Lloyds Of London Underwriting Syndicats v Skilya Property Investments PTY LTD SCA

FACTS:

Skilya Property Investments (Pty) Ltd (“Skilya”) was insured by Lloyd’s against the loss of or damage to its aircraft cause by risks specified in a Hull “All Risk” and War Policy and claimed the value of its aircraft following its confiscation by the Mozambican government.

Until 22 July 1998, Professional Aviation Services (Pty) Ltd (“PAS”) (operator of the aircraft) entered into an indefinite lease agreement with a Kenyan company, Trackmark Ltd (“Trackmark”).   Trackmark intended to use the aircraft to deliver humanitarian relief supplies to Southern Sudan.   First it was necessary to reposition the aircraft in Nairobi where Trackmark conducted its operations.  Immediately prior to departure from Lanseria, PAS entered into a contract with another client to convey cigarettes to Beira.

On 22 July 1998 the aircraft flew from Lanseria to Beira carrying 250 cases of cigarettes, arriving at approximately 18h51 and attempted to depart at 06h10 on 23 July 1998. However, its cargo of cigarettes was not offloaded and no attempt was made to do so.

Mozambican customs officers boarded and then detained the aircraft early on 23 July 1998 preventing it from taking off.  They suspected the aircraft was smuggling cigarettes into Mozambique without paying customs levies and taxes. The customs tribunal further ordered that the aircraft should remain at Beira and thwarted all attempts by the aircraft’s owner and operator to secure its release.

Lloyd’s repudiated liability based on the illegal purpose exclusion contained in the hull policy. They maintained that the aircraft was lost whilst it was being used illegally.

On appeal to the Supreme Court of Appeal, the issues were as follows:

1. The interpretation of the insurance contract; and
2. Whether, at the time of the loss, Skilya’s aircraft was being used illegally.

THE INSURANCE POLICIES:

The Supreme Court of Appeal considered the following provisions of the policies:

In terms of the hull policy the aircraft was covered against the more common risks of flying an aircraft and moving it about on the ground. Among the excluded risks was the so called ‘war risk exclusion’.  It provided, inter alia, that:

“This Policy does not apply:-

Illegal Uses:

…whilst the Aircraft is being used for any illegal purpose or for any purpose other than those stated in the Declarations and as defined in the Definitions;

Skilya was also insured in terms of a war policy to provide cover to the insured in respect of most of the risks which were contained in the war risks exclusion in the hull policy. The first section of the war policy provides an indemnity for loss or damage to the aircraft on the following terms:

“Subject to the terms, conditions and limitations set out below, this Policy covers loss of or damage to the Aircraft nominated in the Schedule against claims excluded from the Assured’s Hull “All Risks” Policy as caused by:

…(e) Confiscation, nationalisation, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any Government (whether civil military or de facto) or public or local authority.”

THE INTERPRETATION OF THE INSURANCE POLICIES:

Lloyd’s repudiated liability on the basis of the illegal purpose exclusion which is contained in Section IV(A) of the hull policy. Skilya raised several arguments to prove that the illegal purpose exclusion did not apply to their situation.

The court however held that:

1.   It was obvious that the use of an aircraft for an illegal purpose increases the risk of loss or damage.
2. The confiscation risk (for which the war policy provides cover) is greatly increased by the illegal use of the aircraft.
3. One should consider the two policies together as a sensible business arrangement, which seeks to provide more extensive cover for the insured than had been provided in the hull policy on its own. If this is done, the war policy should be interpreted in such a way as to acknowledge that the underwriter was not contractually prepared to take the risk of illegal use upon itself.

Accordingly, the Supreme Court of Appeal held that the illegal purpose exclusion was incorporated into the war policy.

The second argument raised by the insured was the semantic construction of the phrase ‘whilst the Aircraft is being used for any illegal purpose’.

The insured contended that the illegal purpose exclusion provision had no application to the facts of this matter either because:

1. the purpose of the flight was not to smuggle but to reposition the aircraft in Nairobi; and
2. the loss was not suffered whilst the aircraft was being used for an illegal purpose.

It was common cause that the ultimate purpose of the flight was to reposition the aircraft in Nairobi for the distribution of relief supplies. However, the aircraft was first used to convey cigarettes to Beira.

In terms of flight control regulations overflight clearances had to be arranged before take-off as such, the court held that, from the time that the overflight clearances had been arranged, the first leg of the flight was undertaken for an illegal purpose. The ultimate second leg of the flight related to the repositioning of the aircraft in Nairobi. This would have been legal and did not have any effect on the legality of the first leg of the journey.

They further argued that:

1. the loading of the cigarettes at Lanseria Airport was legal;
2. while the aircraft was on its way to Beira it was not engaged in any illegal activity;
3. no illegality would be committed until the pilots of the aircraft attempted to take the cigarettes through Mozambican customs without paying duty on them. The latter would be an independent act and unrelated to the flying or use of the aircraft.

It was held that this argument lost sight of the terms in which the illegal purpose provision had been couched namely that:

“… it does not exclude from indemnity the unlawful carriage of goods; it excludes liability where the purpose for which the aircraft is used is illegal. The legality of the conveyance need have no bearing on the unlawful object: of importance is the object for which the aircraft was used not the manner in which it was used.”

The Insurer succeeded with costs.

CONCLUSION:

The interpretation of the court provides an important precedent for cases where the insured may seek to rely on a purely semantic analysis of certain provision of the policy (even if they are busy with illegal activities) without having regard to the context and commercial purpose of that provision.

Roua Pienaar

Candidate Attorney