|B. FACTUAL BACKGROUND
|The MTC valuation
|Purchase of the "Sapphire"
|The March 2011 email
|Marketing the Yacht
|The claimant's marketing instructions
|Previous years' insurance
|The January 2009 quotations
|The January 2011 quotations
|The instruction of AIS
|Obtaining the April 2011 quotations
|Completing the proposal form
|Presenting the proposal form
|Expert evidence of market value
|Why did the claimant insure the Yacht for 13m?
|C. THE CLAIM AGAINST INSURERS
| (1) Non-disclosure
|The evidence regarding materiality
|Market value as the basic measure of indemnity
|The indeterminacy of market value
|Determining the insured value
|Relevance of the purchase price
|Relevance of valuations
|Relevance of the yacht being for sale
|The claimant's knowledge argument
|The claimant's purchase price argument
|The legal test
|The claimant's argument
|The Insurers' knowledge
|The Insurers' conduct
|Exercising a contractual right of inspection
|Service of the Defence
|The "Misrepresentation or Fraud" clause
|Conclusions on non-disclosure
| (2) Misrepresentation
|What representation was made?
|Section 20 of the Act
|The effect of the subjectivity
|Inducement: the legal test
|Inducement: factual findings
| (3) Non-compliance with policy requirements
|The "Filing of Proof" clause
|The "Examination under Oath" clause
|The "Time for Suit" clause
|The claimant's response
|The effect of the "Time for Suit" clause
|The effect of litigation
|Alleged non-compliance with the "Filing of Proof" clause
|Alleged non-compliance with the "Examination under Oath" clause
|Relationship of the R12 and IV Clauses
|The claim settlement provisions
| (4) Notice of Abandonment
|The relevant law
|The threshold for a constructive total loss
|Was notice given in time?
|Was notice necessary?
|D. THE CLAIMS AGAINST THE BROKERS
|Relationship between the claimant and AIS
|The use of a sub-broker
|The relationship between AIS and OAMPS
|The relationship between the claimant and OAMPS
|Henderson v Merrett
|The position of a sub-broker
|Expert broking evidence
|Alleged negligence of AIS
|(1) Alleged failure to establish the basis of insurance
|(2) Alleged failure with regard to market value
|(3) Alleged failures with regard to the proposal form
|(4) Alleged failure to advise on duty of disclosure
|(5) Alleged failures post-loss
|Quantum of loss
|The claim against OAMPS
|(1) Alleged failure to warn of duty of disclosure
|(2) Alleged failure with regard to the proposal form
Mr Justice Leggatt:
- In the early morning of 3 December 2011 the claimant's yacht "Galatea" ("the Yacht") caught fire at her mooring in the Athens Marina. As a result of the fire, the Yacht was damaged beyond economic repair. The defendants ("Insurers") had agreed to insure the Yacht against all risks for an agreed value of 13 million. In this action the claimant is seeking to recover that sum from Insurers. Insurers accept that the loss was an accident of a kind which the policy was intended to cover. They deny liability to pay the claim, however, on a number of grounds.
- The Insurers' principal complaint is that the Yacht was over-valued. They contend that, although insured for 13m, the market value of the Yacht was and was believed by the claimant to be no greater than 78m. In particular, the claimant had obtained a professional valuation in November 2009 which had valued the Yacht at about 7m (net of VAT); on 2 March 2011 the claimant had been advised by the Yacht's manager that, if put on the market for sale, the Yacht should be listed for a maximum asking price of 8.5m and that the claimant should be happy to get 7m; and by the time the contract of insurance was concluded on 17 May 2011 the Yacht was actually being advertised for sale at an asking price of 8m. These facts were not disclosed to Insurers. It is the Insurers' case that these facts were material and should have been disclosed to them, and that this non-disclosure induced them to insure the Yacht on the terms agreed. They say that in these circumstances they were entitled to avoid, and have validly avoided, the policy. In addition and as an alternative to this defence, Insurers contend that they were discharged from liability as result of a misrepresentation in the proposal form that the market value of the Yacht was believed by its manager to be 13m. Further defences on which Insurers, if necessary, rely are that the claimant is not entitled to maintain this action because of failure to comply with requirements of the policy regarding the provision of a sworn proof of loss and the production of documents reasonably requested by Insurers after the fire, and that the claimant cannot in any event recover for a total loss because it did not give a valid notice of abandonment.
- The claimant maintains that all these defences are without merit. Without prejudice to that position, the claimant has 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 Limited ("AIS"), is a Greek company which acted as a producing broker. The second third party, OAMPS Special Risks Limited ("OAMPS"), is an English broker which placed the insurance in the London market. In the event that the claimant fails to recover the amount claimed from Insurers under the policy, it claims damages from AIS and/or OAMPS on the ground that their negligence has led to this result. The brokers each deny that they were negligent or that, even if they were, this has caused the claimant's loss. OAMPS further denies that it owed any duty directly to the claimant in circumstances where it was acting as the agent of AIS and had no direct dealings with the claimant or its manager.
- I will address in turn the claims made by the claimant against Insurers and against its brokers. Before doing so, however, I will first describe the factual background in more detail and make findings on certain disputed questions of fact.
