(Article from Insurance Law Alert, February 2026)
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Holding
The English Commercial Court has, for the first time, considered language in a mortgagee’s interest insurance (“MII”) policy based on the 1997 Institute Mortgagees’ Interest Clauses wording. The court considered the requirement that an insured peril occur without the “privity” of the assured and held that there was no “privity,” as the assured’s consent had been obtained by fraud. The court was also satisfied that the proximate cause of the claimant’s loss was a mine strike in Ukrainian waters—a loss that was prima facie covered under the MII policy. Oceanus Capital SARL v Lloyd's Insurance Company SA (Re M/V Vyssos) [2025] EWHC 3293 (Comm) (17 December 2025).
Background
The owners of a ship had taken out a war risks insurance policy, which was subject to warranties, including that the vessel could not enter the territorial waters of Ukraine unless otherwise agreed with the insurer (the “War Risks Policy”). The claimant mortgagee provided financing to the owners of the ship, secured by way of a first-preference mortgage over the vessel. The claimant mortgagee also took out an MII policy from the defendant underwriters. An MII policy typically protects lenders if the borrowers’ primary insurance over the insured asset fails to respond, due to issues like trading warranty breaches or unseaworthiness—unless the assured is privy to such issue.
In December 2023, the claimant mortgagee was informed that the vessel was to trade in Ukrainian waters, which would be a breach of the trading warranties under the War Risk Policy. A breach of these trading warranties constituted an insured peril under the MII policy, provided that the assured was not privy to such breach. The mortgagee insisted on a number of occasions that the appropriate additional war risk cover be put in place, as this trade would be in breach of the warranties in the War Risks Policy. A purported additional war risks cover document was provided by the vessel’s charterers. Relying on the cover note, the claimant mortgagee allowed the voyage, but the ship struck a mine while in Ukrainian waters and was declared a constructive total loss. It was later discovered that the additional war risks cover was a forgery.
The mortgagee claimant argued that it was entitled to an indemnity under the MII Policy, as the failure of the War Risks Policy to respond due to breach of the trading warranties was an insured peril. The MII Policy underwriters disputed the claim, arguing that: (i) the cause of the mortgagee’s loss was its inability to recover under the forged additional cover, which was not an insured peril; and (ii) the mortgagee claimant had been privy to the vessel’s journey into Ukrainian waters.
Decision
The two key issues determined by the High Court were:
- whether the proximate cause of the mortgagee’s loss was the loss of or damage to the vessel or the forged policy; and
- whether the breach of the trading warranties in the owner’s war risks policy occurred or existed without the privity of the mortgagee.
On causation, the court found that the MII policy insured the loss of/damage to the Vessel—and the proximate cause of the mortgagee’s loss was the mine strike, not the invalidity of the forged policy. The court held that the loss would have been prima facie covered under the owner’s valid War Risks Policy, but for the breach of the trading warranties thereunder. The court rejected the insurers’ position that the loss was only suffered because the forged policy did not respond and fraud of this sort is not the risk that the insurers assumed.
On the second issue, no prior authority defined “privity” in the context of an MII policy. The court considered that privity in this context would require a relatively high degree of connivance or blameworthiness. The court determined that the key question was whether the claimant mortgagee had consented to or concurred in this voyage being made in breach of trading warranties. The court concluded that the consent of the claimant to allow the vessel to enter Ukrainian waters could not be valid as it was induced by fraud.
Comments
The court, when faced with a straightforward causation argument (the mine strike causing the loss) and a more complex argument relating to an intervening event (the forged policy), adopted the straightforward answer.
This judgment also contains the first and only judicial commentary on what is meant by the words “privity of the assured” in an MII policy. The court granted permission to appeal, recognizing that this wording has not been interpreted before and that the Court of Appeal may well reach a different conclusion.