DMC Category Rating: Confirmed

This case note is based on an Article in the July 2004 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA. DLA is an International Contributor to this website.

Background
Silversea was the operator of a fleet of four ultra-luxury cruise ships, The Silver Cloud, The Silver Wind, The Silver Shadow and The Silver Whisper. Its business was significantly affected by passenger cancellations and a drop in future bookings following the events of 11 September 2001 and subsequent US government warnings to US citizens making travel plans. In addition, the Port of New York was closed for over 6 months, necessitating the substitution of Philadelphia on four voyages.

Shortly after the attacks, Silversea initiated a strategic reconsideration of its 2001, 2002 and 2003 itineraries. It decided to lay up and refurbish one of its four vessels, the Wind and redeploy the newly-refurbished Cloud to perform the Wind's voyages for the rest of 2001 and for 2002. The 2002 itineraries of the Shadow and Whisper were maintained. Passengers already booked on cruises affected by these changes were to receive either a full cash refund or a cruise credit for rebooking. Silversea also relaxed its normal cancellation penalty for passengers booked to sail between 11 and 30 September and some passengers on Wind voyages departing in October were offered cruise credits.

The policy
Silversea claimed under its "Loss of income and extraordinary costs" insurance policy. This comprised three sections, A(i), A(ii) and B.

Section A(i) covered "loss of income expected to be earned by the operation of the vessel…This insurance covers loss due to the vessel being wholly or partially deprived of income as a consequence of an occurrence within the policy period of one of the following events…". It then listed seven perils, of which the fifth and seventh were relevant:

"[5] Blockage or closure of any canal or navigable waterway, capture, seizure, confiscation or any other event which directly interferes with the scheduled itinerary of the vessel by … terrorists … actual or threatened …
[7] Acts of war, armed conflict, strikes, riots and civil commotions which interfere with the scheduled itinerary of the insured vessel, whether actual or threatened".

Section A(i) also incorporated standard provisions from chapter 16 of the Norwegian Marine Insurance Plan 1996, which provided that the insured's loss was to be calculated on a loss of time basis and that, if a fixed amount per day was written into the policy, this was to be regarded as the assessed insurable daily amount "unless the circumstances clearly indicate otherwise". Each casualty would be subject to deductible period, also calculated in days.

The indemnity limits under section A(i) were set out in a schedule, which provided daily amounts that varied according to the vessel involved and the cruising season. The total indemnity available across the fleet as a whole was over US$47 million.

Section B of the policy covered "the reasonable costs of compensating passengers for any loss of amenity by issuing cruise credits and/or on-board credits for future cruises …". The loss was further described as "the cost to the assured of issuing cruise credits and/or on-board credits to the passengers where a cruise has been cancelled or interrupted as a consequence of the happening of an insured event".

The indemnity limit under Section B was "US$5 million per event". Otherwise, section B was subject to the same conditions as A(i), and the two had a combined deductible of "10 days any one accident or occurrence…".

Section A(ii) covered the loss of "anticipated income expected to be earned on any future cruise as detailed in the current Cruise Atlas" (which listed cruises of the four vessels down to the end of 2002). The loss was further described as "Ascertained Net Loss resulting from a State Department Advisory or similar warning by competent authority regarding acts of war, armed conflict, civil commotions, terrorist activities, whether actual or threatened, that negatively impact the Assured's bookings and/or necessitates a change to the scheduled cruise itinerary, subject to a maximum period per event of six months …".

The limit of indemnity under section A(ii) was "US$5,000,000 in the annual aggregate and in all …". and the deductible "US$250,000 per occurrence".

The policy also contained terms applicable to all three sections. These included the following exclusion:

"This insurance does not cover any loss arising from … Deterioration of market and/or lack of support for any scheduled cruise unless as a direct result of an insured event"

and the following general condition: "Each vessel to be a Separate Insurance".

The claim
Silversea alleged that the events of 9/11 created a situation where there was a demand for only three out of the four vessels so it had to reduce the number of cruises and vessels offered by laying up the Wind. The Cloud's voyages were cancelled because they included visits to unsafe destinations in the Middle and Far East and the vessel was used instead to perform the Wind's itinerary. Most of the loss suffered was calculated according to the net value of passenger cancellations over all its scheduled voyages.

The insurers argued the true reason for the decision to take a vessel out of circulation was not 9/11 but over-capacity - a situation that existed prior to the terrorists attacks. They claimed that the exclusion against market deterioration applied, so there had been no insured loss at all. In any event, they strongly contested the basis on which Silversea had calculated its loss.

At first instance, the judge dismissed Silversea's claims under sections A(i) and B of the policy. He concluded that the Cloud's original itinerary was not cancelled because it had been rendered unsafe by the events of 9/11 but because of over-capacity. Silversea's claim under section A(ii) succeeded, but only up to a maximum indemnity limit of $5 million. It was agreed that issues of quantum should be held over to a later hearing.

Silversea appealed, seeking to reinstate its claims under sections A(i) and B and to argue that the US$5 million limit under section A(ii) applied per vessel, not to the fleet as a whole. The finding that the Cloud's itinerary had not been cancelled for safety reasons was not challenged.

Before the appeal, insurers conceded that they were liable under section A(ii) of the cover up to a US$5 million limit for the whole fleet, but without prejudice to their argument that there had been no insured loss at all.

Section A(ii) The Indemnity limit
The first and most significant issue was whether cover under section A(ii) ("US$5,000,000 per event and in all") was limited to $5 million for the whole fleet or applied per vessel. Silversea relied on the general condition "Each vessel to be a Separate Insurance" to argue that the limit applied to each vessel. Insurers, however, argued that the condition did not refer to indemnity limits but was only intended to provide a protection to the rest of the fleet if, for example, there was a non-disclosure in respect of single vessel.