B. FACTUAL BACKGROUND
- The contract of insurance under which the claim is made was effected by way of a declaration to a lineslip operated by the placing broker, OAMPS. A lineslip is a facility whereby a number of insurers authorise one or more leading underwriters to accept on their behalf risks presented by a particular broker, provided the risks fall within a pre-defined scope. As described in MacGillivray on Insurance Law (12th Edn, 2012) at para 2-034, a facility of this kind is not a contract of insurance but "is in the nature of a standing offer by subscribers to be bound to particular risks by their designated underwriter." Such a facility assists the broker in placing insurance as it avoids the demands of having to broke each risk individually to each insurer. It is also convenient for insurers as it provides them with simple access to business.
- At the relevant time OAMPS had two lineslips which were led by Travelers Syndicate 5000 ("Travelers"), which is represented in this action by the first defendant. One was for yachts with a value below US$/10m; the other lineslip, under which the insurance of the Galatea was placed, was for "mega yachts" with a value in excess of US$/10m up to US$/50m.
- Under the terms of the relevant lineslip, Travelers was designated as the "slip leader". To bind or alter an insurance contract written under the lineslip required the agreement of both the slip leader and the second defendant, Royal & Sun Alliance Insurance PLC ("RSA").
- The way in which the lineslip operated in practice was as follows. To obtain a quote for insurance, OAMPS would draw up a quotation slip and take it to Travelers to review and rate. If Travelers agreed to quote for the risk and the quotation was accepted by the prospective assured, OAMPS would then prepare a formal declaration to bind the risk. After the declaration was signed by Travelers, it would be taken to RSA to sign. Provided that RSA accepted the declaration, the following market would be bound.
- Unlike insurance on commercial vessels, yacht insurance business is typically written on the basis of proposal forms. The brokers who placed business with Travelers tended to have their own proposal forms. That was true of OAMPS. When broking a risk under one of the lineslips led by Travelers, OAMPS would either present a completed proposal form with the quotation slip or would ask Travelers to quote subject to receiving a satisfactory proposal form before inception (or if time was short, within a short period after inception).
- At the relevant time the senior yacht underwriter at Travelers was Mr John Higham. His deputy was Mr Jason Stephenson. The senior yacht underwriter at RSA was Mr Wesley Absolom. The broker at OAMPS who placed the policy in this case was Mr Lee Ranson. The broker at AIS who instructed OAMPS was Mr Colin Birch. All these individuals were witnesses at the trial.
- As described in more detail below, the contract of insurance in this case ("the policy") is contained in a declaration made under the lineslip which was signed by Travelers on 13 April 2011 and by RSA on 14 April 2011. The insurance was bound subject to a satisfactory proposal form. A proposal form was presented to Travelers and scratched by Mr Stephenson on 17 May 2011. The period of cover, as finally agreed, was from 13 May 2011 to 12 May 2012.
- Under the policy the Yacht was insured against all risks for an agreed value of 13m. This cover was split between two separate sections of the policy: Section A, which provided Hull and Machinery cover in an amount of 9.75m; and Section B, which provided cover for the "Increased Value of Hull and Machinery" in an amount of 3.25m. I will consider the inter-relationship of these sections in more detail later. Essentially, however, the rationale for the split was that the Increased Value section provided cover only for a total loss (measured by reference to the limit of cover under Section A) and thus carried a significantly lower rate of premium than Section B.
- The policy incorporated the American Yacht Form R12 (the "R12 Clauses"). In addition, the Increased Value cover under Section B was subject to the American Institute Increased Value and Excess Liabilities Clauses (the "IV Clauses").
- The claimant purchased the Yacht in May 2007 for 13m. The Yacht, which was new when purchased, was manufactured in Italy by Riva, which is part of the Ferretti Group. The model was known as the "Athena 115" reflecting the fact that the boat was 115 feet, or about 35 metres, in length. Only nine Athena 115 yachts were built, of which "Galatea" was the second. She was customised for the claimant so that she had four cabins and a sky lounge, whereas the other Athena 115s had five cabins.
- The claimant is a company incorporated in the British Virgin Islands whose ultimate beneficial owner is a wealthy businessman, Mr Filaret Galchev, and the Yacht was acquired as a pleasure vessel for the use of Mr Galchev and his family. From June 2007 until January 2009 the sole director of the claimant was Mr Andreas Nianias, a former banker who works for Mr Galchev and assists in managing his private assets. In January 2009 Mr Nianias was replaced as the sole director of the claimant by Mr Ilias Kaltsidis. Mr Kaltsidis is a nephew of Mr Galchev and describes himself as Mr Galchev's "first assistant". Both Mr Nianias and Mr Kaltsidis gave evidence at the trial, although Mr Galchev did not.
- From November 2008 the Yacht was professionally managed by A1 Yacht Trade Consortium SA ("A1"). A1 is one of the leading international managers of luxury yachts. It is based primarily in Greece but has offices in a number of countries. A1 provides a range of services for owners of luxury yachts, including management, brokerage, chartering and provisioning. It manages some of the largest private yachts in the world.
- The yacht brokerage and yacht management departments of A1 are managed by Mr Andreas Polemis, who is Joint Managing Director of A1. His assistant, since 2007, has been Ms Paraskevi Koronaiou. Both Mr Polemis and Ms Koronaiou were called as witnesses by the claimant.
