Stuarts Success – Case Review: Toby -v- Allianz Global Risks US Insurance Company

Toby –v- Allianz Global Risks US Insurance Company, FSD 152 of 2013 (IMJ), Judgment delivered on 29 August 2018

Stuarts Insurance Litigation Practice, headed by Partner Richard Annette, has achieved a major success in defending US Insurer, Allianz, in proceedings brought by a Cayman Islands exempted company, Toby, seeking to claim under an Aviation insurance policy (the “Policy”) following the confiscation and subsequent auction by the Brazilian authorities of a Cessna C680 Aircraft (the “Aircraft”) leased by Toby and principally operated in Brazil. The Aircraft was registered in the Cayman Islands and the Policy was governed by Cayman Islands Law. Stuarts instructed Mr. Ben Elkington QC of 4 New Square.

The Judgment, running to 210 pages, is the sole Cayman Islands Judgment in respect of the interpretation of Aviation Insurance Policies and also contains important analysis of mainstream policy terms such as Claims Procedure Conditions relating to claims notification. The judgement also, from a practical perspective, demonstrates the benefit of the dogged search for disclosure that ultimately, in the Court’s words, “changed the landscape completely” and resulted in the Plaintiff’s position as to the factual background being “blown away”.

The Learned Judge described the Proceedings as containing a “kaleidoscope” of issues relating not only to numerous aspects of Cayman Islands Insurance Law but also Brazilian Law and that “arriving at this judgment may not be too dissimilar from a pilot trying to safely land an aircraft where there is no existing runway”.

The heart of the factual background related to whether the Aircraft was being used in breach of the Brazilian Temporary Admission Regime (the “TAR”). The TAR permits goods (including aircraft) to be temporarily imported into Brazil and given that their use in Brazil was “temporary” to not be eligible for import duties. The Brazilian authorities had confiscated the Aircraft on suspicion that it was being utilized / operated in breach of the TAR. This was subsequently found to be the case by the Brazilian tax authorities, in administrative proceedings and by the Brazilian Courts (albeit, it was agreed that those decisions did not give rise to an issue estoppel). At the same time, the Policy included cover for “confiscation, nationalization, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any government”. The agreed value of the Aircraft for the purpose of the Policy was US$14 Million (the “Agreed Value”). Toby claimed the Agreed Value less monies already paid out to the lessor, Cessna Finance Corporation (“CFC”) on the basis that the Aircraft had been confiscated.

Allianz sought to avoid the Policy on the grounds of a series of alleged misrepresentations and non-disclosures and, in the alternative, relied upon the Policy to maintain that the Policy did not respond to the losses claimed. Allianz prevailed in respect of the key Policy arguments.

The Judgment is helpful authority in providing a careful analysis of the various stepsand questions to be answered in addressing both the Avoidance and the Policy construction issues. Specifically in respect of the TAR, the Cayman Court concluded, having considered the whole factual background, that the Aircraft had not lawfully taken advantage of the TAR because it had not been “temporarily” admitted as required by the TAR. As a consequence, the Brazilian authorities had lawfully confiscated the Aircraft.

In that factual context, Allianz succeeded in multiple arguments including:-

1. Toby failed to comply with the Law Compliance Condition – requiring Toby to use “all reasonable efforts” to ensure compliance with the laws of any country within whose jurisdiction the Aircraft may be and to obtain all necessary permits for the lawful operation of the Aircraft. Toby was in breach of Brazilian Law (see above) and further it had failed to make reasonable efforts to comply with such law. Compliance with all “reasonable efforts”, in the circumstances, constituted the need for the Insured to obtain legal advice that would have constituted “an informed well-considered opinion”. The failure to do that was key to the Insured’s failure to comply with the Law Compliance Condition and the Court concluded that Toby had been “reckless” in its approach to compliance with Brazilian Law;
2. the claim was excluded pursuant to the Financial Cause Exclusion – the Policy excluded losses caused by one or any combination of “any debt, failure to provide bond or security or any other financial cause under court order or otherwise”. The Grand Court applied the English Court of Appeal decision in The Wondrous [1992] 2 Lloyd’s Report 566 which emphasized the “very wide” meaning of the term “financial cause” and equally that the ordinary meaning of those words should be used in interpreting the exclusion. The Court concluded that the failure to pay the Brazilian import duty was either the sole or a “proximate cause�� of the loss, that the loss was therefore due to a financial cause and hence the loss was excluded from cover;
3. Toby failed to comply with the Claims Procedure Condition – this required “immediate notice of any event likely to give rise to a claim” and then prescribed actions the Insured was required to take following notification of a claim. Allianz argued that the Federal Revenue Service’s decision of 15 January 2013 (7 months after the actual confiscation) triggered the Claims Procedure Condition because it was agreed that it was at that time that the Aircraft was lost for the purposes of the Policy. The 15 January 2013 decision was received by Toby on 29 January 2013, however notification of a claim was only given on 26 February 2013 – effectively just shy of a month later. Relying on Aspen –v- Pectel [2009] All ER (Comm) 873, the Court accepted Allianz’s position that “immediate” means “with all reasonable speed considering the circumstances of the case”. It was accepted that Notice could have been given in January 2013. The Court concluded that in the context that the Insurer’s right to take control of any proceedings “should not be treated lightly or watered down by an Insured’s conduct or delay in giving notice as required by the Policy” the delay that had occurred, in light of all the relevant factual circumstances, was not “immediate” and Toby was in breach of the Claims Procedure Condition, a condition precedent to liability under the Policy; and
4. Toby was not entitled to recover given the Loss Payee Clause in the Policy which provided that, in the event of a Total Loss of the Aircraft, settlement shall be made to CFC. Allianz had settled CFC’s claim. The Loss Payee clause had to be construed in the context of the other arrangements that had been entered into including the Finance Lease between CFC and Toby. In that light, the Court concluded that the parties had entered into a “carefully constructed contractual mechanism”. The effect of the Loss Payee Clause was that, as there had been a Total Loss of the Aircraft, Allianz was obliged to pay CFC and not Toby. Allianz had sought to resolve this as a Preliminary Issue before the matter was assigned to the Judge who ultimately heard the matter.

The Judgment also contains helpful analysis of the interplay between the Policy’s Due Diligence Condition, Illegal Use Exclusion and the Law Compliance Condition. In addition, the Judgment also considered the Doctrine of Illegality in light of the recent Supreme Court decision in Patel –v- Mizra [2016] UKSC 42. Allianz’s position in defending the claim was ultimately vindicated on the multiple grounds set out above.