Oceanus Capital v Lloyd’s Insurance Company: English law issues of causation, privity, and fortuity in MII cover for war risk losses

The English courts are not often asked to consider cover under a mortgagees' interest insurance (MII) policy. In the recent decision of Oceanus Capital SARL v Lloyd’s Insurance Company S.A. [2025] EWHC 3293, the Commercial Court considered cover under standard London wording (Institute Mortgagees’ Interest Clauses Hulls (1/3/97 CL337-97)).

MII cover protects a lender’s mortgage when a borrower or shipowner’s policy does not respond to a loss (for instance due to breach of warranty or non-disclosure by the shipowner). In a welcome judgment for mortgagee policyholder, the Commercial Court looked closely at the language of the insuring clause and established legal principles to reach a conclusion that, on the facts, the claimant policyholder (Oceanus) had met the relevant thresholds, despite arguments put forward by the defendant underwriter to the contrary. The judgment serves as a useful reminder of some of the legal issues that can arise in MII coverage claims, and the applicable tests that must be met.

The case examined the scope of cover available under an MII policy (the “MII Policy”) when the shipowners’ war risks policy (the “War Risks Policy”) did not respond following a mine strike on a vessel trading in Ukrainian waters. The War Risks Policy included a warranty that the vessel would not sail, enter, or deviate towards Ukrainian waters. In breach of that trading warranty (but under the guise of a forged cover note purporting to evidence alternative war risks cover), the vessel proceeded to Ukrainian waters.

We unpack each of the three main issues before the court - (i) causation, (ii) privity, and (iii) fortuity.

1. Causation

The defendant underwriter argued that the proximate cause of Oceanus’ loss was a forged cover note (provided by the vessel’s charterer) which claimed to evidence alternative war risks cover. The underwriter submitted that MII does not provide blanket cover against the acts of a charterer/shipowner and, in this case, the proximate cause of the loss was the failure of the apparent alternative policy which was the subject of the forged cover note, which was not a covered peril under the MII Policy. 

In rejecting the underwriter’s argument, the court was satisfied that the loss insured was the loss/damage to the vessel, and the proximate cause of that loss was the mine strike. The judge highlighted the importance of the language of the insuring clause, which provided cover for loss “resulting from loss of or damage […] to the Mortgaged Vessel”, and held that a claim would have been prima facie payable under the War Risks Policy. The judge went on to conclude that the proximate cause of the inability to recover under the War Risks Policy for the loss of the vessel was the breach by the charterer/shipowner of the trading warranties, which was an insured peril under the MII Policy.

Whilst the scope of cover under an MII policy will turn on the particular language of the insuring clause, the court in this case was cognizant of the interest being protected by the MII Policy: interest as mortgagee of the mortgaged vessel. Damage to the vessel would have been covered by the War Risks Policy (under which the lender was an assignee/loss payee), but for breach of warranty by shipowners. It was further held that the forged cover note could not be treated as part of the shipowner’s policies; it did not provide any insurance in the real sense. 

2. Privity

The underwriter submitted that Oceanus’s claim would fail on the basis the express proviso in the insuring clause of the MII Policy (“without the privity of the Assured”). It was argued that there was no cover in circumstances where Oceanus was privy to the existence and/or occurrence of the breach of the trading warranties. 

It was common ground that there is no direct authority on the meaning of “privity” in an MII context. The judge was satisfied that the meaning in Section 39(5) of the Marine Insurance Act 1906 was highly persuasive. The question, therefore, was whether Oceanus “consented to or concurred in” the breach of the trading warranties. On the facts, the judge held that privity was not established - Oceanus had made clear that the vessel should not enter Ukrainian waters until additional cover was in place, and such cover was a condition precedent to the consent. The Court was not persuaded that Oceanus had consented to or concurred in the breach (“consent” had, in this case, been procured by fraud (the forged cover note)). The judge also observed that it would make little commercial sense for Oceanus to be deprived of cover in circumstances where the loss resulted from the charterer’s misconduct. Protection from the acts of (or in this case fraud by) charterers/shipowners is the precise purpose for which MII cover is sought. 

It was to the policyholder’s benefit that there was evidence of the basis on which Oceanus was prepared to consent to the vessel trading in Ukrainian waters, and there was no suggestion that they should have been suspicious of the fraudulent cover note. Presented with similar requests, MII policyholders should act prudently and ensure that any consent given to shipowners is explicit, conditional, and clearly documented.

3.  Fortuity

It is a well-established principle that for a loss to be recoverable it must be accidental, unforeseen, and fortuitous. In Oceanus, the underwriter sought to argue that Oceanus’s loss was not fortuitous as it was an inevitable consequence of Oceanus’s voluntary conduct in consenting to the vessel trading in Ukrainian waters.

However, the judge was unequivocally clear that the mine strike was plainly fortuitous. It was not in dispute that it would have been covered under the War Risks Policy, had it not been for the breach of warranty. Importantly, the judge held that Oceanus’s conduct was not truly “voluntary” as it had been “fundamentally deceived” by the shipowners. 

Conclusion

It is rare that the English courts are asked to consider MII policy wording and, given the importance of the issues of construction, permission to appeal to the Court of Appeal has been granted. Reed Smith LLP will be watching any appeal closely.

This is a further insurance decision in the range of disputes arising out of the Russian hostilities in Ukraine and Reed Smith continues to closely monitor legal developments in the English courts.