- A formal management agreement between the claimant and A1 was entered into on 27 February 2009. One of the services which, under the terms of the agreement, A1 undertook to provide was arranging and maintaining all the insurances in connection with the vessel in accordance with the claimant's instructions. In the event, as described below, until 2011 the claimant arranged insurance for the Yacht without A1's assistance.
The MTC valuation
- In November 2009 A1 was asked by Mr Nianias to obtain a valuation of the Yacht. It appears that the request emanated from Mr Galchev's accountant who was conducting an exercise to assess the value of his assets. A1 instructed a firm of professional valuers, MTC Company Limited, who inspected the yacht on 17 November 2009 and issued a valuation certificate stating their opinion that the sound market value of the Yacht inclusive of VAT as at that date was in the region of 8.5m. Excluding VAT (which was not paid on the purchase price of the Yacht), this valued the Yacht at around 7m.
- On 25 November 2009 Ms Koronaiou sent a copy of the MTC valuation certificate by email to Mr Nianias and filed the original document. It appears that neither Mr Nianias nor anyone at A1 gave any further thought to this valuation or had regard to it when arranging insurance for the Yacht. The certificate came to light after the loss, in April 2012, when Bargate Murray who were the claimant's solicitors at that time specifically asked A1 whether any valuations of the Yacht had ever been carried out.
Purchase of the "Sapphire"
- In April 2011 Mr Galchev took delivery of another, bigger and much more expensive yacht which was named "Sapphire". The Sapphire was around 73 metres in length and had been custom built by a German manufacturer, Nobiskrug. The purchase price was 65m. The Sapphire was not owned by the claimant but by a different company also under the ultimate control of Mr Galchev. A1 was appointed to manage the Sapphire as well as the Galatea.
- When this new yacht was acquired, Mr Galchev was interested in selling the Galatea.
The March 2011 email
- On 2 March 2011 Mr Polemis sent an email to Mr Galchev and Mr Kaltsidis. In this email (the "March 2011 email") Mr Polemis referred to the fact that he had received an enquiry from a broker acting for a client who had expressed interest in Galatea. Mr Polemis went on to say that he had "also made a research on your behalf in order to guide you for the price status of such a yacht". Mr Polemis reported that the Riva Athena 115 was now being built only on request and that the list price for building a brand new Athena 115 was 12m. Mr Polemis had also established that there was no other used Riva Athena 115 for sale. His email continued:
"If you ask me for a valuation, I would comment:
The identical Ferretti 112' of 2007-2008 is LISTED from 6 to 7.3m euro.
Various other same category yachts 2007-2008 are LISTED from 5 to 5.6m euro.
The smaller Riva 92' called Duchessa of 2008 is LISTED between 5 to 5.5m euro in various broker sites.
Taking the above into consideration I would say the Galatea should be listed for 8.5m MAX and you should be happy to get 7m NET to your pocket.
Hope the above comments would be of assistance to you to set her asking price."
- The expression of interest referred to in this email had come from a broker in Qatar. The broker had contacted Mr Kostis Pontifex of Ekka Yachts SA, a yacht broker which specialises in Italian luxury boats and represents the Ferretti Group in Greece. On 1 March 2011 Mr Pontifex sent an email to the Qatar broker stating:
"We contacted the owner of the Riva 115 with hull #2 which is in Athens, Greece. He is interested to sell her, BUT he wants to hear an offer for you. ...
Waiting an offer indication ... subject to viewing, testing
On the same day the broker replied:
"We have a client for 8 million euros, please forward this to the owner."
- Mr Pontifex gave evidence for the claimant at the trial as an expert valuer. He said that this enquiry was handled by a colleague of his at Ekka Yachts, Mr Themelis. Mr Polemis gave evidence that he recalled a telephone conversation with Mr Themelis in which Mr Themelis said that he had a potential purchaser for a yacht such as Galatea, that this potential purchaser had a budget of 8m and that he thought this price was about right for Galatea. It is likely that it was this conversation which led to the March 2011 email.
- It is apparent that nothing further came of this expression of interest. I find that the most likely reason for this is that the client of the Qatar broker decided not to pursue the enquiry any further. Although Mr Pontifex said in evidence that he thought the reason was that Mr Polemis of A1 responded to this expression of interest by saying that the Yacht was not for sale, I am satisfied that Mr Pontifex was mistaken in suggesting this. It is clear from the March 2011 email and subsequent events that Mr Galchev was indeed interested in selling the Galatea and that, if someone had shown serious interest in buying her for a price of around 8m, negotiations would certainly have ensued.