Section A(ii) Concurrent Causes
Insurers also contended that Silversea's claim under A(ii) was not covered because of the general exclusion:
"This insurance does not cover any loss arising from … Deterioration of market and/or lack of support for any scheduled cruise unless as a direct result of an insured event"

Insurers maintained that the losses resulted directly from terrorist activities rather than from the US government warnings and that terrorist activities were not an insured event under section A(ii). Only losses caused by government warnings were covered, not losses caused by the underlying events.

The judge at first instance found that it was impossible to divorce the effect of the warnings on passengers and potential passengers from the effect of 9/11. Both had directly caused the fall-off in bookings. In passing, he noted that, had terrorist activities been specifically excluded from the cover, there would have been no recovery under section A(ii). This is because, in the case of concurrent causes, where one is insured and the other the subject of a specific exclusion, insurers will not be liable for the loss (Wayne Tank & Pump Co Ltd v Employers Ltd Assurance Corporation Limited [1973] 2 Lloyd's Rep 237).

Judgment
The policy as a whole
The Court of Appeal's starting point was to look at the overall structure of the policy. Section A(i) was concerned with the immediate consequences of insured perils on the operations of vessels and their current itineraries. The incorporation of the Norwegian Plan and the loss of time basis of calculation suggested that the cover was concerned with loss caused by delay to the actual operations of the vessels, rather than to market losses expressed in terms of passenger calculations.

Section B, which was closely related to section A(i), also envisaged insured perils interfering with the operations of specific vessels and giving rise to the need to compensate passengers whose cruises had been cancelled or interrupted. The difference was that section B cover indemnified against the cost of such compensation rather than for loss of time.

Section A(ii), on the other hand, covered loss of anticipated income on future cruises. The Net Ascertained Loss under this section was measured in terms of lost bookings. The section also covered loss from a peril that necessitated a change to the scheduled cruise itinerary, but in the context of the policy as a whole, this appeared to contemplate a loss of market sufficiently severe to require alterations to the range of cruises scheduled in the Cruise Atlas.

Section A(ii) The Indemnity Limit
The Court of Appeal, like the judge at first instance, agreed with insurers, although with some hesitation. The general condition about each vessel having separate insurance and the separate limits per vessel in section A(i) meant that the question was not entirely clear-cut. On balance, however, the Court concluded that the limit applied to the fleet. The section A(ii) cover by its nature and by its wording appeared to take a fleet-wide approach to the ascertainment of loss.

The decision on the A(ii) limit and insurers' concession rendered many of the other issues on appeal irrelevant. However, the Court of Appeal allowed Silversea's argument that the six-month time limit mentioned in section A(ii) was the period in which a fall-off of passenger booking was to be measured for all cruises then being marketed (i.e. all cruises in the Cruise Atlas) not just those due to start during that period.

Section A(ii) Concurrent Causes
The appeal judges also dismissed insurers’ arguments on this point. They agreed that the losses were covered under A(ii). Terrorist acts were not excluded, they were simply not covered under section A(ii). But they were covered elsewhere in the policy and they were also a necessary precondition to any government warnings under section A(ii). There had clearly been no intention to exclude losses directly caused by government warnings just because it could be said that the losses were concurrently caused by the underlying terrorist activities.

The A(i) claim
The two problems with Silversea's section A(i) claim were that, on the court's construction of the policy wording, (1) there had to be some interference in the scheduled itineraries of vessels as a result of an insured event and (2) the loss had to be measured in terms of loss of time, not passenger cancellation or loss of bookings. The Court of Appeal agreed with the judge that there had been no such interference and that this was really a loss of market claim which properly belonged under section A(ii), not A(i).

A more general question was whether the events of 9/11 amounted to "Acts of war, armed conflict…" under the seventh paragraph of section A(i). The question whether or not an event is a war does not depend on it being recognised by the government or on any technical meaning (Kawasaki Kisen Kabushiki Kaisha of Kobe v Bantham Steamship Company Ltd [1939] 2 KB 544; Spinneys (1948) Ltd v Royal Insurance Co Ltd [1980] 1 Lloyd's Rep 406. The word had to be construed in a commonsense way, not necessarily as it would be construed under public international law.

In the Spinneys case Mustill J put forward three questions which generally need to be addressed in such situations:

1. Can it be said that the conflict was between opposing "sides"?
   (2) What were the objectives of the "sides" and how did they set about achieving them?
   (3) What was the scale of the conflict and its effect on public order and on the life of the inhabitants?
   
   Silversea argued that the events of 9/11 amounted to acts of war. There were identifiable sides with opposing objectives, the attacks were unprecedented in terms of mere terrorism and led directly and swiftly to the undoubted war in Afghanistan and to the "war on terror". Insurers, however, pointed out that experts repeatedly referred to 9/11 as a terrorist attack and to Al Qaeda as a terrorist organisation. There were no opposing armed forces, only hijackers and victims.

The Court of Appeal did not have to decide the issue and reached no conclusion on the point. But Lord Justice Rix acknowledged the cogency of the arguments on both sides. He pointed out that the term was actually "act of war" and so was probably rather broader than "war" alone. A casus belli (an act justifying war) could, conceivably be an act of war and the events of 9/11 led within a month to the invasion of Afghanistan, which, under the Taliban, was believed to have been a state sponsor of Al Qaeda. He felt considerable weight had to be given to the concerns of businessmen and their insurers over the scale and ramifications of the attacks, which showed an unprecedented level of organisation, co-ordination and planning.

Lord Justice Ward, however, was more cautious on the point. He did not believe that businessmen, underwriters or insureds watching the events unfold would have said they were acts of war rather than terrorist actions. The "war on terror" was a rhetorical response and only emphasised that there was no identifiable side against which war could be waged.