DMC/INS/08/02
Strive Shipping Corporation and Royal Bank of Scotland plc v Hellenic Mutual War Risks Association (The Grecia Express)
English Commercial Court: Colman J.: 25 March 2002
Mr. N Hamblen QC and Mr. M Coburn, instructed by Clyde & Co., for Strive Shipping
Mr. Anthony Boswood QC, Mr S. Moriarty QC and Mr. D. Dale, instructed by Richards Butler, for the Hellenic
Summary
This unusual case involved allegations by war risks insurers that the person controlling the shipowner company, Mr Ventouris, not only caused the vessel to be fraudulently cast away but failed to disclose (amongst other things) that he had fraudulently cast away his own luxury power boat, the Coha II, two months beforehand.
The court had no hesitation in clearing Mr Ventouris of any involvement in either the loss of the Grecia Express or the other losses relied on by insurers and held that there had been no non-disclosures entitling insurers to avoid the policy. Nor had there been any breach of the duty to act reasonably to avert the loss under section 78(4) of the Marine Insurance Act. The judgment, however, raises some interesting points on the nature of moral hazard and the duty of disclosure.

Background to the Case
The Cover
The Grecia Express was insured under a war risk policy for 12 months from 1 January 1994 to a value of US $8 million. The cover was in the terms of the Hellenic Mutual War Risks Association's Rules 1994 and By-laws. These provided that the owner of an entered ship would be insured against losses caused by (amongst other things) "any terrorist or any person acting maliciously, or from a political motive" (clause 2A.2.5). Exclusions included (at clause 2A.4.2.1) losses wholly or partially covered by the standard Lloyd's or ILU Marine Policy issued as from 1 October 1991 incorporating the Institute Time Clauses - Hulls (1983 or any subsequent edition).

The Institute Clauses include "barratry of Master Officers or Crew" as one of the insured perils. Barratry is defined by Schedule 1 Rule 11 of the Marine Insurance Act 1906 as "every wrongful act wilfully committed by the master or crew to the prejudice of the owner, or, as the case may be, the charterer".

The Loss of the Grecia Express
On the night of 4/5 March 1994, the Grecia Express was moored for the winter on the southern shore of the Gulf of Corinth. During the night, somebody cut the vessel's mooring ropes and opened one of the four seawater drencher valves located in the vessel's auxiliary engine room. Water began entering the vessel at about 1 or 2 am on 5 March and the vessel capsized and sank some time between 10.30 and 10.50 am that day. It was a constructive total loss.

The sole watchman, Mr Vangelis, was not on board during that night because, in dereliction of duty, he had spent the night in his car with a woman friend. He only discovered the mooring ropes had been broken at about 7.15 am.

The Insurers’ Arguments
1. Insurers alleged Mr Vangelis assisted in sinking the Grecia Express and that Mr Ventouris was complicit. Under section 55(2)(a) of the Marine Insurance Act, insurers are not liable for a loss attributable to the wilful misconduct of the insured.

Alternatively, they alleged the insured was in breach of its duty to take reasonable steps to avert or minimise the loss under the Association's Rules (Rule 3.14) and/or under section 78(4) of the Marine Insurance Act 1906. In particular, it was alleged that Mr Vangelis ought to have re-boarded the vessel at about 9.00 am and closed the watertight doors.

Insurers further alleged that the vessel, insured to a value of $8 million, was very substantially over-valued. They said its true market value was $2-3 million, and an over-valuation of that extent raised questions relevant to moral hazard and therefore ought to have been disclosed.

2. Insurers' alternative case was based on their right to avoid the policy for non-disclosure of material facts relating to the loss of other vessels. These were material because they went to moral hazard and/or to the magnitude of the risk of sabotage. They were:

The Italia Express - a passenger ferry owned by Mr Ventouris' brother that, six years previously, sank at its moorings following an explosion caused by limpet mines attached to its hull. A few months beforehand, the vessel had been owned by a company jointly owned by Mr Ventouris and his brother, but at the time of the sinking Mr Ventouris had no remaining interest in it. The insurers of the vessel alleged the loss was fraudulent but lost their case at trial when the owner was totally vindicated.

The Star One - another passenger ferry, bareboat chartered by Mr Ventouris' company only a week before it sank in May 1992 when its engine room flooded after sea valves were opened. The owner of the ferry successfully claimed on insurers for the loss. No claim was ever made by Mr Ventouris or his company against the insurers and he did not stand to gain from the insurance proceeds.