Marketing the Yacht
- From early May 2011 onwards, A1 marketed the Yacht for sale. In particular, the documents disclosed by the claimant show the following:
i) The brokerage department of A1 first proposed the Galatea for sale in messages sent to other brokers on 9 and 10 May 2011.
ii) On 11 May 2011, A1 sent an advertisement to Boats & Yachts for publication in the June edition. The advertisement included the asking price of 8m.
iii) By 17 May 2011, A1 had received an enquiry from Burgess (a large yacht broker) asking for full information and images and saying that they "might have a client". In sending the specification and pictures of the Yacht in response to this enquiry, Mr Karalis (the broker at A1 responsible for marketing the Yacht) mentioned that the asking price was 8m but said that it was negotiable.
iv) On 2 June 2011, a full advertisement with professional photographs of the Yacht was sent to various brokers. The advertisement was also published in various yacht publications and on 9 June 2011 Brokerage News reported news sent by Mr Karalis of A1 that "he's signed the 35.4m motor yacht Galatea for sale".
v) On 8 June 2011, A1 sent another circular announcing their appointment as central agents for the sale of the Yacht, described as being in "turn key condition" with an asking price of 8m.
vi) On 12 September 2011 Mr Karalis replied to a broker who asked how long the boat had been on the market that the Galatea had been for sale "since the 73m new build megayacht was delivered to the owner, last May".
vii) On 3 November 2011 the description of the Yacht in A1's circular was revised to state "Two-yacht owner wants her sold".
viii) At around the same time A1 approved the proof for an advertisement of the Yacht to go in the December issue of Boat & Yachts.
ix) At the time of the fire the Yacht was listed on the Boat International website and this listing was not in fact removed until February 2012.
- In all, the documents disclosed by the claimant record 12 requests for more details of the Yacht and at least seven expressions of interest, including from big yacht brokers such as Burgess, Camper & Nicholsons and Edmiston.
The claimant's marketing instructions
- Mr Kaltsidis gave evidence that neither he nor Mr Galchev ever authorised A1 to advertise the Yacht for sale with an asking price of 8m. Mr Kaltsidis said that, when he received the March 2011 email, he did not agree with the advice of Mr Polemis. He personally thought that the Yacht was worth 10-11m and should be advertised at such a price. He said that he told Mr Polemis this and understood Mr Polemis to agree with him. Mr Kaltsidis said that he was not asked to approve any of the advertisements and was not aware that the Yacht was being advertised with an asking price of 8m until a few days before the fire, when he found this out. He then asked Mr Polemis to take the advertisement down because the asking price was too low. Mr Kaltsidis attributed the fact that the Yacht had been marketed by A1 at a price of 8m for some seven months to a "misunderstanding" between himself and Mr Polemis.
- Mr Polemis in his evidence on this point gave the impression that he was trying to support the claimant's case while at the same time not accepting that A1 had acted without its client's authority. This was a difficult course to steer. On the one hand, Mr Polemis said that he would not have marketed the Yacht without instructions from Mr Kaltsidis to do so. He was equivocal, however, about whether the asking price of 8m was specifically approved by Mr Kaltsidis. Mr Polemis said that Mr Kaltsidis had merely asked him to "fish the market" and that brokers such as A1 often "do tricks" to test the reaction of the market. Mr Polemis also said that he remembered a conversation with Mr Galchev some time in the summer of 2011 in which Mr Galchev mentioned that he was minded not to sell Galatea as he had good memories of using her and no real reason to sell, and that he might want to give the Yacht to his daughter. Mr Polemis said that this was a very casual conversation but that, after this, A1 stopped actively marketing the Yacht for sale although they did not take down the advertisements which had been placed online for the vessel.
- I reject as false the evidence given by Mr Kaltsidis and much of the evidence given by Mr Polemis on this point. I regard it as inconceivable that A1 would have advertised the Yacht for sale with an asking price of 8m unless they had been given express instructions to do so. It is notable that the figure of 8m was slightly lower than the 8.5m which Mr Polemis had recommended in the March 2011 email as the maximum price for which the Yacht should be listed. In the last sentence of that email Mr Polemis expressed the hope that his comments would be of assistance to Mr Galchev and Mr Kaltsidis in setting an asking price. I am sure that a specific decision to set the asking price at 8m was made following receipt of the email. My impression is that the decision was of sufficient importance that it would have been taken by Mr Galchev himself, although it is likely to have been communicated to Mr Polemis by Mr Kaltsidis. I am sure too that the instruction to market the Yacht at an asking price of 8m was never revoked and that, if it had been, A1 would not have continued to advertise the Yacht at this price.
- It is possible that there was a very casual conversation some time in the summer of 2011 in which Mr Galchev told Mr Polemis that he had fond memories of using the Galatea and would be sorry to sell her. There is no indication, however, that the level of A1's marketing activity changed at that time or at any time before the fire, and I am confident that any such conversation was not understood by Mr Polemis to signify any change in his client's instructions.
- The signs are that Mr Galchev was not in a rush to sell the Galatea and wanted to try to get the best price that he could. Thus, the Yacht was not laid up for sale and was kept ready for use. Moreover, the asking price was pitched higher than the amount of 7m which Mr Polemis had advised Mr Galchev that he should be happy to get. Although there was not much interest shown at the advertised price, at the time of the fire no decision had yet been taken that the asking price should be reduced.
Previous years' insurance
- For three years from 15 May 2008 to 14 May 2011, the Yacht was insured with Allianz Suisse Insurance Company against all risks for an agreed value of 13m. The insurance was arranged on behalf of the claimant by Mr Nianias through a firm of insurance brokers in Switzerland. A1 was not involved in arranging the insurance with Allianz. There was an occasion, however, in early 2009 when A1 obtained a quotation for insurance of the Yacht which was not taken up.
