In brief the facts of the case were as follow: in 2011, the owners of the superYacht M/Y GALATEA insured the latter for the agreed value of 13 million Euros, which was the actual price paid by the owner in 2007. Prior to the conclusion of the insurance policy, in November 2009 a professional MTC evaluation was obtained by the Claimant which had valued the vessel at about 7 million Euros but which had never been disclosed to the insurers. In December 2011, the Yacht became a total loss after a fire on board the Yacht but the Insurers declined to compensate the assured arguing that: the Yacht was over-valued since although insured for 13 million Euros, the market value of the Yacht was, and was believed by the Claimant to be, no greater than 7-8 million Euros. Accordingly, they argued that they were entitled to avoid the policy as result of a misrepresentation in the proposal form that the market value of the Yacht was believed by its manager to be 13 million Euros.
The claimant denied both of the arguments and initiated proceedings against the insurers. The issues before the court were: 1) whether the non-disclosure of both the actual market value of the Yacht and the MTA valuation were material and 2) whether the insurers had waived their right to avoid the policy. Moreover, the claimant had joined as additional parties to the proceedings the two firms of insurance brokers which were responsible for arranging the insurance. The first third party, AIS Insurance Services Ltd (“AIS”), was a Greek company which acted as a producing broker. The second third party, OAMPS Special Risks Ltd (“OAMPS”), was an English broker which placed the insurance in the London market. The claimant argued that in the event that he failed to recover the amount claimed from the defendant under the policy, he could claim damages from AIS and/or OAMPS on the ground that their negligence led to this result.
In brief, the insured party of an insurance policy is under a pre-contractual duty of utmost good faith which consists of two duties: the duty to disclose all material information and the duty not to misrepresent the material facts. Following the principle established in the leading case of Pan Atlantic Ins Co Ltd v Pine Top Ins Co Ltd, the party claiming breach of the duty has to prove both materiality and inducement with regard to both duties. A material circumstance is the one which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk. For there to be inducement the insurer must prove that had he known the full facts he would not have entered into the contract.
The defendant (Insurer) in the case claimed that the non-disclosure of the actual price of the vessel and the MTC valuation was a material fact which had to be disclosed and that the lack of that information induced the insurer to enter into the insurance policy under those terms. On the other side, the claimant denied materiality and inducement and claimed recovery under the policy. In summary, the claimant argued that the Defendant knew or may be presumed to have known that the amount of cover sought represented the purchase price of the Yacht and that it was apparent that the market value in 201 would inevitably be lower than the price paid in 2007.
With regard to the first issue, despite that overvaluation is an accepted common practice in the insurance market, the court relied on Ionides v Pender the leading case establishing the test for overvaluation. Accordingly, the test is whether the overvaluation was so great as to make the insurance speculative. By ‘speculative’ the court meant that the property was valued in an amount which, as the assured must have known, would result in a significant financial gain in the event of loss compared with the position if no loss occurred. In considering all the relevant authorities present before it, the court emphasized the importance of the MTA evaluation and reached the conclusion that not only the non-disclosure of both the evaluation and the true market valued of the Yacht was material, but it had also induced the underwriter to agree to insure the Yacht for 13 million Euros.
With regard to the waiver issue, the claimant argued that even if the Insurers had a right to avoid the policy for non-disclosure, that right was waived by Insurers. The argument was that when the insurers became aware of the actual market value of the Yacht, they did not avoid the contract but instead their right to avoid it was waived by affirmation. The court found that argument ill-founded and relied on the principle of election as enunciated by Lord Goff in The “Kanchenjung”. Generally, when a party is entitled to exercise a right, it has to either exercise it or not. Two requirements exist though: firstly, the insurer must have knowledge of the facts giving rise to the relevant right and of the right itself and secondly, the decision to exercise or not to exercise the right has to be communicated unequivocally to the other party. Thus the insurer would have been treated as having elected to affirm the contract of insurance, if it spoke or acted in a way which would reasonably be understood as consistent only with the insurer having made an informed choice to treat the contract as valid. In the case, the insurer had the right to either affirm or avoid the insurance policy. Applying the law on the facts, the court held that defendant was entitled to avoid the policy and they had not waived that right because of lack of sufficient knowledge of the relevant facts to know that they had a right to avoid the policy and lack of any unequivocal communication of an election to affirm the policy. Therefore, the insurer was permitted to avoid liability altogether.
With regard to the claims against the two brokers, AIS and OAMPS, the court was satisfied that the AIS (the producing broker) owed a duty of care to the claimant both in tort and in contract and was in breach of that duties in failing to take care to ensure that the proposal form for insurance of the Yacht stated the opinion of the market value of the Yacht. That breach caused the claimant to enter into a voidable contract to insure the Yacht for 13 million Euros instead of a valid insurance of 8 million Euros. The claim against the London sub-brokers OAMPS was dismissed by the court because of failure to infer an assumption of direct responsibility by the London’s broker to the claimant.
All in all, the claims against Insurers and OAMPS failed and were accordingly dismissed, while the claim against AIS succeeded to the extent that the Claimant was entitled to recover damages from AIS in the sum of 2 million Euros.
The insured’s non-disclosure was not found to be deliberate or reckless. It was however found that the non-disclosure related to material circumstances (in fact the overvaluation was almost twice the value of the yacht, a fact known to the insured’s representatives) which had induced the insurer to insure the yacht for 13 million Euros.
Brokers and any representative of the yacht owners should take reasonable care when making representations on behalf of the owner to the Insurance company and when filling in the relevant forms . They must ensure that they, as well as the owner, understand the duty of disclosure and how this may affect any potential claim.
We note that, in general, in cases of constructive total loss, the insured loss is usually limited to the amount for which the vessel could have been sold or an equivalent one purchased. If dealing with commercial boats, then, loss of income would also be taken into consideration.