CALDERWOOD & HARKNESS LLP
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is prepared in anticipation of litigation and for the purpose of rendering legal advice to the client. Any disclosure, copying, or distribution of this memorandum or its contents without the express written consent of Calderwood & Harkness LLP is strictly prohibited.
MEMORANDUM
TO: File (C&H-2022-ITS-04781)
FROM: James Prentice
DATE: December 2, 2022
RE: Insurance Coverage Analysis — Oceanos Underwriters SA Financial Lines Policy No. OCU-FIN-2021-GR-0487
I. Purpose
This memorandum analyzes whether the Financial Lines Policy issued by Oceanos Underwriters Société Anonyme ("Oceanos") to Thalassa Shipping & Logistics Société Anonyme ("TSL") under Policy No. OCU-FIN-2021-GR-0487 (the "Policy") provides coverage for the customs classification and valuation dispute arising from the Independent Authority for Public Revenue of the Hellenic Republic ("AADE") Assessment Notices AADE/ADAN/2022/0073 (Classification) and AADE/ADAN/2022/0074 (Valuation), both dated August 12, 2022 (collectively, the "Assessment Notices"). The Assessment Notices relate to the importation of ship-to-shore ("STS") gantry cranes and automated stacking crane ("ASC") systems by TSL into the Hellenic Republic during the period from March 2019 through December 2021, and assert additional customs duty liability, VAT adjustments, administrative penalties, and late payment interest in a combined amount that constitutes a substantial financial exposure for TSL.
In addition to analyzing the Policy's coverage provisions and exclusions, this memorandum evaluates and responds to the reservation of rights letter issued by Oceanos on November 22, 2022 (the "Reservation Letter"), in which Oceanos reserved its rights to deny coverage on two specific exclusion grounds: (1) willful non-compliance under Policy Section 4.3(a), and (2) deliberate undervaluation under Policy Section 4.3(b). The Reservation Letter does not constitute a denial of coverage, but it signals potential grounds for a future coverage dispute that must be addressed proactively.
Finally, this memorandum provides a recommended course of action regarding the insurance claim, the coverage dispute, and the coordination of the insurance recovery with TSL's broader defense strategy in the underlying AADE customs proceedings.
This memorandum should be read in conjunction with the following related work product documents prepared in connection with this matter:
• Memorandum on Classification Analysis — CN 8426 41 00 vs. CN 8428 90 90 (C&H-2022-ITS-04781, dated November 15, 2022);
• Memorandum on Customs Valuation Analysis — UCC Articles 70–74 (C&H-2022-ITS-04781, dated November 18, 2022);
• Financial Covenant Impact Memorandum (to be prepared, anticipated date December 5, 2022);
• Draft Response to Oceanos Reservation of Rights Letter (Document 30, to be prepared under separate cover).
II. Policy Summary
A. Key Policy Parameters
The relevant parameters of the Oceanos Financial Lines Policy are summarized as follows:
The Policy is a claims-made policy, meaning that it covers claims first made against the insured during the policy period, regardless of when the underlying conduct occurred. This is a critical structural feature: because the Assessment Notices were issued on August 12, 2022, and the Policy period extends through March 31, 2023, the temporal coverage requirement is satisfied. The Policy was placed by Aether Insurance Brokers Limited, a London-based specialty insurance broker, and underwritten by Oceanos Underwriters SA, a Greek insurance company licensed to write financial lines coverage in the European Union.
The Customs & Excise Duty Disputes Sublimit of €3,000,000 is a sub-limit within the overall €15,000,000 policy limit. This means that the maximum amount recoverable under the Policy for the AADE customs dispute is €3,000,000, less the €250,000 retention, for a net maximum recovery of €2,750,000. The sublimit applies on a combined basis to defense costs and assessed amounts; it is not a separate sublimit for each category. This combined structure has important implications for the quantum analysis set forth in Section VII below, as defense costs will erode the sublimit available for assessed duties.
B. Insuring Clause — Section 2.4 (Tax/Regulatory Authority Disputes)
The operative insuring clause for the AADE customs dispute is Section 2.4 of the Policy, which provides coverage for Tax or Regulatory Authority Disputes. The relevant insuring language states:
"The Insurer shall pay on behalf of the Insured all Loss, including Defense Costs and Assessed Amounts, incurred by the Insured arising from a Tax or Regulatory Authority Claim first made against the Insured during the Policy Period, provided that such Claim does not arise from Fraud, willful non-compliance, or deliberate evasion."
The Policy defines "Loss" in Section 1.14 to include two principal components:
(a) Defense Costs — defined as "reasonable and necessary fees and expenses incurred by the Insured in defending a Tax or Regulatory Authority Claim, including attorneys' fees, expert witness fees, consultant fees, translation costs, travel expenses, and administrative filing fees and costs, whether incurred before or after the commencement of formal administrative or judicial proceedings"; and
(b) Assessed Amounts — defined as "taxes, duties, levies, and customs charges assessed and imposed by a Tax or Regulatory Authority that the Insured becomes legally obligated to pay as a result of a Tax or Regulatory Authority Claim, excluding fines, penalties, and interest arising from Fraud or willful non-compliance."
The definition of "Loss" expressly excludes "fines, penalties, and interest arising from Fraud or willful non-compliance." As discussed further in Section VII below, this exclusion creates interpretive ambiguity regarding whether penalties and interest are excluded categorically or only when they arise from fraud or willful non-compliance. The most natural reading of the exclusion is that penalties and interest are excluded in all circumstances, as the qualifying phrase "arising from Fraud or willful non-compliance" modifies the entire category of "fines, penalties, and interest" rather than creating a carve-back for penalties arising from innocent conduct. However, the counter-argument — that penalties assessed on a good-faith basis should be distinguished from penalties arising from fraud — has some textual support and may be worth advancing if the amounts at stake warrant the effort.
The Policy defines "Tax or Regulatory Authority Claim" in Section 1.22 as:
"A written notice or demand from a Tax or Regulatory Authority alleging that the Insured has failed to pay, or has underpaid, any tax, duty, levy, or customs charge, including but not limited to any assessment, audit finding, or administrative proceeding relating to the classification, valuation, or origin of imported goods."