The 2009 quotations
- This occurred at the end of January 2009, some two months after A1 was engaged to manage the Yacht. Mr Birch of AIS was an insurance broker working in Athens who knew Mr Polemis and was also friendly with an Englishman who worked for A1 called Mr Mike Brewer. Mr Polemis knew that Mr Birch was a route by which A1 could obtain insurance for the Yacht at Lloyd's in London. On 27 January 2009 Mr Polemis asked Ms Koronaiou to send a copy of the Galatea's current insurance document to Mr Brewer for him to forward to Mr Birch. Mr Brewer did so, asking Mr Birch for his opinion on the current insurance and "also if you have something better to offer".
- The document sent to AIS contained a summary of the terms of the Allianz policy including the gross annual premium of 60,823. AIS sent a copy of this contract summary to two insurance brokers in London. One of them was Mr Ranson at OAMPS. Mr Ranson approached Mr Higham of Travelers and obtained a quote for insuring the Galatea under the lineslip with an insured value of 13m.
- The Travelers quote was sent by OAMPS to AIS on 3 February 2009. Nothing came of it, as Mr Birch did not consider the quote sufficiently competitive and did not forward it to A1. Instead, he pursued another contact in the London market and obtained a quote with a significantly lower premium of 50,000. This was sent on 13 April 2009 to A1 who forwarded the quote to Mr Nianias. However, Mr Nianias did not accept the quote and decided to renew the Allianz policy.
- The Allianz policy was again renewed by Mr Nianias for the 2010-11 year. For the year 2011-12, however, alternative quotations were again sought.
The January 2011 quotations
- In January 2011 Mr Ranson of OAMPS was again asked to obtain a quotation for insurance of Galatea on terms matching the Allianz policy including the insured value of 13m. On this occasion the instructions did not come from AIS. Mr Polemis had asked a Greek insurance broker whom he knew, Mr Kalivas, at a firm called "Life Partners" to obtain a quote. Life Partners had an association with another broker, EXL, who contacted a London broker called InetAssure, who in turn approached OAMPS. InetAssure was sent, and forwarded to Mr Ranson, a copy of the Allianz contract summary for the 2010-11 year to show the terms which the quote needed to beat. Mr Ranson again obtained a quote from Mr Higham at Travelers and another one from Groupama. As the Groupama quotation was the cheaper of the two, only this quote was sent by OAMPS to InetAssure and passed back by Mr Kalivas of Life Partners to A1.
- It seems clear that Mr Kalivas was told at one stage by Mr Polemis that he had won the order. On 3 February 2011 and again on 11 March 2011, InetAssure sent emails to OAMPS reporting that the quotation from Groupama was going to be taken up. As late as 26 April 2011 Mr Kalivas was asking to know "what to do with the insurance of Galatea as the renewal date approaches". By this time, however, the claimant had already accepted a different London market quotation. That quotation, obtained through AIS, became the policy which is the subject of this action.
The instruction of AIS
- In late March 2011 Mr Galchev and Mr Kaltsidis were anticipating the delivery of the new yacht later named "Sapphire", and A1 was asked to arrange insurance for her. Mr Polemis believed that the best place in which to seek such insurance was the London market. He instructed AIS to obtain a quote. It is not clear why Mr Polemis decided to use Mr Birch of AIS for this purpose rather than Mr Kalivas of Life Partners, but I think the most likely explanation is that he regarded Mr Birch as having much greater expertise in arranging insurance in the London market than Mr Kalivas, and while he was prepared to use Mr Kalivas for what was seen as a simple renewal of insurance for the Galatea, he preferred to use Mr Birch for this very important piece of new business.
- On 29 March 2011 Ms Koronaiou of A1 sent an email to Mr Birch instructing him:
"As there is going to be a new delivery for a 73m new building megayacht, please be so kind to make your best offer for its insurance."
It is apparent from the email sent by Mr Birch the next day in reply that he must have spoken to Ms Koronaiou and learnt that the owner of the new yacht also owned the Galatea. Mr Birch suggested in his email that, at the same time as obtaining a quotation for the new yacht, he would also be able to get a "very competitive indication" for the Galatea.
- On 4 April 2011 Mr Birch sent an email to Mr Ranson at OAMPS giving details of the new yacht received from Ms Koronaiou and asking for an indication "sub to prop" (i.e. subject to a proposal form) for insurance of the new yacht and also for the Galatea. In the email Mr Birch said that the managers, A1, had been "friends and clients of mine for many years" and described them as "very serious people" who "have offices on every island in Greece". The details for the new yacht included a proposed sum insured of 65m. For details of "the other vessel owned by the same people" (i.e. the Galatea) Mr Birch attached a link to a website which listed the specification of the Galatea including such information as the manufacturer, year of launch, length, cruising speed etc. In his email instructing Mr Ranson Mr Birch also wrote that:
the current insurance expires on around the 14th April the vessel is currently valued at 13,000,000 Euros, no claims have been reported. ... I can advise that under their current policy with Allianz the premium is 60,000, including all the frills and spills P&I and Pa, Ded hulls 30,000."
