Recognition of government| Sanction| Insurrection

What sort of title is this, the reader must be wondering. Could not come out with a better one and hence stuck to these three aspects that formed the crux of this very interesting case. Does this relate to cargo insurance? Of course, it does. The case in question is CITGO Petroleum Corporation vs Starstone Insurance & others before the US District Court in New York. The aggrieved parties may well go on appeal but from the insurance standpoint, this Court’s ability to understand and interpret the essence of the problem is truly commendable.

The story begins in Venezuela in 2013, years before the cargo in dispute was even loaded on to the carrying vessel. Upon the demise of the then President, Hugo Chavez, Nicolas Maduro assumed power as the interim President of Venezuela. Two years later, in the legislative elections, a coalition opposed to Maduro got a majority. Notwithstanding this, Maduro’s supporters were appointed judges in many Courts, seizing control over the judiciary. Later snap elections were held in 2017 for the legislature again, that Maduro’s opponents called unfair and again in 2018, in an election boycotted by Maduro’s opponents & criticised by the outside world, Maduro got elected as President for the period 2019-2025. Legislators opposed to Maduro in the National Assembly passed a resolution terming his election illegal and appointing Juan Guaido as interim President. However Maduro continued to wield the power of the State machinery and unleashed violence against all opponents.

The then US President, Donald Trump castigated Maduro and officially recognised Juan Guaido as the interim President of Venezuela. The official press release of the US government read — ‘ The United States maintains diplomatic relations with Venezuela and will conduct our relations with Venezuela through the government of interim President Guaido, who has invited our mission to remain in Venezuela. The United States does not recognize the Maduro regime as the government of Venezuela. Accordingly the United States does not consider former president Nicolas Maduro to have the legal authority to break diplomatic relations with the United States or to declare our diplomats persona non grata.’

Now to the dispute part : CITGO Petroleum was the US subsidiary of the Venezuelan government-owned petroleum company PDVSA. The US government had subjected PDVSA to sanctions in January 2019. Around the same time, CITGO had contracted to buy and ship on board MT Gerd Knutsen, crude oil to Aruba. Loading was completed and when permission to sail was requested on January 28th, same was refused as CITGO could not pay PDVSA because of sanctions. CITGO contested this, saying that payment had been made already through ‘offsets’ in the Crude Supply Agreement. In February, PDVSA asked CITGO to return the cargo and sail away, which CITGO refused. The stalemate continued for over a year with the Master of the vessel seeking permission to sail and refusals/ indifference being the response. Now Juan Guaido ( Interim President recognised by the US) managed to change the Board of PDVA and consequently CITGO’s Board in the US too was reconstituted. This had little impact as courts were controlled by Maduro. Court orders were issued directing the Master of Gerd Knutsen to return the cargo and this was refused. Civil unrest and violence was increasing in Venezuela and Maduro’s men brooked no opposition. Another Court order asking Gerd Knutsen to sail to another port and hand over the cargo was refused. Finally, force was used and naval ships escorted Gerd Knutsen to another port where at the point of guns, the tanker was emptied and the cargo taken away. Many other vessels too were seized by Maduro’s men in Venezuelan ports.

The insurance part: This came to the fore in 2020. CITGO had in place a marine cargo insurance policy covering the cargo on board Gerd Knutsen on ICC-A terms along with the Institute War clauses ( Cargo). When the cargo was forcibly taken away, CITGO lodged a claim on the underwriters under ‘ Insurrection’, a peril covered under the Institute War clauses (Cargo). Underwriters declined the claim citing that the happenings in Venezuela did not constitute Insurrection within the meaning of the policy. Hence, in January 2021, CITGO filed the case against all the underwriters participating in the policy claiming a loss of US $ 40 million.

The primary questions before the Court were 1) Do the actions in Venezuela leading to the loss of cargo constitute an insurrection? 2) Did CITGO have ownership of the cargo when it was lost, since they had not paid for it?. The Court answered both the questions in the affirmative , with appropriate reasoning.

First, any insurance contract that is unambiguous has to be given its ordinary and general meaning as per New York law. If there is any ambiguity, the same shall be decided in favour of the insured UNLESS extrinsic evidence is presented by the other party to the contrary. Here the ambiguity related to the term ‘Insurrection’ and the underwriters had not come up with any extrinsic evidence on its meaning. It is not in dispute that Nicolas Maduro’s government was not the one legally recognised by the US. This is borne out by the US government statement and the fact that the United States President ‘enjoys’ exclusive power to ‘recognise foreign governments’.So the actions taken to retrieve the cargo from Gerd Knutsen cannot be said to be governmental action, but does it fall under Insurrection?

The Court relied on the definition of ‘Insurrection’ in the case Pan Am World Airways Inc. vs Aetna — ‘ The word ‘insurrection’ means 1) a violent uprising by a group or movement 2) acting for the specific purpose of overthrowing the constituted government and seizing its powers’. The defendants argued that when Maduro’s forces did not lose control over all levers of power and the recognised ‘ruling government’ could not exercise any power in the face of violence, how can that be an insurrection. The Court agreed that insurrection could be successful but the crux would be the intent to overthrow a constituted/recognised government. Here Maduro’s forces were successful in their intent and their actions and words ( We will liberate our Nation with arms) fell within the meaning of Insurrection. As for ownership of the cargo, The Court rightly observed that payment was not relevant. The very fact that cargo was loaded on to the chosen vessel as per the sale contract between PDVSA and CITGO is sufficient proof of ownership.

The importance of every term used in an insurance policy and understanding its full meaning is important. Equally important is the official position of countries in recognising the government in another country. So, an underwriter must understand politics too.