This definition is notably broad. It expressly encompasses assessments, audit findings, and administrative proceedings relating to the classification, valuation, or origin of imported goods — precisely the categories at issue in the AADE dispute. The definition does not require that the claim take the form of a formal judicial proceeding; an administrative assessment or audit finding is sufficient to trigger coverage. The AADE Assessment Notices, which constitute formal administrative assessments of additional customs duties based on post-clearance audit findings regarding both classification and valuation, fall squarely within this definition.
C. Key Exclusions
Two exclusions are relevant to the coverage analysis and form the basis of Oceanos's reservation of rights. Both are found in Section 4.3 of the Policy.
Section 4.3(a) — Fraud/Willful Non-Compliance Exclusion
Section 4.3(a) provides that the Policy does not cover any Loss:
"arising from or attributable to Fraud, willful non-compliance, or deliberate evasion of any tax, duty, or customs obligation by the Insured or any officer or director of the Insured acting in such capacity."
The Policy defines "Fraud" in Section 1.10 as:
"Any dishonest, fraudulent, or criminal act committed by the Insured with the intent to deceive or evade a legal obligation, as established by a final, non-appealable adjudication or admission."
The definition of "Fraud" is noteworthy for its requirement that the fraudulent act be "established by a final, non-appealable adjudication or admission." This is a high evidentiary threshold — sometimes referred to as an "adjudication-in-fact" or "final determination" standard. Under this standard, the insurer cannot invoke the Fraud exclusion based on its own investigation or preliminary findings; rather, fraud must be established through a completed judicial or administrative proceeding that has reached finality, or through an explicit admission by the insured. No such adjudication or admission has occurred in this case, nor is one anticipated based on the current facts.
The Policy defines "willful non-compliance" in Section 1.24 as:
"A deliberate decision by the Insured to disregard a known legal obligation with respect to tax, duty, or customs classification, valuation, or reporting."
Unlike the definition of "Fraud," the definition of "willful non-compliance" does not include an adjudication-in-fact requirement. This means that Oceanos could, in theory, invoke this exclusion without waiting for a final adjudication. However, the substantive requirements of the definition — a "deliberate decision" to "disregard" a "known legal obligation" — impose a high factual threshold that, as discussed in Section VI.A below, is not met on the present facts.
Section 4.3(b) — Deliberate Undervaluation Exclusion
Section 4.3(b) provides that the Policy does not cover any Loss:
"arising from or attributable to the Insured's deliberate undervaluation of imported goods for the purpose of reducing customs duties payable."
This exclusion has two cumulative elements: (1) the undervaluation must be "deliberate," and (2) the undervaluation must be undertaken "for the purpose of reducing customs duties payable." Both elements must be satisfied for the exclusion to apply. As discussed in Section VI.B below, neither element is satisfied on the present facts.
D. Notice and Claims Procedures
Section 5.1 of the Policy requires the insured to provide notice of a Tax or Regulatory Authority Claim to the insurer "as soon as practicable but in any event within sixty (60) days of the Insured first becoming aware of the Tax or Regulatory Authority Claim." Notice must be provided in writing and must include a description of the claim, copies of the relevant assessment or demand documents, and a summary of the insured's response or intended response.
The relevant timeline for the notice analysis is as follows:
• The AADE Assessment Notices are dated August 12, 2022.
• TSL received the Assessment Notices on August 16, 2022.
• TSL engaged Calderwood & Harkness LLP on September 22, 2022 (Matter No. C&H-2022-ITS-04781).
• On October 15, 2022, James Prentice of Calderwood & Harkness, acting on behalf of TSL, filed a formal insurance claim notice with Oceanos Underwriters via Aether Insurance Brokers. The notice was transmitted through Fiona Hartwell, Senior Account Executive at Aether, for onward submission to Oceanos's claims department.
The notice period from the date TSL received the Assessment Notices (August 16, 2022) to the date the claim notice was filed (October 15, 2022) is approximately sixty (60) days. This is within the Policy's notification window, though it is at the outer boundary. The notice complies with the Policy's timing requirements, and Oceanos has not raised any objection to the timeliness of the notice in its Reservation Letter.
The claim notice included copies of both Assessment Notices, a summary of the underlying classification and valuation disputes, a description of the professional advisors engaged by TSL, and a preliminary estimate of defense costs and assessed amounts. The notice was prepared in a manner designed to preserve TSL's coverage rights while providing Oceanos with sufficient information to begin its coverage evaluation.
III. Chronology of the Insurance Claim
The following timeline sets forth the key dates relevant to the insurance coverage analysis. This chronology is limited to insurance-related events; a more comprehensive timeline of the underlying AADE customs dispute is set forth in the classification and valuation analysis memoranda referenced above.
The timeline demonstrates that TSL acted promptly in engaging counsel and providing notice of the claim to its insurer. The notice was filed within the sixty-day window prescribed by the Policy, and no notice-related defenses have been raised by Oceanos. The key issue going forward is the substantive coverage analysis — specifically, whether Oceanos can successfully invoke either of the two exclusions identified in its Reservation Letter to deny coverage for all or part of the claim.
IV. Oceanos Reservation of Rights Letter — Summary
Oceanos's Reservation Letter, dated November 22, 2022, acknowledges receipt of TSL's insurance claim notice and confirms that Oceanos is investigating the claim under Policy No. OCU-FIN-2021-GR-0487. The Reservation Letter does not constitute a denial of coverage; rather, it preserves Oceanos's right to deny coverage in the future based on the exclusions cited in the letter. The Reservation Letter identifies two specific grounds on which Oceanos reserves its rights:
1. Willful Non-Compliance — Section 4.3(a). Oceanos reserves the right to deny coverage if it is determined that TSL's classification of the STS gantry cranes and ASC systems under Combined Nomenclature code 8426 41 00 constitutes "willful non-compliance" within the meaning of Section 4.3(a) of the Policy — that is, a "deliberate decision by the Insured to disregard a known legal obligation" with respect to customs classification. In support of this reservation, Oceanos references the existence of the German BTI ruling DE-BTI-2020-05678, which classified ASC-type systems under heading 8428, and suggests that TSL may have been aware of this ruling or should have been aware of it at the time of importation. Oceanos also notes that TSL did not seek a BTI ruling in Greece prior to importation, which Oceanos characterizes as a failure to take reasonable steps to confirm the correct classification.
