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A
claim under a war risks policy for constructive total loss following
an explosion was dismissed on the grounds of the ship owners' complicity
in the explosion and because insurers had avoided the policy for non-disclosure
of material facts.
The registered owner of the North Star was North Star Shipping Limited
which was a one-ship company managed by Kent Trading Corporation ("Kent"),
in turn beneficially owned by Harry and Michael Petrakakos ("HP
and MP"), collectively "the Owners". Whilst undergoing
repairs at Drapetsona, near Pireaus, the North Star was damaged by an
explosion, caused by the detonation of an explosive device beneath the
waterline. The resulting ingress of 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 claimed
under the war risks policy for a constructive total loss.
Insurers submitted that the vessel's loss was not caused by an insured
peril but was caused or procured for the purpose of advancing a fraudulent
claim. Insurers also avoided the policy for material non-disclosure,
namely the failure to disclose of certain criminal proceedings pending
in the Greek Courts against one or more of HP and MP, civil proceedings
against Kent for fraudulent trading, excessive valuation of the North
Star under the war risks policy, cancellation of the hull and machinery
cover for non-payment of premium and the serious financial position
of the Owners.
At first instance, Colman J held that 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. Conversely, the owners'
perception of their financial situation before the explosion was that
it was virtually irretrievably hopeless. This and a number of other
fact findings led Colman J to conclude that HP personally procured the
placing and detonation of the explosive in order to commit a fraud on
insurers. Colman J said that the finding was made with the high level
of confidence necessary for allegations of the kind.
Colman J also held at first instance that there was a failure to disclosure
material facts, including criminal proceedings in Greece and civil proceedings
in Panama in which allegations of fraud were made. Colman J held that
moral hazard was a significant factor in war risks underwriting. The
serious financial position of the vessel's registered owners, previous
policy cancellation and record of premium defaults were all material
and went to evaluation of the potential moral hazard exposure of insurers.
In relation to inducement, Colman J commented that in evaluating underwriters'
evidence it was important to keep firmly in mind that all such evidence
was necessarily hypothetical which by its nature lent itself to exaggeration
and embellishment in the interests of the party on whose behalf it was
given. It was very easy for an underwriter to convince himself that
he would have declined the risk or impose special conditions if given
certain information. For these reasons such evidence had to be rigorously
tested by reference to logical self-consistency, and to such independent
evidence as may be available. It was also a relevant consideration that
in the London marine market underwriters would normally be expected
to evaluate a risk with some rapidity. Accordingly, underwriters simply
did not have the time or legal expertise necessary to satisfy themselves
with regard to a complicated structure of disputes as to the innocence
of an assured in circumstances where certain allegations had been made.
Risks are taken at face value and in the case of war risks insurance,
an underwriter would not wish to be involved if there were any lingering
doubt as to the commercial probity of the assured.
Colman J held at first instance that had all the material circumstances
been disclosed at the time of placing, underwriters would not have written
the risk. Having been induced to enter into the war risk policy by non-disclosure
of material facts underwriters are entitled to avoid the policy.
Although permission to appeal was obtained in relation to both aspects,
the appeal in relation to the non-disclosure aspect was heard first.
Before the Court of Appeal the greatest reliance was placed on the failure
to disclose the existence of criminal proceedings involving allegations
of dishonesty, which although pending in the Greek Courts at the time
of placement, were subsequently dismissed. The material fact relied
on by insurers was "the allegations", not the dishonesty itself.
In dismissing the appeal Waller LJ held that Colman J's conclusion,
based on the evidence of the expert relied on by insurers that the charges
being made in the Greek proceedings should have been disclosed, was
unimpeachable.
However, both Waller LJ and Longmore LJ commented on potential injustices
which might result from the current state of the law on non-disclosure
and welcomed the Law Commission's review of this particular issue.
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