War Risk Clauses and Terrorism

August 2006

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1 Introduction

 This article seeks to investigate what is included within the scope of a war risk clause. It is interesting to examine this question in the light of topical events, in particular the current situation in the Lebanon.

On 13th July 2006, Israel announced an air and sea blockade of the Lebanon, as part of their response to the capture of two Israeli soldiers by Hezbollah guerrillas the previous day. Israel have now enforced a full naval closure of access to and from Lebanese ports (including Beirut and Tripoli) and in addition the Israeli port of Haifa is now closed due to retaliatory rocket attacks. Given Beirut’s strength as a commercial shipping port, large numbers of voyages have been affected.

2 Typical war risk clauses

 A typical war risk clause will cover “act of war, civil war, hostilities, revolution, rebellion, civil commotion, warlike operations, laying of mines …acts of piracy, acts of terrorists, acts of hostility or malicious damage, blockades …” But what exactly is included within the scope of a war risks clause? It is interesting to note that not all war risks clauses refer to terrorism, especially the outdated versions of these clauses.

3 Definition of war 

 The paradigm case is a war between states. The Court of Appeal in Kawasaki Kisen Kabushiki Kaisha of Kobe v Bantham [1939] 1 All ER 819 held that ‘war’ had to be given its ordinary common sense meaning. Key principles in determining whether a war had broken out included the formality of the conflict, the intensity and continuity of the violence and which actors were involved (i.e. states or private actors). Pan American World Airways Inc. v The Aetna Casualty & Surety Co [1975] 1Lloyd’s Rep 77 examined the meaning of war further. In this case they held that: “War is of course a hostility engaged in by entities that have at least significant attributes of sovereignty”. The court also went on to hold that in order for a guerrilla group’s activities to be categorised as war, the guerrilla group had to have at least some of the incidents of sovereignty. One of Pan Am’s planes was hijacked. The Court of Appeal held that the exclusion for war did not apply because the loss of the Pan Am 747 was in no sense proximately caused by any war being waged between states. 

With respect to civil war the central case in this area is Spinneys (1948) Ltd v Royal Insurance Co. Ltd [1980] 1 Lloyd’s Rep 406 where Mustill J concluded that at the time there was not a civil war in the Lebanon in1980. The level and seriousness of the fighting was consistent with a civil war. But he did not consider that there were “sides” struggling to wrest power from each other. These cases clearly rule that terrorism cannot be regarded as “war” and that if the war risk clause does not specifically refer to terrorism, then it will not apply.

Is there currently a “war” within this definition in the Lebanon? When applying the relevant factors to the current situation in the Lebanon, there can be little doubt that a state of war exists. However the particular contract terms, and the precise factual context of the contract must be examined carefully before relying on this overall statement.

4 Terrorism 

It is important to note that war risks clauses have been gradually expanded to include terrorist activities. 

Traditionally war risks clauses did not refer to terrorist activities and American aviation insurers were caught out by the terrorist activities such as the hijacking by Palestinians of American planes in 1970 (see Pan American World Airways v Aetna Casualty [1975] 1 Lloyd’s Rep 77). 

What is meant by terrorism is not that easy to pinpoint. In UK legislation for example there are two alternative definitions of terrorism. The Reinsurance (Acts of Terrorism) Act 1993 defines acts of terrorism as “acts which carry out activities directed towards the overthrowing or influencing, by force or violence, of Her Majesty’s Government in the United Kingdom or any other government de jure or de facto”

A far more extensive definition of terrorism is given by the Terrorism Act 2000. Terrorism is defined as:

 (i) actions involving serious violence against a person, serious damage to property, serious disruption of the electronic system, 

(ii) which is designed towards seriously influencing the government or intimidating the public and 

(iii) is made for the purpose of advancing a political, religious or ideological cause. 

The result of this is there is no ascertainable definition of terrorism as such, and it is advisable to define this within the charterparty itself. The importance of this can be seen in that, if there was not such a clear cut situation in the Lebanon, we would then have to consider whether this was a “terrorist” situation which could also trigger the application of the war risk clause.

5 Effect of the exercise of war risks clauses

A typical war risk clause provides Owners with two different remedies, in the situation where the war is taking place at the intended destination of the charterparty.

Firstly the vessel can not be made to call at a location which is subject to a blockade / war / hostilities / warlike operations or exposes the vessel to a risk of capture or seizure. The clause may also give importance to whether the location is considered dangerous, and may make reference to the reasonable opinion of the master or owners which will be judged objectively. 

Secondly, following on from events in Iraq, the Owners may now frequently be given liberty to comply with directions from the flag state, war risk underwriters, any other government, the Security Council of the UN and directives of the European Community.

If the clause is triggered provisions are made as to discharge of cargo elsewhere or, if the vessel proceeds, as to payment of additional insurance.

In addition to the contractual remedies under a war risks clause, it should also be considered whether the contract is frustrated or whether the port of destination is an unsafe port (see Iraq – Legal implications of War). 

In the current situation in the Lebanon, if the war risks clause is taken to apply, this will mean that the owner of the ship would be justified in not calling at that location, or probably in following any directions given for example by the Security Council of the UN.

From an insurance perspective, war risks are typically excluded from insurance contracts as the scale of damage caused by war to property and businesses, means that it would often be uneconomical for insurers to provide cover for all these risks within their standard premiums. The commonly accepted practice across the industry is to exclude war risks, leaving the insured to find a separate all risks insurance cover. In practice the shipowner carries the burden of the normal insurance risks, whilst additional premiums are allocated to the charterer. At present, it seems that a charterer wishing to trade to the eastern Med is accepting that he must pay the extra insurance costs involved in trading there. At the outbreak of war or hostilities, since this significantly alters the assessment of risk, most policies allow the insurer to cancel the insurance on notice, subject to reinstatement within the notice period at a new (invariably higher) rate. 

6 Conclusion

This article serves as a source of general information for the possible risks facing Members whose vessels could be destined to “war” like areas of the region. Already some vessels are trapped in the Lebanon. Members who are in this situation should seek legal advice from the Club or their legal advisers. This is a fast changing situation which is throwing up further issues on a daily basis.

With thanks to Frances Hamilton and Alex Andrews of Richards Butler LLP for preparing this article.