2. Deliberate Undervaluation — Section 4.3(b). Oceanos reserves the right to deny coverage for the valuation adjustments assessed in AADE/ADAN/2022/0074 if it is determined that TSL "deliberately undervalued" the imported goods for the purpose of reducing customs duties payable. Oceanos specifically identifies two components of the valuation dispute as raising concerns: (a) the Nereus Maritime Advisory Limited procurement coordination fee of €2,940,000, which Oceanos notes was paid to an entity with related-party connections to TSL's controlling shareholder (Andreadis Family Holdings LLC) and to a former sales agent of the equipment manufacturer (Konstantinos Melas); and (b) the Hailong Heavy Industries technology license fee arrangements totaling €4,900,000, which Oceanos notes were structured under a Technology License Agreement executed on January 10, 2019 — five days before the first equipment purchase contract — and calculated as a percentage of the equipment purchase price, raising questions about whether the fees should have been included in the customs value as a condition of sale.
The Reservation Letter requests that TSL provide additional documentation regarding both the classification and valuation issues, including copies of the Customs Brokerage Agreement with Peloros Customs Agency S.A., the Technology License Agreement with Hailong Heavy Industries, the Procurement Services Agreement with Nereus Maritime Advisory Limited, all correspondence with customs brokers and advisors regarding the classification selection, and any internal memoranda or analyses regarding the valuation treatment of the technology license fees and procurement coordination fees.
The Reservation Letter also states that Oceanos "will continue to investigate the claim and reserves all rights under the Policy, including but not limited to the right to deny coverage in whole or in part." Notably, the Reservation Letter does not address the advancement of defense costs, which is a separate obligation under Section 5.3 of the Policy, as discussed in Section VIII.C below.
V. Analysis of Coverage — Insuring Clause
A. The AADE Assessment Qualifies as a "Tax or Regulatory Authority Claim"
The threshold question in any coverage analysis is whether the underlying event falls within the scope of the insuring clause. Here, the AADE Assessment Notices satisfy each element of the Policy's definition of a "Tax or Regulatory Authority Claim" under Section 1.22.
First, the AADE is the Independent Authority for Public Revenue of the Hellenic Republic (Ανεξάρτητη Αρχή Δημοσίων Εσόδων). It is the principal tax and customs administration authority of Greece, charged with the assessment and collection of taxes, duties, and customs charges. AADE is unquestionably a "Tax or Regulatory Authority" within the meaning of the Policy.
Second, the Assessment Notices constitute "written notice[s] or demand[s]" from a Tax or Regulatory Authority. Each Assessment Notice is a formal written document, bearing AADE reference numbers and dated August 12, 2022, that demands payment of additional customs duties, VAT adjustments, administrative penalties, and late payment interest. The Assessment Notices are not informal inquiries or preliminary audit findings; they are legally binding assessments that create an immediate payment obligation subject to TSL's right to file an administrative appeal.
Third, the Assessment Notices allege that TSL "has failed to pay, or has underpaid" customs duties — specifically, that TSL misclassified the imported equipment (resulting in the application of a 0% duty rate instead of a 2.2% rate) and undervalued the goods (by excluding certain costs and fees from the customs value). These allegations relate directly to "the classification, valuation, or origin of imported goods," which the Policy definition expressly encompasses.
Fourth, the claim was "first made against the Insured during the Policy Period." The Assessment Notices are dated August 12, 2022, and were received by TSL on August 16, 2022. Both dates fall squarely within the Policy period of April 1, 2021 through March 31, 2023. The Policy is written on a claims-made basis, and the temporal requirement is unambiguously satisfied.
Accordingly, the AADE Assessment Notices constitute a Tax or Regulatory Authority Claim within the meaning of Section 2.4 of the Policy, and the insuring clause is triggered.
B. "Loss" Encompasses Both Defense Costs and Assessed Duties
Having established that the insuring clause is triggered, the next question is whether TSL's anticipated expenditures qualify as "Loss" under the Policy. The analysis proceeds by category.
Defense Costs. TSL has engaged the following professional advisors in connection with the AADE customs dispute, all of whose fees and expenses qualify as "Defense Costs" under the Policy:
(a) Calderwood & Harkness LLP — international trade and customs counsel, responsible for overall case strategy, coordination with local counsel and experts, analysis of EU customs law, preparation of legal memoranda, and representation in any proceedings before EU institutions (including DG TAXUD). Calderwood & Harkness's fees and expenses constitute "attorneys' fees" within the Defense Costs definition.
(b) Vournas & Theodorakis Dikigiriko Grafeio ("V&T") — local Greek counsel, located at 22 Academias Street, 106 71 Athens, Greece, responsible for Greek-law analysis, preparation and filing of administrative appeals before AADE and the Diefthyntiki Epilysi Diaforon (Directorate for the Resolution of Disputes), and representation in any proceedings before the Greek administrative courts. V&T's fees and expenses constitute "attorneys' fees" within the Defense Costs definition.
(c) Argonaut Trade Consulting GmbH — customs classification expert, led by Dr. Lukas Brenner, based in Berlin, Germany. Argonaut has been retained to provide expert analysis and testimony on the correct Combined Nomenclature classification of the STS gantry cranes and ASC systems, including analysis of the relevant GIRs, Chapter Notes, and Explanatory Notes to the Harmonized System. Argonaut's fees and expenses constitute "expert witness fees" and "consultant fees" within the Defense Costs definition.
(d) Kestrel & Palladian LLP — customs valuation advisory firm, led by Spyros Makris, based in Athens, Greece. Kestrel & Palladian has been retained to provide expert analysis on the customs valuation treatment of the technology license fees, procurement coordination fees, and post-importation commissioning costs under UCC Articles 70–74 and the Implementing Regulation. Kestrel & Palladian's fees and expenses constitute "expert witness fees" and "consultant fees" within the Defense Costs definition.
(e) Other costs — including translation services (Greek to English and English to Greek, for legal documents, expert reports, and correspondence), travel expenses (for counsel and experts traveling between jurisdictions for meetings and proceedings), and administrative filing fees and costs associated with the AADE appeal and BTI application processes.
