North Star Shipping Ltd v Sphere Drake Insurance Plc [QBD (Comm)]
| Jurisdiction | England & Wales |
| Judge | Colman J |
| Judgment Date | 22 April 2005 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 22 April 2005 |
Queen's Bench Division (Commercial Court).
Colman J.
David Goldstone (instructed by Shaw & Co) for the claimants.
Nicholas Hamblen QC and Mr Graham Charkham (instructed by Richards Butler) for the defendants.
The following cases were referred to in the judgment:
Brotherton v Aseguradora Colseguros SA [2003] 2 CLC 629.
Compania de Navegacion Pohing SA v Sea Tanker Shipping Pte (The Buena Trader)UNK [1978] 2 Ll Rep 325.
Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) LtdUNK [1982] 2 Ll Rep 178.
General Shipping and Forwarding Co v British General Insurance Co Ltd (The Borre)UNK (1923) 15 Ll L Rep 175.
Glowrange Ltd v CGU Insurance plc (26 June 2001, Colman J).
Insurance Corp of the Channel Islands v Royal Hotel Ltd [1998] Ll Rep (IR) 151.
Lamb Head Shipping Co Ltd v Jennings (The Marel)UNK [1994] 1 Ll Rep 624.
O'Kane v Jones (The Martin P)UNK [2004] 1 Ll Rep 389.
Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1994] CLC 868; [1995] 1 AC 501.
R v LucasELR [1981] QB 720.
Rhesa Shipping Co SA v Edmunds (The Popi M)WLR [1985] 1 WLR 948.
Strive Shipping Corp v Hellenic Mutual War Risks Association (The Grecia Express) [2002] EWHC 203 (Comm); [2003] 1 CLC 401.
Shipping — Marine insurance — War risks — Institute War Clauses 1.10.83 -Material non-disclosure — Moral hazard — Avoidance — Explosion below waterline caused constructive total loss by flooding engine room and damaging engine room equipment — Location of explosive inside vessel and financial situation of owners led to conclusion that owners were complicit in explosion so that damage not caused by insured peril — Failure to disclose other proceedings against owners alleging fraud material — Moral hazard relevant to war risks underwriting — Failure to disclose overvaluation of vessel, history of premium payment defaults and adverse financial situation material — Insurers entitled to avoid for material non-disclosure.
This was a claim by shipowners against insurers after owners' vessel was damaged by an explosion while moored in shallow water alongside a mole for the purpose of undergoing repairs in order to complete her special survey, and became a constructive total loss.
The explosion was caused by the detonation of an explosive device which was located about one metre below the water line on the port side and just aft of the engine room forward bulkhead with No. 6 hold. The explosion blew an aperture in the shell plating just aft of the bulkhead. Substantial quantities of seawater were admitted to the engine room and, through the bulkhead, into No. 6 hold. The seawater so completely damaged the engine room machinery that the vessel could not be repaired except at a cost likely to be in excess of its value.
The vessel was registered in Malta. The assured registered owner was North Star Shipping Ltd which was a one-ship company managed by Kent Trading Corp, which had offices in Piraeus and New York. Kent was beneficially owned by the third and fourth claimant brothers, “HP” and “MP”.
It was common ground, subject to an issue as to burden of proof, that if the explosion had been caused by an explosive device put in place either by terrorists or by some other outsider in order to cause malicious damage, there would have been an insured peril within the Institute War Clauses dated 1.10.83 which were expressly incorporated into the policy.
At the time of the explosion seven members of the vessel's crew were on board in the crew accommodation above the engine room. Five of them had refused to sign off because they claimed to be entitled to severance pay for early termination of their contracts. HP was on board until about 6pm on the day before the explosion.
The defendant insurers alleged, first, that the vessel's loss was not caused by an insured peril because the explosion was deliberately caused or procured by the assured owners for the purpose of advancing a fraudulent claim on underwriters, and secondly that they were entitled to avoid the policies ab initio for misrepresentation and non-disclosure of HP's involvement in proceedings in which fraud was alleged, of the significant overvaluation of the vessel and of the owners' serious financial position.