- Some of the information given by Mr Birch in this email about the current insurance policy for the Galatea was incorrect. In particular, the Allianz policy expired on 14 May and not 14 April, and the premium was just over 55,000 and not 60,000. It was suggested by counsel for the claimant that the likely source of Mr Birch's information about the Allianz policy was the contract summary for the year 2008-09 which he had been sent when asked to obtain a quote for insurance of the Galatea two years earlier in 2009. The main basis for this suggestion was the fact that the premium under the Allianz policy in 2008-09 was 60,823, whereas in 2010-11 the premium was 55,233.
- For several reasons, I think it improbable that, when sending his email dated 4 April 2011 to OAMPS, Mr Birch looked back at the Allianz contract summary for 2008-09 and derived his information about the Allianz policy from that source. In particular:
i) Mr Birch said in evidence that in April 2011 that he had forgotten that he had obtained a quote for insurance of the Galatea two years earlier. Whether that was so or not, I see no reason to suppose that, even if he had a recollection of obtaining such a quote, he would have thought it useful to search through the box files kept at AIS to see what information he had been sent two years before.
ii) Even if Mr Birch had found and looked at the 2008-09 Allianz contract summary, it would not have told him that the vessel was "currently valued" at 13m nor that the premium figure of 60,000 was still current. It would only have told him what the sum insured and premium had been two years earlier, which might well not be the current figures. Mr Birch would, on the other hand, have been able to take from that document details of the specification of the Yacht instead of relying, as he in fact did, on the fruits of an internet search.
iii) The understanding that "the current insurance expired on around the 14th April" could not have come from the 2008-09 contract summary and was indeed inconsistent with it as that document showed the renewal date to be 14 May.
- I find that the most likely source of Mr Birch's information about the current policy with Allianz was a telephone conversation with Ms Koronaiou. How she came to make the mistakes about the current premium and the renewal date is unclear, but I have noticed that, when seeking a quotation earlier in the year, EXL had been erroneously advised evidently by A1 that the Yacht's current insurance expired on 15 April 2011.
Obtaining the April 2011 quotations
- On receipt of the instruction email from AIS sent on 4 April 2011, OAMPS obtained quotations for the new yacht and for the Galatea from Mr Higham at Travelers. Mr Ranson recalled and I do not doubt his recollection that Mr Higham was very excited at the prospect of writing such substantial business.
- Quote slips for insurance under the lineslip were scratched by Mr Higham and sent as email attachments by Mr Ranson to Mr Birch on 5 April 2011. Mr Birch forwarded the quotations to Mr Polemis and Ms Koronaiou at A1 on the same day, describing them as "extremely competitive". Both quotations were "subject to satisfactory proposal form and crew details prior to inception". Mr Ranson included this subjectivity when preparing the quote slip because he knew from experience that, where no proposal form was yet available, Travelers would have added this subjectivity when giving a quote if it had not already been included in the slip.
- On 12 and 13 April 2011 there were telephone conversations involving Mr Polemis, Mr Kaltsidis and Mr Nianias to discuss the insurance of the two yachts. Mr Kaltsidis decided to accept the quotations for insuring both yachts at Lloyd's which had been obtained by AIS. Mr Birch was informed of this decision by email, and he in turn notified Mr Ranson by email, on 13 April 2011. Because it was believed (wrongly) that the current insurance for the Galatea was about to expire, Mr Birch instructed Mr Ranson to hold the Galatea covered "sub[ject to] prop[osal form]".
- On receiving the order, Mr Ranson sent to Mr Birch by email a blank proposal form to use for both vessels, which Mr Birch sent on to Ms Koronaiou at A1. The form was a standard proposal form designed and used by OAMPS, headed "Mega yacht Insurance Application".
- Mr Ranson prepared declarations for each of the two yachts and took them to Travelers on the same day (13 April 2011). He saw Mr Higham's deputy, Mr Stephenson, who scratched the declarations. The declaration for the Galatea stated, opposite the description "subjectivities":
"Subject to satisfactory proposal form and crew details within 7 days of inception."
On the following day (14 April 2011) Mr Ranson saw RSA's underwriter, Mr Absolom, and obtained his signature on the declarations. Mr Ranson then informed Mr Birch by email that the risks had been bound.
- Mr Birch had by this time found out that the existing insurance of the Galatea did not in fact expire for another month. On the morning of 15 April 2011 he sent an email to Mr Ranson confirming a telephone conversation the previous evening in which he had informed Mr Ranson that Galatea "will attach on the 15 May as this is when their existing insurance expires". Mr Ranson accordingly returned to the market and obtained the agreement of Travelers and RSA to the amended inception date.
Completing the proposal form
- On 14 April 2011 Ms Koronaiou partially completed proposal forms for the Galatea and for the Sapphire. On each form she left blank several of the items of information requested, including the "purchase date" and "purchase price" and a section headed "Amount of Coverage". Each proposal form was signed by Ms Koronaiou on behalf of the insured and dated 14 April 2011.