All of these costs fall within the Policy's broad definition of Defense Costs, which encompasses "reasonable and necessary fees and expenses incurred by the Insured in defending a Tax or Regulatory Authority Claim, including attorneys' fees, expert witness fees, consultant fees, translation costs, travel expenses, and administrative filing fees and costs." There is no basis for Oceanos to challenge the characterization of any of these expenditures as Defense Costs.
Assessed Amounts. The additional customs duties assessed by AADE in the Assessment Notices total €1,697,080, comprising:
(a) €1,478,400 in additional customs duties resulting from the reclassification of the equipment from CN 8426 41 00 (0% MFN duty rate) to CN 8428 90 90 (2.2% MFN duty rate), as assessed in AADE/ADAN/2022/0073; and
(b) €218,680 in additional customs duties resulting from the inclusion of previously excluded costs in the customs value, applying the 2.2% duty rate to the valuation adjustments, as assessed in AADE/ADAN/2022/0074.
These additional customs duties constitute "taxes, duties, levies, and customs charges assessed and imposed by a Tax or Regulatory Authority that the Insured becomes legally obligated to pay as a result of a Tax or Regulatory Authority Claim" — i.e., "Assessed Amounts" under the Policy. The additional duties are the direct consequence of the AADE Assessment Notices, and TSL will become legally obligated to pay them unless the assessments are successfully overturned on administrative appeal or in court proceedings. Accordingly, these amounts qualify as covered "Assessed Amounts" under the Policy, subject to the sublimit and retention.
VAT Adjustments. The total VAT adjustments assessed by AADE amount to €2,740,416, comprising:
(a) €354,816 in VAT on the customs duty differential (i.e., 24% Greek VAT applied to the €1,478,400 additional duty amount); and
(b) €2,385,600 in VAT on the increased customs value (i.e., 24% Greek VAT applied to the €9,940,000 in valuation adjustments).
The treatment of VAT adjustments under the Policy raises a more nuanced question. On one hand, VAT on imported goods is a "tax" or "levy" assessed by AADE in connection with the customs dispute, and the additional VAT liability is a direct consequence of the reclassification and revaluation assessed in the Assessment Notices. Under this reasoning, the VAT adjustments would qualify as "Assessed Amounts" within the Policy definition.
On the other hand, VAT is generally a pass-through tax for businesses that are registered for VAT and entitled to deduct input VAT. TSL, as a Greek-registered company engaged in commercial activities, is presumed to be entitled to claim input VAT credits for VAT paid on imported goods. If TSL can recover the additional VAT through the input VAT credit mechanism, the net economic cost of the VAT adjustments would be limited to a timing or cash flow impact — TSL would pay the additional VAT to AADE and subsequently recover it through its VAT return. In that scenario, the VAT adjustments may not constitute a genuine "Loss" to TSL, and Oceanos could argue that coverage is not warranted for an amount that TSL will ultimately recover through the tax system.
Further analysis is needed on this point, including: (a) confirmation that TSL is in fact entitled to full input VAT recovery on the goods in question; (b) assessment of any limitations or restrictions on input VAT recovery that might apply (e.g., if certain goods are used for exempt activities or if the VAT recovery is time-barred); and (c) determination of whether the Policy treats VAT as a covered "duty" or an excluded pass-through tax. This analysis should be coordinated with V&T, which has expertise in Greek tax law, and with Fiona Hartwell at Aether, who may have insight into how similar claims have been handled under comparable Oceanos policies.
VI. Analysis of Exclusions
The core of the coverage dispute centers on the two exclusions cited by Oceanos in its Reservation Letter. For the reasons set forth below, neither exclusion applies to the present claim.
A. Willful Non-Compliance Exclusion — Section 4.3(a)
1. Definition and Standard
As noted above, the Policy defines "willful non-compliance" as "[a] deliberate decision by the Insured to disregard a known legal obligation with respect to tax, duty, or customs classification, valuation, or reporting." This definition imposes two cumulative elements that must both be satisfied for the exclusion to apply:
(a) The decision must be "deliberate" — meaning that the insured must have made a conscious, intentional choice, as opposed to making an inadvertent error, following incorrect advice, or adopting a reasonable but ultimately incorrect interpretation of an ambiguous legal standard; and
(b) The insured must have disregarded a "known legal obligation" — meaning that the obligation in question must have been clearly established and known to the insured at the time of the relevant conduct. An obligation that is subject to genuine uncertainty or competing interpretations cannot be a "known" obligation within the meaning of this definition.
The burden of proving that an exclusion applies generally rests with the insurer. Under Greek insurance law — which governs the Policy as the law of the jurisdiction where the Policy was issued and the insured risk is located — the insurer bears the burden of establishing the factual predicates for the invocation of a policy exclusion. This is consistent with the general principle, recognized across virtually all insurance jurisdictions, that exclusions are to be construed narrowly against the insurer and in favor of coverage.
2. TSL's Classification Does Not Constitute Willful Non-Compliance
The willful non-compliance exclusion does not apply to TSL's classification of the STS gantry cranes and ASC systems under CN 8426 41 00. This conclusion is supported by multiple independent grounds, any one of which would be sufficient to defeat the exclusion.
(a) No "known legal obligation" was disregarded.
The foundation of the willful non-compliance exclusion is the existence of a "known legal obligation" that the insured deliberately chose to disregard. In the context of customs classification, this would require a clear, established legal requirement that the equipment in question must be classified under a specific CN code — and that TSL knew of this requirement and deliberately chose a different classification.
No such clear, established requirement existed at the time of TSL's importations (March 2019 through December 2021). Prior to the AADE post-clearance audit initiated on April 4, 2022, there was no AADE guidance, Binding Tariff Information ("BTI") ruling, or administrative precedent issued by the Greek customs authorities indicating that STS gantry cranes or ASC systems should be classified under CN 8428 90 90 rather than CN 8426 41 00. TSL's importations predated any Greek administrative determination on the proper classification of this equipment.
Moreover, the Combined Nomenclature itself does not unambiguously resolve the classification question. As discussed extensively in our classification analysis memorandum, the distinction between heading 8426 (which covers, inter alia, "other machinery having a self-contained jib" and "other lifting, handling, loading or unloading machinery") and heading 8428 (which covers "other lifting, handling, loading or unloading machinery") depends on a detailed functional analysis of the equipment at issue, and reasonable minds can and do differ on the proper classification. The absence of a clear, unambiguous classification rule is itself fatal to the willful non-compliance argument: one cannot "disregard" an obligation that does not exist with sufficient clarity to be "known."
