Following the constructive total loss by fire in an Athens marina of the yacht the MY GALATEA1 (the yacht), it was held that insurers validly avoided an insurance policy due to non-disclosure by the insured of material facts relating to the over-insurance of the yacht.
Background to the claim
In May 2011 the claimant entered into an insurance policy against all risks with the defendant insurers for the insurance of a 115ft Riva yacht for an agreed value of €13 million (split between Hull & Machinery and Increased Value cover). Seven months later, in December 2011, the yacht was substantially damaged in an Athens marina by a fire on board, resulting in the owners tendering a Notice of Abandonment and claiming a constructive total loss. In this action the claimant sought to recover the full insured value of €13 million from the defendants.
Insurers accepted the fire was an accident that the policy was intended to cover but denied liability on the grounds that they were entitled to, and did, avoid the policy on account of material non-disclosure. During the course of the litigation, various items came to light that had inadvertently not been disclosed to the insurers at placement, namely that:
- The claimant had received a professional valuation of the yacht at approximately €7 million.
- The yacht was on the market for €8 million when the insurance policy was concluded.
Conclusions of the judgment
It was held by the judge that these facts were material to the insured’s request to insure the yacht, and should have been disclosed at placement. It was held that had these circumstances been disclosed, insurers would not have agreed to insure the yacht for €13 million, and so were entitled to avoid the policy, as they did. In the judgment, that will be of interest to the marine insurance and yacht market, the judge stated that “the logical amount of cover to buy would have been the amount which the claimant was hoping to get from a sale, that is, the asking price of €8 million”, and also that “in the absence of a valuation or other information which allows the owner to make a realistic estimate of current market value, it may be reasonable to treat the price paid as an objective yardstick of value and to insure for this amount, even though the owner knows in general terms that the market value is probably less”.
Notice of abandonment
In the proceedings insurers also relied on the defence that the claimant could not treat the loss of the yacht as a total loss because it did not give a valid notice of abandonment. Insurers maintained that a notice of abandonment was not given with reasonable diligence following the receipt by the claimant from naval architects of reliable information of the loss, as required by s62(3) of the Marine Insurance Act 1906. The insurers argued that the consequent inability to treat the loss as a total loss meant that the claimant could not recover under the Increased Value section of the policy as it only provided cover for a total loss.
The claimant argued that notice of abandonment was unnecessary as there would have been no possibility of benefit to insurers if notice had been given to them, which was agreed by the judge, having regard to the following clause in the Increased Value section of the policy:
“In the event of a Total Loss, the Underwriters waive interest in any proceeds from the sale or other disposition of the vessel or wreck”.
It was held that the claimant did not fulfil the requirements of notice of abandonment, though the judge did not consider that the omission to give this notice, which was unnecessary so far as the Increased Value cover was concerned, prevented the claimant from treating the loss as a total loss for the purpose of a claim under the Increased Value section of the policy.
Claim time-barred on the policy terms
Insurers also ran the defence that the claimant failed to comply with three policy terms, as follows:
- That the claimant failed to provide a sworn proof of loss to the insurers within 90 days from the date of loss. Although the claimants argued that providing such a proof of loss would not have added anything significant to insurers’ understanding of the claim as insurers’ agents attended the scene of the fire almost immediately. The judge, however, held that the claimant’s failure to provide a sworn proof of loss in accordance with the policy barred the claimant from bringing proceedings for the recovery of its claim under the Hull & Machinery section of the policy, though not under the Increased Value section, to which this particular clause did not apply.
- Insurers argued that the claimant persistently failed to provide documents relating to the valuation, sale and marketing of the yacht, in breach of the “Examination under Oath” clause of the policy. However, it was held that as the insurers had not designated a time and place at which the documents were to be produced, as required by the clause, there was no breach of this clause.
- Insurers also argued that the claim was contractually barred due to a clause which prevented the claimant from bringing legal proceedings unless it had fully complied with all requirements of the policy. The failure to provide a sworn proof of loss was sufficient to bar the claim under the Hull & Machinery section of the policy, to which this clause applied, with the judge not accepting the claimant’s argument that a breach under this clause merely suspends the claimant from bringing proceedings.
Would the outcome have been different under the Insurance Act 2015?
It was importantly highlighted by the judge that had the Insurance Act 2015 been in force, the claimants would have achieved a “just” result. The act, which comes into force in August 2016 will introduce a system of proportionate remedies with regard to non-disclosure. Under the new regime the insurance would be treated as valid in a reduced amount of €8 million, a sum in accordance with the insured value at which the insurers would have written the risk had all material facts been disclosed.
Alongside the insurers, the insured also joined to the proceedings the placing and producing brokers who had arranged the insurance. It was held that although the placing brokers did not owe any relevant duty to the insured directly, the producing brokers were liable for part of the loss as they had been negligent in completing the proposal form: but for the producing broker’s negligence, the claimant would have had a valid policy for €8 million. The broker was found liable to pay damages of €2 million, the proportion of the Increased Value cover that would have been in place and recoverable by the claimant.