- It is common ground that Mr Birch attended the offices of A1 on that day. Ms Koronaiou said in evidence that she remembered sitting in the office of Mr Brewer at A1 going through the proposal forms with Mr Birch. In his evidence Mr Birch said he thought that Ms Koronaiou had filled out the proposal forms before he arrived and that he may have just picked them up. I think it more likely that Ms Koronaiou completed the proposal forms (to the extent that they were completed) when Mr Birch was present. There would have been no point in Mr Birch making what he said was a 45 minute journey each way to visit A1's offices simply to collect documents which could just as well have been sent as email attachments. Ms Koronaiou said in evidence that she had never previously completed a proposal form for yacht insurance. Even though Mr Birch may not have known this, I think it probable that the purpose of his visit was to provide any explanation and assistance required by Ms Koronaiou. It is therefore logical to conclude that she is right in recalling that she filled out the forms and signed them when Mr Birch was present.
- When Mr Birch returned to his office with the two proposal forms on 14 April 2011, they were scanned and sent as email attachments to Mr Ranson.
- Two weeks later on 28 April 2011 Mr Birch re-sent the proposal forms to Mr Ranson. Mr Ranson did not, however, present the proposal form for either yacht to underwriters at that time.
- On 9 May 2011 Mr Birch sent an email to Mr Ranson in which he said:
"Attached please find completed proposal as requested please incept cover as of Friday 13 [May] 2011."
The document attached to the email was a different version of the proposal form for the Galatea from the version which had previously been sent to OAMPS on 14 and again on 28 April 2011. The difference was that on the document which Ms Koronaiou had signed on 14 April 2011 some further details had now been added by Mr Birch. The information added comprised:
i) the "closing/renewal date", which was entered as 13 May 2011;
ii) the length and speed of the Yacht; and
iii) some figures entered in the section for the "Amount of Coverage", of which the most significant was the figure of "13,000,000" on the line for "hull market value".
- It is likely, and the words "as requested" in the email from Mr Birch suggest, that further information had been included in the proposal form at the request of Mr Ranson. It is impossible to know, however, what exactly prompted Mr Ranson to make this request and why no similar request was made in relation to the proposal form for the Sapphire. There is no obvious reason for the difference in approach, as all the same information which had been missing for the Galatea, apart from the length of the yacht, was also missing for the Sapphire.
- There is a dispute between the claimant and AIS as to how Mr Birch obtained the further information which he entered on the proposal form. The evidence of Mr Birch was that he believes there was a second meeting between himself and Ms Koronaiou and that at this meeting she supplied additional details which he entered on the form in her presence. Ms Koronaiou's evidence was confused by the fact that when she made her first witness statement she was only shown the second version of the proposal form. This led her to "remember" that at her meeting with Mr Birch in A1's offices on 14 April 2011 she had filled in some parts of the proposal form and Mr Birch had filled in those parts which were in his handwriting. When it was appreciated by the claimant's solicitors that there were in fact two different versions of the proposal form, Ms Koronaiou made a further witness statement in which she said that she thought it most likely that the sections completed by Mr Birch were filled in by him some time after their meeting without any further input from her. A consistent feature of Ms Koronaiou's evidence was that she only recalled there being one meeting with Mr Birch.
- I find it more likely than not that Mr Birch entered the additional information on the form shortly before he sent it to OAMPS on 9 May 2011 and that he did this on his own, without reference to Ms Koronaiou. My reasons are these:
i) I do not believe that Mr Birch would have thought it necessary to make another journey to A1's offices just to ask Ms Koronaiou to add to the proposal form a few further details which he regarded as entirely straightforward; and apart from his suggestion that he went there, there is no evidence that any further meeting took place.
ii) Furthermore, it would not have given a good impression of Mr Birch's competence if, over three weeks after Ms Koronaiou had filled out and signed at a meeting with him a proposal form which he had led her (by implication if not expressly) to believe was sufficiently completed, Mr Birch had told Ms Koronaiou that the proposal form had still not been submitted but that the information on it was in fact inadequate and more information was required.
iii) If the further information had been added at a meeting with Ms Koronaiou, it is improbable that Mr Birch would have written the further details himself on a document on which all the previous entries had been made by Ms Koronaiou and which she had signed; rather he would have asked her to do so.
iv) Although the renewal date of 13 May 2011 must have reflected a further instruction received from A1, Mr Birch did not need to meet Ms Koronaiou in order to be told this date. Nor did he need to speak to her at all to find out the length and speed of the Yacht, which were available on the website to which he had previously referred Mr Ranson. Nor do I believe that he thought it necessary to speak to her in order to complete the details in the section headed "Amount of Coverage", which he regarded as already established.
v) It appears from researches carried out by the claimant's solicitors that A1 did not have a copy of the final version of the proposal form in their possession until after the fire on Galatea, when they were provided with a copy of it by AIS on 28 December 2011.
vi) If the further answers had been added to the proposal form with Ms Koronaiou's knowledge and authority, I think it likely that Mr Birch would have supplied her with a copy of the amended document, which the evidence suggests he did not.
vii) My conclusion that Mr Birch probably added the further answers to the proposal form without consulting A1 or telling them that he had done so is not inconsistent with my general impression of Mr Birch and of his standard of diligence as a broker.
