North Star Shipping Ltd v Sphere Drake Insurance Plc
| Jurisdiction | England & Wales |
| Judge | Waller,Longmore,Lloyd L JJ. |
| Judgment Date | 07 April 2006 |
| Court | Court of Appeal (Civil Division) |
| Date | 07 April 2006 |
Court of Appeal (Civil Division).
Waller, Longmore and Lloyd L JJ.
David Goldstone (instructed by Davies Johnson & Co) for the appellants.
Nicholas Hamblen QC and Graham Charkham (instructed by Richards Butler) for the respondents.
The following cases were referred to in the judgment of Waller LJ:
Brotherton v Aseguradora Colseguros SA [2003] 2 CLC 629.
Drake Insurance plc v Provident Insurance plc [2004] 1 Ll Rep IR 277.
Inversiones Manria SA v Sphere Drake Insurance Co (The Dora)UNK [1989] 1 Ll Rep 69.
March Cabaret Club & Casino Ltd v London AssuranceUNK [1975] 1 Ll Rep 169.
Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1994] CLC 868; [1995] 1 AC 501.
Reynolds v Phoenix Assurance Co LtdUNK [1978] 2 Ll Rep 440.
Strive Shipping Corp v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Grecia Express) [2003] 1 CLC 401.
Shipping — Marine insurance — War risks — Material non-disclosure — Moral hazard — Dishonesty — Allegations of fraud — Avoidance — Vessel so badly damaged by explosion as to be constructive total loss — War risks insurers avoided policy for non-disclosure of allegations of fraud in pending proceedings against appellant shipowners — Criminal charges against owners later dismissed — Allegations of fraud material matters to be disclosed to underwriters at time of placing — Exculpatory material did not provide clear answer to allegations — Failure to disclose overvaluation of vessel and non-payment of premium probably not material — Insurers entitled to avoid for material non-disclosure-Marine Insurance Act 1906, s. 18.
This was an appeal by shipowners against the decision of Colman J ([2005] 2 CLC 238) that the respondent insurers were entitled to avoid war risks insurance for non-disclosure of the shipowners' involvement in other proceedings alleging fraud.
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. The North Star had been so badly damaged by an explosion as to be a constructive total loss. The insurers refused to pay on the basis that the owners had been complicit in the bombing of the vessel and that they were entitled to avoid the policy on the grounds of non-disclosure by the shipowners of pending criminal proceedings in the Greek courts charging fraud, of certain civil proceedings in which fraud was alleged, of the over-valuation of the vessel for insurance purposes and the cancellation of hull and machinery insurance for non-payment of the premium.
The criminal charges had later been dismissed by the Greek courts.
The insurers did not assert that they could establish the truth of the allegations made in the proceedings but asserted that the allegations themselves were material.
The appellants argued that the allegations of dishonesty in the Greek criminal proceedings and the other civil proceedings had nothing to do with the risks being insured and nothing to do with claims under an insurance policy.
Held, dismissing the appeal:
1. The judge's conclusion on the evidence that the charges being made in the Greek criminal proceedings were disclosable was unimpeachable. Allegations of fraud made by third parties were material matters to be disclosed to underwriters at the time of placing even if they later turned out to be untrue. Materiality was a question of fact on which expert evidence of underwriters was admissible. Most expert underwriters would be likely to say that an allegation of fraud, not shown to be false at the time of placing, was material in the sense of being a circumstance which would influence the judgment of a prudent insurer in fixing the premium or determining whether he would take the risk. The existence of exculpatory material did not change that view. If the allegations should have been disclosed together with the exculpatory material, materiality was established.
2. The allegations of fraud in civil proceedings were also disclosable. The judge had been entitled to find that the allegations of fraud in the civil proceedings would be disclosable on their own and the more so on the assumption as to what would have been disclosed in relation to the allegations being made in the Greek criminal proceedings.
3. The allegations of excessive overvaluation and non-payment of premium were probably not material.
Waller LJ:
1. 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 April 1994. On 6 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 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.
2. 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.
3. 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.
4. 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.
5. Different judges have come to different conclusions. Forbes J in Reynolds v Phoenix Assurance Co LtdUNK[1978] 2 Ll 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 disclosureof the allegation as such added nothing. As he put it “the only occasion on...
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