(b) Favorable precedent supports TSL's position.
TSL's classification under heading 8426 was not only reasonable — it was affirmatively supported by published EU customs authority precedent. On June 14, 2021, the Netherlands customs authority (Douane Nederland) issued BTI ruling NL-BTI-2021-01234, which classified substantially similar STS gantry cranes and ASC-type systems under heading 8426, specifically under CN code 8426 19 00. While the specific subheading (8426 19 00 vs. 8426 41 00) differs from TSL's classification, the critical point is that the Dutch BTI ruling classified the equipment at the heading level under 8426, not 8428 — consistent with TSL's approach.
BTI rulings, while technically binding only on the customs authorities of the issuing member state with respect to the holder of the ruling, serve as persuasive authority across the European Union and are publicly available through the EBTI (European Binding Tariff Information) database. A company that classifies its imports consistently with a published BTI ruling of another EU member state is acting in good faith and in reliance on an official interpretation of the Combined Nomenclature. Such conduct is the antithesis of "willful non-compliance."
(c) Genuine classification ambiguity exists.
The existence of divergent BTI rulings across EU member states is, by itself, dispositive evidence that no single classification can be treated as a "known legal obligation." The record demonstrates that:
• The Netherlands BTI ruling NL-BTI-2021-01234 (June 14, 2021) classified substantially similar equipment under heading 8426, supporting TSL's classification approach;
• The German BTI ruling DE-BTI-2020-05678 (date in 2020, precise date to be confirmed) classified ASC-type systems under heading 8428, supporting AADE's proposed reclassification; and
• AADE itself acknowledged the classification ambiguity by referring TSL's BTI application (BTI-GR-2022-003847), filed in connection with the current dispute, to the European Commission's Directorate-General for Taxation and Customs Union ("DG TAXUD") under Article 34(10) of the Union Customs Code (Regulation (EU) No. 952/2013).
Article 34(10) of the UCC provides a mechanism for resolving divergent classification interpretations among EU member states. The fact that AADE invoked this mechanism — rather than simply issuing a BTI based on its own independent analysis — is a tacit admission that the classification question is genuinely uncertain and requires harmonized EU-level guidance. A classification dispute that rises to the level of requiring DG TAXUD intervention under Article 34(10) cannot, by any reasonable measure, be characterized as the result of "willful non-compliance" by the importer. The dispute arises from a genuine regulatory ambiguity that the EU's own institutional mechanisms are designed to resolve.
If Oceanos were permitted to invoke the willful non-compliance exclusion in the context of a genuinely ambiguous classification dispute — one where EU member states' customs authorities have reached opposite conclusions — the exclusion would effectively swallow the coverage. Every classification dispute involves, by definition, a situation where the insured selected one classification and the customs authority determined that a different classification applies. If the mere fact that the customs authority disagrees with the insured's classification were sufficient to establish "willful non-compliance," the insuring clause for Tax or Regulatory Authority Claims would be rendered meaningless. This cannot be the intended operation of the Policy.
(d) Professional reliance.
TSL did not select its customs classifications unilaterally or without professional guidance. TSL's customs declarations for the period March 2019 through December 2021 were prepared and filed by Peloros Customs Agency S.A. (EORI: GR801234567000), a licensed Greek customs brokerage firm, through its responsible customs broker, Stavros Liapis (License No. GR-CB-1287). Peloros was engaged under a Customs Brokerage Agreement dated February 1, 2019, and was responsible for selecting the appropriate CN codes, determining the customs value, preparing the customs declarations, and filing them with AADE on TSL's behalf.
TSL relied in good faith on the professional judgment of Peloros and its licensed customs broker, Stavros Liapis, in selecting CN code 8426 41 00 for the STS gantry cranes and ASC systems. Liapis, as a licensed customs broker registered with the Greek customs authorities, holds himself out as possessing the specialized knowledge and expertise necessary to correctly classify goods under the Combined Nomenclature. TSL's reliance on Liapis's professional classification judgment was reasonable and customary in the industry.
Reliance on a professionally licensed customs broker is fundamentally inconsistent with the concept of "willful" disregard of a legal obligation. An insured that entrusts the classification function to a licensed professional and follows that professional's advice has, by definition, not made a "deliberate decision to disregard a known legal obligation." If anything, TSL's engagement of a licensed customs broker demonstrates a commitment to compliance, not a disregard of it.
(e) No prior adverse customs history.
TSL has never been the subject of a prior adverse customs classification or valuation ruling, either in Greece or in any other EU member state. TSL has no history of customs violations, penalties, or enforcement actions. The AADE Assessment Notices represent the first occasion on which TSL's customs practices have been questioned by any regulatory authority.
This clean compliance history further undermines any suggestion that TSL engaged in willful non-compliance. A pattern of prior violations, warnings, or adverse rulings could conceivably support an inference that the insured was aware of its classification obligations and chose to disregard them. No such pattern exists here.
Conclusion on Section 4.3(a): The willful non-compliance exclusion under Section 4.3(a) should not apply to the classification dispute. TSL's classification of the equipment under CN 8426 41 00 was based on a reasonable interpretation of the Combined Nomenclature, was consistent with a published BTI ruling of another EU member state (the Netherlands), was made in reliance on the professional judgment of a licensed Greek customs broker, and was adopted in the context of a genuine classification ambiguity that even the EU's own customs authorities have been unable to resolve without recourse to DG TAXUD. There was no "deliberate decision to disregard a known legal obligation," and Oceanos cannot meet its burden of establishing the factual predicates for this exclusion.
B. Deliberate Undervaluation Exclusion — Section 4.3(b)
1. Definition and Standard
The deliberate undervaluation exclusion under Section 4.3(b) requires the insurer to establish that the insured engaged in "deliberate undervaluation of imported goods for the purpose of reducing customs duties payable." As noted above, this exclusion has two cumulative elements:
(a) The undervaluation must be "deliberate" — meaning that the insured must have intentionally and knowingly understated the customs value of its imported goods, as opposed to adopting a reasonable but ultimately incorrect valuation methodology in good faith; and
(b) The undervaluation must have been undertaken "for the purpose of reducing customs duties payable" — meaning that the insured's purpose in understating the value must have been to pay less customs duty than would otherwise be owed. This is a specific intent requirement: the insured must have acted with the affirmative objective of reducing its duty liability through the undervaluation.
