North Star Shipping Ltd and Others v Sphere Drake Insurance Plc and Others (No 2)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Waller,Lord Justice Longmore,Lord Justice Lloyd |
| Judgment Date | 07 April 2006 |
| Neutral Citation | [2006] EWCA Civ 378 |
| Docket Number | Case No: A3/2005/1022 |
| Court | Court of Appeal (Civil Division) |
| Date | 07 April 2006 |
[2006] EWCA Civ 378
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT
Mr Justice Colman
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Waller
Lord Justice Longmore and
Lord Justice Lloyd
Case No: A3/2005/1022
1996FOLIO644
David Goldstone (instructed by Davies Johnson & Co, Solicitors) for the Appellants
Nicholas Hamblen QC and Graham Charkham (instructed by Richards Butler, Solicitors) for the Respondents
Introduction
The appellants were the owners of the North Star. That vessel was insured on a total loss only basis by the respondents under a war risks policy placed on 27 th April 1994. On 6 th July 1994 the North Star was damaged by an explosion and so badly damaged as to be a constructive total loss. The insurers refused to pay on two bases – first on the basis that the owners had been complicit in the bombing of the vessel, and second on the basis that they were entitled to avoid the policy on the grounds of non-disclosure. Colman J, by a judgment handed down on 22 nd April 2005, found in favour of the insurers on both grounds. He refused permission to appeal but the owners obtained permission to appeal in relation to both aspects with limitations relating to certain findings of fact by the judge. For reasons which it is unnecessary to enter into, directions were given that the non-disclosure aspect of the appeal should be heard first. In the context of that appeal the relevant limitation placed on the owners obtaining permission was that they should not be entitled to challenge the judge's finding that, if material facts were not disclosed, the underwriters were induced to write the policy by the non-disclosure of those facts.
This part of the appeal, argued before us over two days, thus raises only the following point – was the judge right to find that certain facts, which it is common ground were not disclosed by the owners to the underwriters, were material i.e. were they facts which would have influenced the judgment of a prudent underwriter. The facts with which this part of the appeal are concerned are put shortly the following:-
(1) Pending criminal proceedings in the Greek courts charging fraud, namely
(a) the Sotiriadis proceedings;
(b) the Angelopoulos proceedings;
(c) the Overseas Agency proceedings;
(d) the Alliance Trust proceedings.
Harry Petrakakos was a defendant in all the proceedings and Michael Petrakakos was a defendant in the Sotiriadis proceedings only. The basic allegation against the Petrakakos brothers who owned and managed the company owning the vessel, itself part of a group of companies known as 'The Kent Group', was that they had dishonestly misappropriated clients' money.
(2) Civil proceedings by Atlantic Light Corporation in Panama against Kent Group companies claiming damages for a fraud on a business associate.
(3) The valuation of the North Star under the War Risks policy at US 4 million exceeded, by a considerable margin, the actual value of approximately US 1.3 million.
(4) That the insurance of the Kent fleet was cancelled by hull and machinery underwriters with effect from 6 March 1994 for non-payment of the premium.
Argument relating to a further fact alleged not to have been disclosed related to the owner's financial position has sensibly been agreed to be adjourned to be dealt with, if necessary, with the other aspect of the appeal on the basis that the owners' own financial position is controversial and inextricably linked with the evidence in relation to the owners' complicity in the loss.
For reasons which I will explain later facts (3) to (4) are in my view individually very arguably not material, and I have doubts whether it is legitimate to add them together in order to make them more arguably material. Unsurprisingly they never loomed large in the insurers' arguments, at least before us. Although some reliance was placed on fact (2) , the Panamanian proceedings, it is the charges in the Greek criminal proceedings, fact (1) , on which greatest reliance has been placed. They are alleged to be material as going to moral hazard, and the material fact relied on is "the allegations", not the dishonesty itself because, although the charges had been made prior to the placement, the charges were dismissed by the Greek courts in 1995 and 1996. The insurers have never asserted that they could establish the truth of the allegations. Even as regards fact (2) , the allegations in the Panamanian proceedings, the insurers did not seek to establish the truth of the allegations made in those proceedings; it was the allegations themselves that they asserted were material. This aspect of the appeal raises for consideration accordingly what is the correct approach to an allegation of dishonesty which at the time of placement the insured would maintain was false, and ultimately after placement of the insurance turns out to be false, or an allegation that the insurers do not seek to establish as true.
