Increased Value (IV) policies are a common feature of Hull and Machinery (H&M) insurance. Their purpose is to enable the assured, in certain circumstances, to recover on the basis of a higher valuation of his ship than that contained in the underlying H&M policy. They do not, however, always seem to work in the way that the market anticipates, as the decision of Mr Justice Leggatt in the case of Involnert Management Inc v Aprilgrange Ltd  2 Lloyd’s Rep 289 illustrates.
The case concerned a claim for the CTL of a mega yacht, The Galatea, whose ultimate beneficial owner was the Russian cement magnate Mr Filaret Galchev. The yacht had been insured by the London Market for a total value of €13m. The cover was split into two sections: section A for H&M, which incorporated the American Yacht Form R12 Clauses; and section B for IV, which incorporated the American Institute Increased Value and Excess Liabilities Clauses. As is often the case, the cover of €13m was split 75% - 25% between the H&M and IV sections respectively, i.e. €9.75m on H&M and €3.25m on IV. The same underwriters insured the H&M and IV sections of the policy.
On 3rd December 2011, the yacht was destroyed by fire. Underwriters denied the assured’s claim for a CTL on the basis that: (i) they were entitled to avoid the policy for the assured’s failure to disclose before the insurance was placed that it had been advised and believed the yacht to be worth significantly less than the sum insured; (ii) they were entitled to avoid because of a misrepresentation in the proposal form that the market value of the yacht was believed by its managers to be €13m; (iii) the assured had lost any right to sue underwriters because of its failure to comply with policy conditions requiring (a) provision of a sworn proof of loss within 90 days of the casualty and (b) the production of documents reasonably requested by underwriter; and (iv) the assured had failed to give a valid notice of abandonment.
At trial, underwriters succeeded in their argument that they were entitled to avoid for material non-disclosure on the basis that the assured’s marketing of the yacht for €8m and possession of a €7m valuation at the time it was seeking cover for €13m were material facts, which were not disclosed and which induced underwriters to insure on the terms they did.
The judge also found that, had underwriters not been entitled to avoid, the claim for a CTL on the H&M section of the policy would have failed because the assured had failed to provide a sworn proof of loss within 90 days and failed to tender a valid notice of abandonment. Leggatt J found, however, that whilst these arguments would have been enough defeat a claim for a CTL on the H&M section of the policy, they would not have prevented the assured claiming under the IV section.
The judge’s justified his conclusions in the following ways. First, he noted that the obligation on the assured to provide a sworn proof of loss within 90 days was a condition precedent found in the H&M section of the policy but not the IV section. Secondly, the judge explained that the IV clauses contained a waiver of interest in the proceeds from the sale or other disposition of the vessel or wreck in the event of a total loss. As such, he concluded that a notice of abandonment was of no possible benefit to the underwriters of the IV section of the policy and therefore, under section 62(7) of the Marine Insurance Act 1906, a notice of abandonment was unnecessary.
Thus, had underwriters not succeeded in avoiding the policy, it would have produced the highly unusual result of the assured being able to recover €3.25m on its CTL claim under the IV section of the policy, notwithstanding the fact that it could recover nothing under the H&M section.
This conclusion is surprising in two respects. First, IV cover is generally understood to be written on the basis that it will not be called upon in the event that the claim for a total loss on the H&M section of the policy fails. It is for this reason that the premium charged for IV cover is usually lower than that charged on H&M.
Secondly, as the editors of Arnould point out, the approach would have led Leggatt J to conclude (had it been necessary) that if the claim on the H&M section of the policy had been settled as a partial loss, no recovery could have been made on the IV section, but that if there had been no recovery on the H&M section at all (for non-compliance with the clauses applicable to that section), the assured might yet have recovered on the IV section by proving that the yacht was a CTL.
What can the market do to avoid such outcomes in the future and to ensure that IV cover works in the way that they anticipate? There are two potential options. Perhaps the most obvious solution is to include wording in the IV policy that makes clear that if the claim for a total loss on the H&M policy fails for whatever reason, the assured is not entitled to call on the IV policy.
An alternative, however, would be to ensure that all condition precedents in the H&M cover are expressly incorporated into the IV cover. This would mean that any breach of condition precedent which is a bar to the assured claiming for a total loss under the H&M policy would automatically also be a bar to a total loss claim under the IV policy.
The market also needs to be careful about the possible unintended consequences of waiver of interest clauses in IV policies. It is highly unlikely that such clauses were ever intended to provide the assured with a route to claiming a CTL on its IV policy even if its claim for a CTL on the H&M policy fails for want of a valid notice of abandonment. It may be necessary, therefore, to spell out with greater clarity in policy wordings precisely what such clauses are, and are not aimed at achieving.