Held, dismissing owners' claim:
1. There was no direct evidence of owners' complicity. The evidence strongly suggested that the explosion was caused by an internal charge. It was extremely improbable that any of the crew on board the vessel that evening would have planted the explosive. The probabilities were that no stranger could have entered the engine room without being detected. Such evidence as there was suggested a very low possibility of terrorist motivation and little or no possibility of motivation attributable to a commercial grudge. Owners' had a motive because of their deteriorating financial position. Taking into account the location of the explosive device, the character, demeanour, commercial and financial circumstances of HP and the owners, including the fact that the Kent group was financially crippled, and the contemporaneous conduct of HP, specifically his presence in the engine room late on the previous day and his delayed arrival at the vessel following the explosion, the court concluded that he personally procured the placing and detonation of the explosive in order to commit a fraud on the insurers. That finding was made with the high level of confidence necessary for allegations of the kind. Accordingly, owners' claim failed and was dismissed.
2. The court was not convinced to the requisite standard of proof that MP was complicit in the fraud.
3. In the case of allegations of fraud in the course of pending proceedings, criminal or civil, the attribute of materiality was not diminished by exculpatory evidence. Such evidence would go only to inducement. In deciding whether to write this risk the prudent underwriter would have been influenced by the allegations of fraud made in the criminal and civil proceedings. In as much as there would have been placed before him exculpatory information, that too would have been regarded by him as something to be taken into account. The prudent underwriter would have been influenced by the whole of the related information and would not have accepted the risk.
4. As to excessive overvaluation of the vessel, the relevant test of materiality was whether the disparity between the insured value and the market value was consistent with prudent ship management. The insured value of US$4 million could not be justified given the contemporaneous sale for US$1.1 million “as is” and US$1.4 million with special survey complete. That was therefore a material fact and should have been disclosed. (The Grecia Express[2003] 1 CLC 401followed.)
5. The owners' cash flow difficulties and defaults in payment of hull policy premiums were also material facts going to moral hazard which should have been disclosed. (The Martin PUNK[2004] 1 Ll Rep 389considered.)
6. There was therefore material non-disclosure which induced underwriters to enter into the war risks policy and they were therefore entitled to avoid.
Colman J:
1. In the early hours of the morning of 6th July 1994 the first claimant's bulk carrier “North Star” was damaged by an explosion at Drapetsona, near Piraeus. The vessel was moored in shallow water alongside the mole for the purpose of undergoing repairs in order to complete her special survey. The explosion was caused by the detonation of an explosive device which was located about one metre below the water line on the port side and just aft of the engine room forward bulkhead with No. 6 hold. It is in issue whether the device was either attached or placed close up to the outside of the hull or was placed up against the internal shell plating at the forward end of the engine room. The explosion blew an aperture in the shell plating just aft of the bulkhead. The aperture consisted of the space left by missing plating detached by the explosion and the space created by the fracturing of the edge of the hole left by the missing plating and the formation between those fractures of tongues of metal or “petals” which had been displaced from their alignment with the side of the hull. The result was that substantial quantities of seawater were admitted to the engine room and, through the bulkhead, into No. 6 hold. The seawater so completely damaged the engine room machinery that the vessel could not be repaired except at a cost likely to be in excess of its value. Accordingly, the Owners claim under their war risks policies for a constructive total loss.
2. The vessel was registered in Malta. The assured registered owner was North Star Shipping Limited which was a one-ship company managed by Kent Trading Corporation (“Kent”), which had offices in Piraeus and New York. Kent was beneficially owned by the third and fourth claimants, the brothers Harry and Michael Petrakakos, (“HP” and “MP” respectively). I refer to them, Kent and the registered owners collectively as “the Owners”. Both brothers had been educated in the United States where their father had been a successful businessman in New York. HP had a master's degree from MIT in naval architecture and marine engineering and shipping and shipbuilding management. MP had a master's degree also from MIT in naval architecture and marine engineering. In 1977 both brothers set up P & P Marine Consultants, a consultancy service providing ship repairs supervision and claims and management services. It operated in New York and Piraeus, and it provided services to several large shipowners and to P & I clubs, particularly the Oceanus.
3. Kent was set up in 1983. As well as its shipping activities it was a trading company which owned or managed other companies dealing in carpets and computer software design.
4. By the end...
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