Both elements must be satisfied for the exclusion to apply. The insurer bears the burden of establishing both elements. As with the willful non-compliance exclusion, the deliberate undervaluation exclusion must be construed narrowly against the insurer and in favor of coverage.
2. TSL's Valuation Declarations Do Not Constitute Deliberate Undervaluation
The deliberate undervaluation exclusion does not apply to the valuation adjustments assessed in AADE/ADAN/2022/0074. This conclusion is supported by multiple independent grounds.
(a) No motive for undervaluation — 0% duty rate.
This is the single most powerful argument against the deliberate undervaluation exclusion, and it is, in our view, dispositive.
TSL classified the imported equipment under CN code 8426 41 00, which carries a 0% Most Favoured Nation ("MFN") duty rate under the Common Customs Tariff of the European Union. Under a 0% duty rate, the customs value of the imported goods has absolutely no impact on the amount of customs duty payable. The customs duty calculation is: customs value × duty rate. When the duty rate is 0%, the result is zero regardless of the customs value. A customs value of €1,000,000 and a customs value of €100,000,000 both produce zero customs duty at a 0% rate.
TSL therefore had no motive, incentive, or rational reason to understate the customs value of its imports. The entire premise of the deliberate undervaluation exclusion — that the insured understated value "for the purpose of reducing customs duties payable" — is logically impossible when the applicable duty rate is 0%. There are no customs duties to reduce. The purpose element of the exclusion simply cannot be satisfied.
The valuation dispute only becomes relevant to duty liability if, and only if, the classification is changed from CN 8426 41 00 (0% duty rate) to CN 8428 90 90 (2.2% duty rate). But the reclassification is a contingency that TSL did not anticipate, had no reason to anticipate, and is actively contesting. TSL cannot be found to have "deliberately" understated the customs value "for the purpose of reducing customs duties" when, at the time of the valuation declarations, TSL reasonably believed that no customs duties were payable regardless of the declared value.
If Oceanos wishes to invoke the deliberate undervaluation exclusion, it must explain how TSL could have been motivated to reduce a duty liability that it reasonably believed to be zero. This is a question to which there is no credible answer.
(b) Reasonable characterization of separate payments.
Even setting aside the dispositive 0% duty rate argument, the substantive valuation positions adopted by TSL were reasonable and grounded in legitimate interpretations of the UCC valuation framework.
AADE's valuation adjustments target three categories of payments that TSL excluded from the declared customs value:
Technology license fees (€4,900,000): The technology license fees were paid to Hailong Heavy Industries Co., Ltd. ("Hailong"), the manufacturer of the STS gantry cranes and ASC systems, under a Technology License Agreement ("TLA") dated January 10, 2019. The TLA covers post-importation software updates, technical support services, operator training, and access to Hailong's proprietary terminal management software platform over a 10-year term. TSL treated the TLA fees as payments under an independent services contract, separate from the purchase price of the equipment, and excluded them from the customs value on the basis that they relate to post-importation activities rather than to the goods as imported.
This characterization was based on a reasonable interpretation of Articles 70–72 of the Union Customs Code and the WCO Technical Committee on Customs Valuation's guidance on the treatment of license fees and royalties. Under Article 71(1)(c) UCC, royalties and license fees are included in the customs value only if they relate to the goods being valued, constitute a condition of sale, and are not already included in the price actually paid or payable. TSL's position that the TLA fees are post-importation service fees — not license fees that constitute a condition of sale — is a legitimate and defensible interpretation of these provisions.
Oceanos's Reservation Letter notes that the TLA was executed on January 10, 2019, only five days before the first equipment purchase contract, and that the TLA fee is calculated as 5% of the equipment purchase price. These features, Oceanos suggests, indicate that the TLA may be functionally linked to the purchase of the equipment and should have been included in the customs value. However, temporal proximity and percentage-based pricing do not establish deliberate undervaluation. Many legitimate commercial arrangements are negotiated and executed in close succession, and percentage-based fee structures are common in technology licensing. Oceanos's concerns may go to whether the TLA fees should, as a matter of UCC interpretation, be included in the customs value — but they do not support a finding that TSL "deliberately" excluded the fees "for the purpose of reducing customs duties payable," particularly when the applicable duty rate was 0%.
Procurement coordination fees (€2,940,000): The procurement coordination fees were paid to Nereus Maritime Advisory Limited ("Nereus"), a maritime procurement consulting firm, under a Procurement Services Agreement ("PSA") dated December 1, 2018. TSL characterized the Nereus fees as buying commissions deductible from the customs value under Article 72(a) of the UCC, on the basis that Nereus acted as TSL's procurement agent in identifying, evaluating, and sourcing the equipment from Hailong.
The Reservation Letter highlights the related-party aspects of the Nereus relationship: Andreadis Family Holdings LLC, which holds a controlling stake in TSL's parent company, also holds a 40% equity interest in Nereus, and Konstantinos Melas, who holds a 30% equity interest in Nereus, is a former sales agent of Hailong. Additionally, Eleni Andreadis holds a 30% stake in Nereus. These related-party connections undeniably create factual complexity and will require careful analysis in the context of the underlying AADE dispute. However, the existence of related-party relationships does not, by itself, transform a good-faith valuation characterization into "deliberate undervaluation."
The question under the UCC is whether Nereus functioned as TSL's buying agent (in which case the fees are a deductible buying commission under Article 72(a)) or as the seller's agent or an independent intermediary (in which case the fees would be a non-deductible selling commission or brokerage fee). TSL's characterization of Nereus as a buying agent was supported by the terms of the PSA, which defines Nereus's role as acting on behalf of TSL to identify equipment suppliers, evaluate proposals, negotiate pricing, and coordinate procurement logistics. Whether this characterization will ultimately prevail before AADE is uncertain, but it reflects a legitimate commercial and legal judgment — not a deliberate scheme to understate the customs value.