The Coha II - this luxury powerboat, owned by Mr Ventouris disappeared in mysterious circumstances in October 1993. Mr Ventouris abandoned his claim against the insurers of the Coha II, but said this was because he realised there had been a breach of a speed warranty in the policy so that the case was a hopeless one. The insurers of the Grecia Express alleged Mr Ventouris had scuttled it. The circumstances in which the Coha II was lost were fairly extraordinary. On the evening of 27 October 1993, Mr Ventouris' wife was in hospital about to have their third child but there were complications. Mr Ventouris decided to drive his new powerboat to the island of Tinos to pray at the church there for the child. He set out with one employee as crew, but, during the journey, they were held up by problems with the fuel filters. Meanwhile, the weather deteriorated and both Mr Ventouris and the crewmember fell overboard trying to fix a fender to the side of the vessel. The vessel, on automatic pilot, carried on and was never seen again and the two were rescued after 10 hours in the sea. No wreckage was ever found.

The St Nicholas - another powerboat, sold by Mr Ventouris to his brother-in-law (and business associate) two months before it was stolen in 1990. It was not claimed that this loss was discloseable in its own right, but that, taken together with the other allegedly material facts, it ought to have been disclosed as part of a "pattern of losses" of vessels with which Mr Ventouris had been associated.

3. Insurers argued that, for Mr Ventouris to prove the loss was caused by "persons acting maliciously", he also had to prove that he was not complicit in the loss.

Judgment
The burden of proof
As regards point 3, the judge held that the situation was analogous to barratry ("every wrongful act wilfully committed by the master or crew to the prejudice of the owner, or, as the case may be, the charterer"), where the Court of Appeal has held that the insured is presumed not to have been complicit unless and until the underwriters prove that he was (Elfie A Issaias v Marine Insurance Co Limited [1923] 15 Lloyd's Rep 186).

In this case, Mr Ventouris had to establish that the sinking fell within the scope of the war risk cover. Since the war risk cover excluded barratry, he also had to prove, on the balance of probabilities, that the sinking was not caused or procured by the master or crew. It was for the insurers to prove that the loss was caused by the wilful misconduct of the insured.

Where criminal activity is alleged, a higher standard of proof is required than the normal civil standard of the balance of probabilities (The Ikarian Reefer ([1995] 1 Lloyd's Rep 455). The court must be satisfied on the whole of the evidence that it is highly improbable that the vessel was lost accidentally. The judge’s approach was that the evidence had to be sufficiently strong to induce a high level of confidence that the allegation of scuttling was true.

The burden of proof of the various non-disclosures also rested with insurers. In the case of the alleged scuttling of the Coha II, the same higher standard of proof applied. A criminal activity was being alleged and it made no difference whether the allegation involved another vessel (and so was raised in the context of non-disclosure) or whether it involved the insured vessel.

Having heard all the evidence, the judge was satisfied that Mr Ventouris was innocent of the alleged scuttling of both the Grecia Express and the Coha II. In the case of the Grecia Express, the insured had proved, on the balance of probabilities, that the loss was caused by unknown persons acting maliciously and not by any barratry. Even when taken in aggregate, the unsatisfactory features of some of the evidence did not give rise to an inference that the Grecia Express was sunk in execution of a plan promoted by Mr Ventouris, or of which he had knowledge. It was not even a case where the evidence was finely balanced.

Duty to disclose
In respect of the loss of the Coha II, insurers' primary case was that that the loss was fabricated and therefore discloseable as material to moral hazard. But they also claimed that the circumstances of the loss were discloseable even if the loss was accidental, because the circumstances were highly suspicious, suggested dishonesty and would have influenced a prudent insurer in deciding whether or not to renew the cover for Grecia Express.

As regards the other losses, insurers alleged that, in combination, they were material and discloseable because they shed a suspicious light on Mr Ventouris' integrity (and this was relevant to moral hazard) and/or because they suggested an enhanced risk of sabotage of vessels with which he was connected (and so they were relevant to the magnitude of the risk). In addition, insurers alleged that the extent of the over-valuation of the Grecia Express was a material non-disclosure relevant to moral hazard.

There is little authority on the discloseability of allegations of wrong-doing and of suspicious circumstances. The commission of a criminal offence is a material fact that ought to be disclosed. An arrest, charge and pending trial would be discloseable, but would not be if the insured is acquitted of the crime before inception of the policy - unless, in fact, he had been guilty and the insurers were prepared to allege this and to prove it (March Cabaret Club & Casino Limited v The London Assurance [1975] 1 Lloyd's Rep 169).

What if allegations are made but the insured claims he is innocent? The materiality of a given circumstance has to be tested at the time of the placing of the risk and by reference to the impact it would have on the mind of a prudent insurer. Thus the existence of a pending criminal charge at the time of inception is material, even if the insured knows he is innocent and the allegation is later proved to be ill founded (The Dora [1989] 1 Lloyd's Rep 69).

