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MARINE INSURANCE

North Star Shipping Limited and Others -v- Sphere Drake Insurance Plc and Others

April 2006

The vessel North Star ("the vessel"), owned by North Star Shipping Ltd ("the Owners"), formed part of a fleet managed by Kent Trading Corporation, a company owned and controlled by two brothers, Harry and Michael Petrakakos. In April 1994 the Owners agreed to sell the vessel, subject to her passing special survey. For that purpose the vessel was moored alongside a repair berth to enable maintenance repairs to be completed. On 6 July, however, the detonation of an explosive device placed on board caused such extensive damage that the vessel became a constructive total loss.

She was insured with the defendants ("the underwriters") under a war risks policy, but the underwriters declined to pay the Owners' claim. They contended, firstly, that the Owners had been complicit in the bombing of the vessel and, secondly, that they were entitled to avoid the policy for non-disclosure of material facts. As previously reported on this website, the action was tried in the Commercial Court before Colman J. and resulted in judgment being given in favour of the underwriters. The Owners were subsequently given permission to appeal, but the Court of Appeal directed that the non-disclosure issue should be heard first.

It was common ground that the Owners had not disclosed certain facts to the underwriters when the war risks insurance was placed in April 1994. In particular they had failed to disclose that: (1) in five criminal proceedings pending before the Greek courts Harry Petrakakos was accused of fraud, and in one of those proceedings allegations of fraud were also made against his brother, Michael; (2) in civil proceedings pending in Panama damages for fraud were claimed against the Kent Group; (3) the valuation of the vessel in the war risks policy exceeded her actual value by a considerable margin; and (4) the hull and machinery insurance of the Kent fleet had been cancelled in March 1994 for non-payment of premium. The issue between the parties was whether those facts were material in relation to war risks insurance.

Facts (3) and (4) above never loomed large in the arguments before the Court of Appeal. Although some reliance was placed on fact (2) - the civil proceedings in Panama - the underwriters placed the greatest reliance on the Owners' failure to disclose the charges in the Greek criminal proceedings ("the Greek charges"). They argued that the existence of the Greek charges would have influenced the judgment of a prudent war risks underwriter: the fact that the Petrakakos brothers had been acquitted of the charges before the underwriters avoided the policy was immaterial.

In the light of the decision in Brotherton v Aseguradora Colseguros S.A. (2003) the Owners had conceded that it was open to underwriters to rely on the Greek charges, notwithstanding the fact that they were subsequently dismissed. Nevertheless they submitted that, in assessing materiality, the court should draw a distinction between allegations of dishonesty that related to the risk itself and allegations that had nothing to do with the risk, the particular insurance, or with insurance generally.

Waller LJ, who delivered the Court of Appeal's leading judgment, recognised that the law in this area was capable of producing serious injustice. He was not convinced, however, that material facts that must be disclosed could be defined as a matter of law: establishing what information would have an effect on the mind of the prudent underwriter was a matter of evidence. Colman J had heard evidence from underwriting experts as to whether allegations of dishonesty were material in placing war risks insurance. The experts had given contrasting evidence. However, the judge had found the evidence of the underwriters' expert "entirely convincing" and, in Waller LJ's view, the judge's conclusion that the Greek charges were disclosable, which was based on that evidence, was unimpeachable.

The Owners' appeal therefore failed on that ground alone. Nevertheless, Waller LJ proceeded to comment on the remaining aspects of the non-disclosure issue, albeit briefly. Whilst expressing some reservations, he concluded that the judge's finding in favour of the underwriters in relation to the allegations made in the civil proceedings in Panama was one that he was entitled to make on the evidence, and he would dismiss the appeal on that ground also. He had greater doubts about the judge's conclusions on the overvaluation and non-payment of premium issues. However, in the circumstances, he did not feel the need to reach any concluded view on either matter.

In a short concurring judgment Longmore LJ observed that the case brought into sharp focus the problems of the present state of the law concerning non-disclosure. He posed the question whether it was not time for a change in the law, at least to the extent that the disclosure obligation should be limited to matters either which the insured knows are relevant to the insurers' decision to accept the risk or which a reasonable insured could be expected to know are relevant to that decision. Like Waller LJ he was gratified to know that the Law Commission had embarked on a review of this area of the law.

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