The law
Courts have previously wrestled with this problem, recognising first that there is something unjust in the notion that insurers can avoid a policy on the grounds of a suspicion as to the insured's probity flowing from an allegation which is in fact false, but second that it is difficult to gainsay an underwriter who gives evidence that an allegation of fraud would have an influence on his underwriting judgment if it was unknown at that time whether that allegation was true or false.
Different judges have come to different conclusions. Forbes J in Reynolds and Anderson v Phoenix Assurance Co. Ltd [1978] 2 Lloyd's Rep 440 at 460 recognised that the odd feature of a rule that required allegations to be disclosed was that it was in fact only false allegations to which such a rule had any relevance. If the allegation was true then the insured was bound to disclose that he had committed the fraud, and disclosure of the allegation as such added nothing. As he put it "the only occasion on which the allegation as an allegation must be disclosed is when it is not true"—" a conclusion so devoid of any merit that I do not consider that a responsible insurer would adopt it and nor do I." However, May J had expressed a contrary view in March Cabaret Club & Casino Ltd v The London Assurance [1975] 1 Lloyd's Rep 169, and Phillips J in The Dora [1989] 1 Lloyd's Rep 69 said that he preferred the view of May J. Colman J then in The Grecia Express [2002] 1 Lloyd's Rep Insurance and Reinsurance 669 at 718 supported Phillips J, saying "if an allegation of criminal conduct has been made against an assured but is as yet unresolved at the time of placing the risk and the evidence is that the allegation would have influenced the judgment of a prudent insurer, the fact the allegation is unfounded cannot divest the circumstances of the allegation of the attribute of materiality." But Colman J, having found that the allegation was material, mitigated that finding by holding that for the insurers to persist at a trial in taking the point, in the face of evidence before the court that the suggested facts never existed, would be contrary to their obligation of good faith. In his words "Such a course would be so starkly unjust that I would hold that in such a case it would be unconscionable for the Court to permit the insurers to avoid the policy on the grounds of non-disclosure." [719R]
The view of Colman J was considered in the Court of Appeal in Brotherton v Aseguradora Colseguros SA [2003] 1 Lloyd's Insurance and Reinsurance Rep 746. The judgments of Mance LJ (as he then was) and Buxton LJ with which Ward LJ agreed confirmed Colman J's view as to the materiality of an allegation even if it turned out to be false. As Mance LJ said "it is difficult to see any reason why, if the evidence satisfies the court that a prudent underwriter would have regarded information suggesting the possibility of moral hazard as material in the sense identified by Lord Mustill [in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501], that should not suffice. In my view that is the basic legal position."
However the Court of Appeal in Brotherton rejected Colman J's route for mitigating the possible injustice if the facts established at a trial demonstrated that the allegation was false. They held that Moore-Bick J had been right in refusing an application for disclosure relating to the issue whether an allegation was actually false or not. It was irrelevant, they held, to fight out at a trial the truth or otherwise of an allegation because it was the allegation that was material to be disclosed, and as Mance LJ put it "neither principle nor sound policy" supported the conclusion that a court could hold that an insurer should not be entitled to persist at trial in seeking a declaration that he had successfully avoided the policy as Colman J had suggested. As Mance LJ stated:-
"It would be an unsound step to introduce into English Law a principle of law which would enable an insured either not to disclose intelligence which a prudent insurer would regard as material or subsequently resist avoidance by insisting on a trial, in circumstances where:
(i) if insurers never found out about the intelligence, the insured would face no problem in recovering for any losses which arose – however directly relevant the intelligence was to the perils insured and (quite possibly) to the losses actually occurring; and
(ii) if insurers found out about the...
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