Involnert Management Inc v Aprilgrange limited and others [2015]

The Commercial Court’s decision has generated interest from marine insurers.

Mr Justice Leggatt upheld insurers’ avoidance of a yacht insurance policy for innocent non-disclosure, a finding which may look somewhat out of place when the Insurance Act comes into force in 2016. But the case will also be of interest to brokers and their professional indemnity insurers, who ended up picking up part of the tab.

Background

The super yacht ‘Galatea’ was bought in May 2007 for €13 million, and was insured at this figure each year until it was damaged by fire in December 2011, resulting in a total loss.

Before the placing of the extant policy, the yacht had been professionally valued at €7 million and later marketed for sale at €8 million. Neither the valuation nor details of the marketing were disclosed to insurers. The Insured’s producing broker had inserted the €13 million figure into the proposal form which it submitted to insurers via a London market placing broker, without approval or agreement from the Insured. The Insured had previously approved the proposal form with the valuation details left blank.

The yacht was insured for “hull and machinery” risks and “increased value” risks; the former required a sworn proof of loss to be filed in the event of a total loss, which the Insured failed to do.

The issues before the court included whether insurers could avoid for non-disclosure and/or mis-representation and whether the producing broker and/or placing broker were themselves liable to the Insured in negligence.

Decision

The Court held that:

  1. The €7 million valuation and the €8 million sale price were material facts which had not been disclosed, albeit innocently.
  2. As a consequence, insurers were entitled to avoid. They had not waived their rights of avoidance, despite omitting to plead this in the original Defence. The judge was satisfied that they could not have known of that right at the time.
  3. The Insured’s failure to provide a sworn proof of loss in accordance the policy, was a contractual bar to recovery of hull and machinery loss, in any event.
  4. The producing broker was “plainly negligent” in inserting the market value of the vessel into the proposal form after it had been stamped by the Insured and without further reference to them. Had it made further enquiries, on the balance of probabilities, the yacht would have been validly insured for €8 million.
  5. The producing broker was also negligent in failing to explain the duty of disclosure.
  6. The Insured’s failure to file the sworn proof of loss within the contractual time limit was not attributable to the producing broker. Damages against the producing broker were awarded to reflect the fact that Insured could only have recovered under the increased value risks section of the policy (not the hull and machinery risks section) – a sum of €2 million.
  7. The placing broker did not owe any duty of care to the Insured (nor was any duty breached had there been one), there being no evidence the Insured had placed any reliance on its expertise.

Comment

In reaching his decision, the Judge made clear that the non-disclosure was inadvertent and had the broker discharged its duties, the Insured would have been content to insure the yacht at €8 million, which Insurers are likely to have agreed. The Judge appears somewhat uncomfortable with the decision he made, which was based on the law as it stands. He commented that the “just result” would have been to treat the insurance as valid in the reduced amount of €8 million, a result which he observed may have been achieved had the Insurance Act 2015 been in force.

Whilst the claim against the Insurer was unsuccessful, the Insured was able to make a partial recovery against its broker. This case is a reminder that brokers should take reasonable care when submitting proposal forms or making representations on behalf of their clients and should take reasonable steps to ensure that the client is aware of and understands the duty of disclosure.