatly with the complexities of the situation, avoiding an uncommercial outcome whereby a party can aid its own position by avoiding learning of (and so of taking steps to prevent) breaches of underlying policies, or by risking harming its coverage position by taking efforts to comply more precisely with it.
Although certainly strong arguments can be made that it is not the role of insurers generally to cover such a gap, in the present instance that was the insurance provided by the MII Policy.
Having found that Oceanus did not have knowledge of the forgery, the judgment does not provide any aid to an assured which might rely upon blind-eye knowledge to maintain a claim under an insurance policy.
