Involnert Management Inc v Aprilgrange Limited and AIS Insurance and OAMPS Special Risks
The Commercial Court in London has recently upheld an underwriter’s avoidance of an insurance policy covering a multi-million Euro Super Yacht M/Y GALATEA (“the Yacht”). The Court found that, before taking out the insurance policy, Involnert Management Inc’s (“the Insured”) representatives failed to disclose to the underwriter that:
(i) they had obtained a market valuation for the Yacht suggesting a value of around half the insured sum and
(ii) the Yacht was being marketed for sale at an asking price of 8 million Euros.
These two findings were held to be material non-disclosures by or on behalf of the Insured, entitling the underwriter to avoid the policy and thereby defeat the Insured’s claim.This placed the producing (“AIS”) and placing brokers (“OAMPS”) in the firing line.
In 2011 the owners insured the Yacht against all risks for the agreed value of 13 million Euros, the original purchase price paid by the owner in 2007. The insurance was arranged through a Greek producing broker and an English placing broker who placed the insurance in the London market. Prior to the conclusion of the insurance policy in November 2009 the Claimant obtained a professional valuation of the vessel at about 7 million Euros. This information was never disclosed to the insurers. Additionally, in 2011 Yacht was also marketed for sale on behalf of the Insured for an asking price of 8 million Euros.
In December 2011 the Yacht suffered substantial fire damage whilst berthed at a marina and was damaged beyond economic repair. The Insured’s lawyers served a Notice of Abandonment and claimed for a constructive total loss in July 2012.The Insured claimed against its insurers for an indemnity under the insurance policy, and in the alternative, against its producing and placing brokers for negligence, claiming as damages any shortfall in its recovery against insurers.
Insurers refused to compensate the Insured arguing that the Yacht was over-valued since the market value of the Yacht was, and was believed by the Insured to be no greater than 7-8 million Euros. Whilst insurers accepted that the loss was an accident of a kind which the policy was intended to cover, they argued they were entitled to avoid the policy as a result of non-disclosure of the real value of the Yacht. In addition, and in the alternative to this defence, insurers contended that they were discharged from liability as a result of a misrepresentation in the proposal form that the market value of the Yacht was believed to be around double of what it was actually worth.
The Court found in favour of insurers and Mr Justice Leggatt accepted their case that although the over-valuation had occurred by oversight, there was non-disclosure of material facts which had induced the writing of the policy for the agreed but inflated insured value. This provided insurers with a complete defence to the claim. The Greek producing brokers were held liable in damages for part of the loss. However, the Lloyd’s placing brokers, successfully resisted the claim against them, the Judge holding that the Lloyd’s placing brokers neither owed any relevant duty directly to the insured, nor were in breach of any such duty.
The Court found the Insured’s non-disclosure to be inadvertent rather than deliberate or reckless. The non-disclosure was not the actual over-valuation but related to material circumstances known to the Insured’s representatives that would have enabled the underwriter to value the Yacht at a more accurate figure.
It was held that, had the insured informed the underwriter of the market valuation and the fact that the Yacht was marketed for sale for a lot less, the underwriter would have enquired about the discrepancy between the market value and the insured value and would probably have only agreed to insure the Yacht for 8 million Euros.
As for the brokers’ liability, the placing broker was found to owe no duty of care to the insured and had not breached any duty of care to the producing broker, however the producing broker, AIS ,was found to owe a duty of care to the insured in contract to act with reasonable skill and care and in tort. AIS was held to be in breach of these duties in failing to take reasonable care to ensure that the proposal form recorded the Yacht manager’s opinion of the Yacht’s market value.
This case also demonstrates that the measure of indemnity for insurance of super yachts is no different to the indemnity principles that underpin insurance generally. The purpose of insurance is to insure for loss and not to put an insured in an advantageous position in the event of loss or damage.
The Insured asked the Court to exercise its power under CPR 40.8 to order that the interest payable under the Judgments Act 1838 on costs payable by them should in each case begin to run six months after the date of the costs order. Having considered the applicable principles, the Court ordered that interest on the costs payable by the Insured was to run at the Bank of England Base Rate plus 2% from the dates when the costs had been incurred until a date three months after the orders for costs had been made, and at the rate prescribed by s 17 of the Act thereafter.
Mr. Justice Legatt held that interest should not begin to run on costs until the paying party has been presented with, and had the opportunity to consider costs. However, whether this three month postponement period is taken to be the benchmark in future cases for the Court's exercise of its discretion on when interest should be payable on costs is yet to be seen.
The Insurance Act 2015
Although the policy in this case was subject to the Marine Insurance Act 1906, Mr Justice Legatt noted that the outcome in terms of the non-disclosure argument would have been different under The Insurance Act 2015 which is due to come into effect in August 2016.
Under the new system, given that the non-disclosures in this case were neither fraudulent nor reckless, the Court would be required to consider what the actual underwriter would have done if a fair presentation had been given. If the underwriter would have agreed a policy on different terms, the law will re-write the contract to reflect those terms, and impose that contract on the parties.
Under the new Insurance Act 2015 therefore, the claim would have succeeded, albeit in a reduced sum of 8 million Euros. This sum would correspond with the lower and more representative insured value at which the underwriters would have written the risk, had the relevant disclosure been given.
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