These authorities, however, concerned specific allegations and not (as in this case) suspicious circumstances that might suggest the insured has been involved in criminal activity but which (the insured knows) is not the case. In such circumstances, the judge thought it would be quite unrealistic for underwriters to require disclosure. That would involve the insured evaluating perfectly innocent facts to see whether they might be misconstrued by an underwriter. Provided there has been no specific allegation, and provided the insured is, in truth, innocent of any offence, the mere suspiciousness of the facts does not render them discloseable.

What if there are circumstances involving the insured which, when viewed objectively, suggest that facts may exist which would increase the magnitude of the risk? If the insured knows of such circumstances, and they would have influenced the judgment of a prudent insurer, those known circumstances are material and discloseable. Such circumstances do not cease to be material because it may eventually be shown that the suggested facts did not exist. But the issue as to what is, or is not, material is based on the circumstances known to the insured and not on what those circumstances might suggest to the insurer. By analogy, mere rumours at the time when the risk is placed can be material and discloseable, even if they later turn out to be untrue (Morrison v Universal Marine Insurance Co [1872] Lloyd's Rep 8), but the rumours have to have at least some real substance and reliability when viewed objectively (Durrell v Bederley [1816] Holt NP 283).

However, the duty of utmost good faith works both ways. Not only does the insured have a positive duty to disclose all material facts, but the insurer also has a duty to act in good faith towards the insured. In the judge's view, the court's jurisdiction to avoid a contract of insurance for misrepresentation or non-disclosure cannot be exercised without regard to whether the insurer has acted consistently with his duty of utmost good faith.

In cases of moral hazard, a failure by the insured to disclose an allegation of dishonesty or criminal conduct will normally be a material non-disclosure. But, if the insured proves that the allegation or charge is unfounded and that there has been no dishonesty or criminal conduct, insurers will not normally be entitled to avoid, because to do so in those circumstances would be a breach of their duty of good faith to the insured. Similarly, insurers seeking to avoid liability in respect of facts that raise suspicions relevant to the magnitude of the risk, cannot avoid paying the loss when it has been established that there was no basis for the suspicion.

The judge held that there had been no material non-disclosures in respect of the Mr Ventouris' connections with the Italia Express, the Star One, the St Nicholas or the combination of all the other losses, either as regards moral hazard or the magnitude of the risk. As for the Coha II, the judge found that Mr Ventouris was innocent of the alleged scuttling. Even if, contrary to the judge's view, the insured had been under a duty to disclose the facts of the loss (on the basis that they were objectively suspicious), the judge was satisfied that any suspicion was unfounded and it would therefore be contrary to insurers' duty of utmost good faith to avoid the contract.

A further issue raised by the insured was whether any of the alleged non-disclosures (had they been found to be discloseable) were not required to be disclosed as they were "matters of common notoriety or knowledge [or] matters which an insurer in the ordinary course of his business, as such, ought to know" (section 18(3)(b) of the Marine Insurance Act). In all cases, the judge held they were not. Even though there had been publicity at the time of some of the other losses, an insured cannot assume that insurers would remember details of previous casualties not insured by them (and not even relating to the same type of risk) and relate that information to the new risk proposed.

Over-valuation
On the evidence, the judge found that the true value of the vessel was about $4 million, but that a ferry owner would want to make sure he was sufficiently insured to take account of the costs of replacement in emergency circumstances. The mere fact that the proposed insured value exceeded the true market value did not in itself suggest moral hazard. Where the proposed value is consistent with reasonably prudent ship management, the excess over the market value is not material to the risk, whatever its precise extent. What would make an over-valuation material would be the want of any reasonable explanation for the disparity. Where there is a reasonable explanation, however, the true market value does not have to be disclosed.

Duty to avert or minimise loss
Insurers alleged that there had been a failure to avert or minimise the loss of the Grecia Express because the watchman ought to have re-boarded the vessel at about 9.00 am and closed the watertight doors.

Section 78(4) of the Marine Insurance Act states:

"It is the duty of the assured or his agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimising a loss".

Rule 3.1.4 of the Association's Rules also provides that it is the duty of the owner and his agents to:

"take and continue to take all such steps as may be reasonable for the purpose of averting or minimising any loss, damage, liability, cost or expense in respect whereof he may be insured".

In order for insurers to succeed on this point, however, it had to be shown, not only that there had been a failure to avert or minimise the loss, but also that the omission to act was the proximate cause of the loss.

On the evidence, the judge found that there were no steps that the insured could reasonably have been expected to take to avert or minimise the loss, or even that any steps would have had any effect on the loss. Even if it was established that there had been a negligent failure to board the vessel and close the doors or organise a rescue operation, the judge was confident that none of this displaced the cutting of the mooring ropes and the flooding of the engine rooms as the dominant cause of the loss.