Commissioning services (€2,100,000): TSL excluded the cost of commissioning services — i.e., the installation, testing, and activation of the equipment at the port terminal in Greece — from the customs value. These services were performed entirely in Greece after the goods had been imported and cleared through customs. Under Article 72(e) of the UCC, charges for construction, erection, assembly, maintenance, or technical assistance undertaken after importation are expressly excluded from the customs value. TSL's exclusion of the commissioning costs has a clear and direct textual basis in the UCC and is the least controversial of the three valuation adjustments. AADE's inclusion of these costs in the customs value appears to rest on the argument that the commissioning services were integral to the equipment purchase and were priced as part of a single comprehensive transaction. This is a legitimate but contestable interpretation, and TSL's contrary position is well-supported by the statutory text.
Taken together, TSL's valuation positions reflect reasonable interpretations of complex UCC provisions, adopted in good faith and consistent with legitimate commercial arrangements. A post-hoc disagreement between TSL and AADE on the proper application of the UCC valuation rules does not constitute "deliberate undervaluation."
(c) No "deliberate" act or fraudulent purpose.
Even if AADE ultimately prevails on any or all of the valuation adjustments — resulting in a total valuation adjustment of €9,940,000 — this would reflect a different interpretation of the UCC valuation rules, not a deliberate scheme by TSL to undervalue its imports. The Policy exclusion requires specific intent: the undervaluation must be "deliberate" and undertaken "for the purpose of reducing customs duties payable." A good-faith valuation disagreement, in which the insured adopts one reasonable interpretation and the customs authority adopts a different one, is categorically different from a deliberate undervaluation scheme.
There is no evidence in the factual record that TSL's management or personnel made a conscious decision to understate the customs value of the imported equipment. The valuation positions were adopted based on the terms of the commercial agreements as executed, the advice of TSL's licensed customs broker (Peloros Customs Agency S.A.), and TSL's understanding of the applicable UCC provisions. There is no internal memorandum, email, or other document suggesting that TSL's management directed or instructed its customs broker to declare a lower customs value for the purpose of reducing duty liability. To the contrary, the 0% duty rate eliminated any possible incentive for such conduct.
(d) AADE's own characterization supports good faith.
Perhaps the most telling indicator of TSL's good faith is AADE's own treatment of the valuation and classification errors. AADE assessed an administrative penalty of €509,124 on the additional duties of €1,697,080. This represents a penalty rate of 30%, which under the Greek Customs Code (Law 2960/2001, as amended) corresponds to the standard penalty rate applicable to good-faith errors and omissions.
Under Article 147 of the Greek Customs Code, the penalty rate is graduated based on the culpability of the taxpayer:
• 30% penalty: applicable to good-faith errors and omissions, where the taxpayer did not act negligently or intentionally;
• 100% penalty: applicable to negligent conduct, where the taxpayer failed to exercise reasonable care;
• 300% penalty: applicable to intentional or fraudulent conduct, where the taxpayer deliberately understated the customs value or misclassified the goods.
AADE's application of the 30% good-faith penalty rate — rather than the elevated 100% or 300% rates — constitutes an administrative determination by the Greek customs authority that TSL's errors were committed in good faith and without negligence or intent. This determination is directly inconsistent with the premise of the deliberate undervaluation exclusion. If AADE itself — the regulatory authority with the most direct knowledge of the facts and the statutory authority to assess penalties — has concluded that TSL's conduct reflects good faith rather than negligence or fraud, it would be anomalous for Oceanos to take the position that the same conduct constitutes "deliberate undervaluation for the purpose of reducing customs duties payable."
AADE's penalty characterization is not merely a data point; it is a quasi-official finding on the question of TSL's intent. While the finding is not binding on Oceanos or on any court that may adjudicate the coverage dispute, it carries significant persuasive weight and would be a powerful piece of evidence in any coverage litigation.
Conclusion on Section 4.3(b): The deliberate undervaluation exclusion under Section 4.3(b) should not apply to the valuation dispute. TSL had no motive to undervalue its imports (the 0% duty rate eliminated any possible incentive); TSL adopted reasonable and defensible interpretations of the UCC valuation provisions; and AADE itself has treated the valuation errors as good-faith mistakes warranting only the standard 30% penalty rate. Oceanos cannot meet its burden of establishing that TSL "deliberately" understated the customs value "for the purpose of reducing customs duties payable."
VII. Coverage Estimate — Quantum Analysis
A. Covered Components
The following table sets forth the estimated amounts that qualify as covered "Loss" under the Policy:
The defense cost estimates reflect our current projections based on the scope of work anticipated through the administrative appeal phase. If the matter proceeds to judicial proceedings before the Greek administrative courts, or if the DG TAXUD referral under Article 34(10) UCC results in extended proceedings, the defense cost estimates would increase correspondingly. The figures above assume a resolution at the administrative appeal stage with limited additional proceedings.
The assessed additional duties of €1,697,080 represent the combined total of the classification-related duty adjustment (€1,478,400) and the valuation-related duty adjustment (€218,680) as set forth in the two Assessment Notices. This figure assumes that AADE's assessed amounts stand as issued. If TSL is successful in reducing or eliminating any portion of the assessed duties through the administrative appeal process, the covered amount would decrease accordingly.
The VAT adjustment of €2,740,416 remains subject to further analysis as discussed in Section V.B above. The key question is whether TSL can recover the additional VAT through the input VAT credit mechanism, in which case the net economic loss would be limited to a timing or cash flow impact rather than a permanent out-of-pocket cost. The Policy likely requires an actual economic loss for the "Assessed Amounts" coverage to apply, and an amount that is fully recoverable through the tax system may not qualify. This issue should be resolved before submitting a final proof of loss to Oceanos.
B. Components Likely NOT Covered
The following table sets forth the components of TSL's total exposure that are likely not covered under the Policy:
C. Maximum Recoverable Under Policy
The maximum amount that TSL can recover under the Policy for the AADE customs dispute is constrained by the Customs & Excise Duty Disputes Sublimit:
• Customs & Excise Duty Disputes Sublimit: €3,000,000
• Less retention/deductible: (€250,000)
• Net coverage available: €2,750,000
This sublimit applies on a combined basis to defense costs and assessed duties. Defense costs are not carved out of the sublimit; rather, they erode the available sublimit dollar-for-dollar. This is a significant structural limitation, as it means that every euro spent on defense costs reduces the amount available to cover assessed duties.
