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Eagle Star Insurance Co Ltd. -v- Games Video Co (GVC) S.A.

January 2004

These proceedings were concerned with the loss, in January 1999, of the vessel "Game Boy" - a vessel with a distinctly unusual history. Built in Bulgaria in 1965 for use as a training ship for the Russian navy, the vessel was brought to Greece in 1989, sold and re-named "Seniorita". She was then laid up until steps were taken in 1993 to convert the vessel into a floating bar and discotheque. Unfortunately, this venture was not a success. It came to an end in late 1994, when the vessel was arrested by creditors. Attempts were made over the next few years to sell the vessel by auction - but on each occasion she failed to achieve her reserve price. She was still under arrest in February 1998 when a Russian businessman, Mr Xirotiris, approached business associates in Greece to explore the possibility of their buying a vessel to be used as a floating casino. The "Seniorita" was identified as being suitable and negotiations proceeded.

In March 1998 London brokers were asked to obtain a quotation for the cost of insuring the vessel: initially whilst laid up or undergoing maintenance repairs for about 2 months and thereafter as a floating casino. The insured value proposed for the port risks cover was US$1,800,000, the intention being that this would be increased to US$2,500,000 when the vessel was ready to begin trading as a floating casino. The terms quoted by underwriters included a requirement for a survey of the vessel's lay-up arrangements by the Salvage Association and, following receipt of reports from the SA that their initial recommendations had been complied with, underwriters agreed to bind themselves to the risk for an initial period of 4 months. Cover was subsequently extended to 13 March 1999.

In November 1998 the vessel, now named "Game Boy" by her new owners, was shifted to the Avlis Shipyard where she remained in the old yard until being towed to the dry-dock area in December and moored there in accordance with arrangements approved by the Salvage Association. However, in the early hours of 13 January 1999, an explosive device was detonated below the waterline on the vessel's port side, causing an ingress of water and the development of a list which resulted in the vessel's sinking.

The total loss claim subsequently presented was declined by underwriters. They commenced these proceedings to obtain declarations that they were not liable to their assureds and that the policy had been validly avoided. Their primary case was that the value of the vessel had been knowingly and fraudulently overstated, but they also raised a number of additional defences, including allegations of breaches of warranty and an allegation of fraudulent presentation of the claim.

The Valuation Issue

Underwriters submitted that the vessel's insured value of US$1,800,000 was grossly excessive and that, in reality, she had not been worth more than her scrap value of about US$100,000. This was disputed by the assureds, who maintained that the policy valuation was made in good faith and was supported by a series of documents. Underwriters responded with an assertion that these documents were not genuine. In consequence, most of the evidence adduced at the trial of the action before Mr Justice Simon related to the authenticity, or otherwise, of the documents on which the assureds sought to rely.

The documents that were subjected to close analysis included the following:

1. A pre-purchase condition report dated 10 March 1998 made by a surveyor, Mr Tsapes, which included a statement that the vessel was worth about US$2 million. In the event, however, the judge concluded that: (i) the report relied upon was not made in March 1998; (ii) the photographs attached to it were selected with a view to giving a misleading picture of the vessel; (iii) the report was put forward with a view to deceiving the Court; (iv) there was no proper basis for the valuation of US$2 million; (v) these facts were known to the assureds; and (vi) the report provided no support for any belief that the value of the vessel was US$1.8 million.
2. A management agreement dated 9 April 1998 purportedly signed by Mr Xirotiris and a Mr Ghiolman, which contained reference to an asking price for the vessel of US$1.8 million, described as "reasonable". However, evidence given to the Court by handwriting experts led the judge to conclude that the document had been created for the purpose of the proceedings and that Mr Xirotiris's signature had been forged deliberately.
3. A Memorandum of Agreement (MOA) for the sale and purchase of the "Seniorita" dated 23 June 1998, which referred to a price of US$1.8 million and contained provisions for its payment by instalments. The judge concluded, however, that the MOA did not reflect the true nature of the transaction; that the payments said to have been made were not in fact made; and that US$1.8 million was not the true price. The judge was also satisfied that certain notarised payment documents produced were not genuine and that 3 receipts for sums totalling US$1,080,000 were false.

Other documents on which the assureds relied were also found by the judge to be neither genuine nor contemporaneous.

In the light of these findings the judge held that the assureds had no genuine belief that the value of the vessel was US$1.8 million: the documents which were said to form the basis for that belief were, to their knowledge, false, and were created because the assureds knew very well that the value of US$1.8 million could not be justified without them.

The judge found that the true value of the vessel at the relevant time was about US$100,000 to US$150,000 and that the assureds knew this. The misrepresentation was material and had been relied upon by underwriters - who were, therefore, entitled to avoid the insurance contract.

Breaches of Warranty

The policy contained a warranty to the effect that all recommendations of the Salvage Association were "to be complied with prior to attachment". Underwriters submitted that two of the ongoing recommendations, relating to the availability of a telephone on board and the attendance of a watchman, had been breached. It was the assureds' case that, as a matter of construction, the Salvage Association's recommendations only had to be complied with "prior to attachment" of the risk or, possibly, prior to any extension of cover. However, that argument was rejected by the judge.

He pointed out that it was necessary to construe the clause so as to elicit its commercial purpose. This was plainly to ensure that the assureds would comply with, and continue to comply with, the express terms of the Salvage Association's recommendations throughout the period on risk. It made no commercial sense that the assureds would agree to comply with the recommendations only on the date that the risk attached, but not thereafter. Accordingly, the judge held that the words "prior to attachment" were to be read as meaning that the assureds warranted prior to attachment that they would comply with the Salvage Association's recommendations made at the time of the attachment of the risk. He went on to find that the assureds had indeed broken the two ongoing recommendations, as alleged. The underwriters were, therefore, entitled to decline liability.

Fraudulent Presentation of the Claim

Having found that at least 3 of the documents relied upon by the assureds were not authentic, and that the assureds knew this, it became necessary for the judge to consider whether the presentation of such documents by the assureds also entitled underwriters to avoid liability. The assureds had given the documents in question to a representative of underwriters in 1999, when the circumstances of the loss were being investigated. The judge held that the assureds had thereby used fraudulent devices in order to advance their claim - with the intention, and in the expectation, that underwriters would accept the documents at face value and pay the claim. The consequence of using fraudulent devices is to defeat the claim. In such circumstances it was held that underwriters were discharged from any liability to the assureds in respect of the present claim in any event.

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