Following the total loss by fire of the Riva motoryacht “GALATEA” whilst moored in Athens in late 2011, the English High Court recently held that insurers were entitled to avoid the ensuing insurance claim.
Purchase price or market value?
The insurers had agreed to insure the yacht against all risks for an ‘agreed value’ of €13 million. The owner had purchased the yacht for €13 million in 2007 and this was the value he gave on the proposal form in 2011, notwithstanding the fact that he had had the yacht professionally valued in 2009 at €7 million. The Court found that the use of the 2007 purchase price, rather than the 2011 market value, was a material misrepresentation.
Nonetheless, this was not sufficient to render the policy void, because a previous history of dealings between the owner and the same insurer indicated that the misrepresentation of “GALATEA”’s value did not induce the insurers to issue the policy. Specifically, the owner had insured another yacht, M/Y “SAPPHIRE”, with the same insurer, leaving the ‘purchase price’ section of the proposal form blank, yet insurers had still been prepared to insure the yacht on the basis of the amount of insurance requested by the owner.
Insurers were, however, found entitled to avoid the claim on the basis of the owner’s failure to disclose the following material facts: (i) that a professional valuer in 2009 had advised that the yacht was worth around €7 million, and (ii) that the owner had advertised the yacht for sale at €8 million shortly before the insurance incepted.
The owner’s producing broker in Greece was found to have been negligent in failing to advise the owner how to fill out the proposal form correctly. This failure led to an interesting result, largely because the yacht’s €13 million insurance cover was made up of separate sums for ‘hull and machinery’ cover (€9.75 million) and ‘increased value’ (IV) cover (€3.25 million):
- The hull and machinery cover incorporated the American Yacht Form ‘R12’ clauses which require the owner to file proof of loss within 90 days; this, the owner had failed to do, but the R12 clauses were not applicable to the IV cover which did not therefore require proof of loss to be filed within 90 days.
- But for the non-disclosures referred to above, insurers would have been liable to pay the IV claim. It followed that the owner was able to recover €2 million, not from insurers but from the producing broker, this being the amount which
would have been recoverable under the IV policy, had the yacht been insured for the correct total figure of €8 million.
Insurance Act 2015
We have previously reported (summer 2015 newsletter) on the new Insurance Act which comes into effect in August 2016. The Court commented that under the new Act a different result would most likely apply: the owner not having been reckless or deliberate in providing the incorrect market value, the modified law would treat the insurance as valid at €8 million. This highlights one of the new Act’s aims, being that of proportionality, in circumstances where the insurers would have provided the requested cover, albeit on different terms.
The judge found that, in the absence of contrary, objective information, yacht underwriters generally accept an owner’s estimate of the value of a large luxury yacht. It was accepted that the practical method for an owner to estimate value is by giving the purchase price, unless particular factors support a different view, e.g. if the yacht is for sale or a professional valuation has been obtained.
Importantly, the judge did not suggest that owners should be obliged to have their yachts valued prior to obtaining or renewing insurance, and nor is it customary for insurers to make such a request. Owners should however ensure that they are clear about the meaning of ‘market value’ and other similar terms in their proposal forms and policies, and they should be mindful of the importance of disclosing all material information.