Based on our current estimates:
• Defense costs range: €730,000–€1,145,000
• Assessed duties: €1,697,080
• Combined total: €2,427,080–€2,842,080
The combined total approaches or exceeds the net sublimit of €2,750,000 in all but the most optimistic defense cost scenario. At the midpoint of our defense cost estimate (approximately €900,000), the combined total would be approximately €2,597,080 — within the sublimit but leaving only €152,920 of available coverage above the actual combined exposure.
If VAT adjustments are also determined to be covered under the Policy, the sublimit would be exhausted almost immediately, and the Policy would not fully cover TSL's total economic exposure. The €2,740,416 in VAT adjustments alone exceeds the net sublimit.
D. Coverage Gap Analysis
The following table presents a comprehensive coverage gap analysis, comparing TSL's total estimated exposure to the estimated policy recovery:
The coverage gap analysis reveals that even under the most favorable coverage determination — in which Oceanos acknowledges coverage and pays up to the full net sublimit of €2,750,000 — TSL's uncovered exposure remains substantial, at approximately €6.1 million at the mid-case estimate. This underscores the importance of pursuing other recovery avenues, including the potential indemnification claim against Peloros Customs Agency S.A. (analyzed in a separate memorandum), and of aggressively challenging the AADE assessments on the merits to reduce the underlying liability.
At the high end of TSL's exposure — which assumes unfavorable outcomes on all classification and valuation issues, maximum penalties, and full interest accrual — total exposure could reach approximately €14.7 million, of which only €2,750,000 would be recoverable under the Policy, leaving an uncovered gap of approximately €12 million.
VIII. Response to Oceanos Reservation of Rights — Strategic Considerations
A. Grounds for Challenging the Reservation
As set forth in detail in Section VI above, both exclusions cited by Oceanos in the Reservation Letter require elements of deliberateness and intent that are not present in this case. The factual record provides a strong basis for challenging the Reservation and demanding that Oceanos acknowledge coverage:
• The "Fraud" definition in the Policy requires establishment "by a final, non-appealable adjudication or admission." No such adjudication has occurred, and no admission has been or will be made by TSL. The Fraud component of the Section 4.3(a) exclusion is therefore inoperative at this stage and cannot provide a basis for denying coverage.
• The "willful non-compliance" component of Section 4.3(a) requires a "deliberate decision to disregard a known legal obligation." The existence of divergent BTI rulings (Dutch ruling supporting heading 8426; German ruling supporting heading 8428), TSL's reliance on a licensed customs broker, and the absence of any prior AADE guidance on the classification of this equipment collectively establish that there was no "known legal obligation" to disregard. The classification question was genuinely uncertain.
• The "deliberate undervaluation" exclusion under Section 4.3(b) requires undervaluation "for the purpose of reducing customs duties payable." The 0% duty rate applicable to CN 8426 41 00 eliminates any possible motive for undervaluation, making it logically impossible for TSL to have understated the customs value for the purpose of reducing duties.
• AADE's own assessment of the 30% good-faith penalty rate — rather than the elevated 100% or 300% rates applicable to negligent or intentional conduct — constitutes an administrative determination that TSL's errors were committed in good faith. This finding directly contradicts the factual predicates of both exclusions.
B. Risk of Coverage Denial
While the reservation of rights does not constitute a denial of coverage, it signals that Oceanos may ultimately attempt to rely on the cited exclusions to deny all or part of the claim. The risk of a coverage denial cannot be dismissed entirely, notwithstanding the strength of TSL's coverage arguments. Certain aspects of the factual record, while ultimately insufficient to support the exclusions, may provide Oceanos with arguable — if ultimately unpersuasive — bases for denial.
The Nereus-related valuation adjustment (€2,940,000 in procurement coordination fees) presents the greatest factual risk for the deliberate undervaluation argument. The related-party structure — Andreadis Family Holdings LLC's 40% equity stake in Nereus, Konstantinos Melas's 30% equity stake in Nereus and his former role as a sales agent for Hailong, and Eleni Andreadis's 30% stake — creates a web of relationships that, when viewed from the outside, could be characterized as suggestive of a non-arm's-length arrangement designed to divert portions of the purchase price into channels that avoid inclusion in the customs value. However, as discussed in Section VI.B above, related-party complexity in procurement structures is not equivalent to "deliberate undervaluation for the purpose of reducing customs duties," particularly when the applicable duty rate is 0%.
The technology license fee structure also presents arguable risk. The TLA was executed on January 10, 2019, only five days before the first equipment purchase contract, and the TLA fee is calculated as 5% of the equipment purchase price. Additionally, Article 8.1 of the TLA contains a cross-default provision linking the TLA to the equipment purchase agreements. These features could be characterized by Oceanos as indicating that the TLA was not an independent services agreement but rather an integral part of the equipment purchase transaction, with the TLA fee functioning as additional consideration for the goods that should have been included in the customs value.
However, this argument fails for two independent reasons: (a) the 0% duty rate eliminates any duty-reduction motive, making it impossible to satisfy the "for the purpose of reducing customs duties payable" element of the exclusion; and (b) the TLA's structure — providing for post-importation software updates, technical support, and training over a 10-year term — reflects legitimate post-importation service arrangements that are commercially reasonable and common in the heavy industrial equipment sector.
In summary, while the factual complexity of the Nereus and TLA arrangements creates some rhetorical ammunition for Oceanos, the legal arguments for coverage remain strong. The 0% duty rate argument is, in our assessment, dispositive of the deliberate undervaluation exclusion, and the absence of any prior adverse guidance or ruling is dispositive of the willful non-compliance exclusion.
C. Demand for Defense Cost Advancement
Regardless of the unresolved coverage dispute, TSL should demand that Oceanos begin advancing defense costs immediately. Section 5.3 of the Policy provides for advancement of defense costs as incurred:
"The Insurer shall advance Defense Costs to the Insured as incurred, prior to the final disposition of the Tax or Regulatory Authority Claim, upon receipt of itemized invoices and such supporting documentation as the Insurer may reasonably request."