Presenting the proposal form
- The request made by Mr Birch in his email dated 9 May 2011 to Mr Ranson which attached the revised proposal form to incept cover for Galatea as of 13 May 2011 was the second request made to change the inception date. Mr Ranson's reply on 10 May expressed his frustration at this:
"Don't say it's now the 13th May attachment! We bound this on the 13th April you then came back and said the actual attachment date was 15 May
. Can you please confirm the correct date of inception before underwriters rip my head off."
Mr Birch responded:
"Please apologise to underwriters as we are led by our clients, the inception is definitely Friday the 13th."
The reason for this second change to the inception date is unclear, as the existing Allianz policy was valid from 15 May 2010 until 14 May 2011, and 15 May 2011 therefore appears to have been the correct inception date.
- Mr Ranson duly arranged for the declaration to be amended once more to show the policy period as being from 13 May 2011 to 12 May 2012. Mr Ranson gave evidence that he believed that this amendment was made on or about 10 May 2011. It is not clear why he did not present the proposal form at the same time as obtaining the underwriter's agreement to this amendment.
- On 13 May 2011 (i.e. the date on which the cover incepted) Mr Ranson sent a cover note for the Galatea to Mr Birch by email. The cover note recorded the subjectivities as "none". It was Mr Ranson's evidence that, when converting the declaration into a cover note on OAMPS' computer system, he would have had to delete manually the subjectivity which was contained in the declaration. Mr Ranson's explanation for why he did this was that he was confident that underwriters would accept the proposal form as satisfactory when it was presented to them.
- Mr Ranson took the proposal form for Galatea to Travelers on 17 May 2011. He saw Mr Stephenson. Mr Stephenson scratched the proposal form with his initials, the date and the words "Please make assured aware of cruising and condition precedent". The reference to "cruising" was to the fact that the geographical scope of cover was limited to the Mediterranean Sea excluding Libya and the reference to "condition precedent" was to the fact that the declaration included as a condition precedent to the validity of cover "No towing of tenders".
- The obvious meaning of Mr Stephenson's initialling of the proposal form was that he accepted it as satisfactory, thus removing the subjectivity. Although I should have reached this conclusion in any event, I note that it was the unanimous view of all the broking and underwriting experts that this is how the underwriter's act of scratching the proposal form would be understood in the market.
- The proposal form for the Sapphire was also scratched by Mr Stephenson on 17 May 2011 and it is likely that Mr Ranson presented the proposal forms for both yachts at the same time. The declaration for the Sapphire had provided:
"Subject to satisfactory proposal form and crew details prior to inception."
The original inception date for the Sapphire policy was 15 April 2011, which was then amended to 21 April 2011. OAMPS received the proposal form for Sapphire from AIS on 14 April 2011 at the same time as the first version of the proposal form for Galatea. It was not until 17 May 2011, however, some 26 days after the inception date, that the Sapphire proposal form was presented to Travelers. It does not appear that Mr Stephenson raised any point about this.
- On the Sapphire proposal form, as on the proposal form for the Galatea, the entries for "purchase date" and "purchase price" had been left blank when the form was signed and dated by Ms Koronaiou on 14 April 2011. So too had the section of the form headed "Amount of Coverage". Unlike the proposal form for Galatea, however, no further information was subsequently added to the proposal form for Sapphire, and so the "Amount of Coverage" section remained blank when the Sapphire proposal form was presented to Mr Stephenson on 17 May 2011. Mr Stephenson's response was to write on the proposal form the amounts of cover which had been agreed in the declaration for Hull and Machinery (39m) and the Increased Value of Hull and Machinery (26m). As with the Galatea proposal form, he also wrote "Please make assured aware of cruising and condition precedent" and scratched the form with his initials and the date.
- Neither of the two proposal forms was scratched by RSA. RSA's underwriter, Mr Absalom, confirmed Mr Ranson's evidence that an understanding had been reached with OAMPS that quotations and proposal forms need not be shown to RSA, but only declarations. On the question of whether a proposal form was satisfactory, RSA was therefore content to defer to Travelers.
Expert evidence of market value
- The claimant and the Insurers each adduced evidence from an expert valuer as to the market value of the Galatea in May 2011. The claimant's expert, Mr Pontifex, estimated the market value of the Yacht at that time at just under 10m. By contrast, the opinion of the Insurers' expert, Mr Maclaurin, was that the market value fell within a range between 3.5m and 4.5m. For reasons which I will explain later, I do not think that it is in fact necessary to make any finding about the "true" market value of the Galatea in order to decide this case. If required to do so, however, I would find that the market value of the Yacht in 2011 was somewhat lower than the figure of 7m which Mr Polemis advised in his March 2011 email that the owner should be happy to get, and that a realistic figure would be 5-6m.
- I do not feel able to place any reliance on the opinion of Mr Pontifex. Mr Pontifex based his valuation primarily on his sense of the amount by which, after four years, a Riva 115 yacht could be expected to have depreciated as a percentage of the original purchase price. His opinion was that, if maintained in very good condition as he understood the Galatea to have been, the depreciation in value of such a yacht over that period would be of the order of 25%. Applying such a discount to the purchase price of 13m produced a value of approximately 9.75m.
- Mr Pontifex did not, however, point to any objective evidence to support his estimate of depreciation. Moreover, his method seemed to me to be flawed as it took no or no apparent account of market conditions. I accept the evidence of Mr Maclaurin, based on his many years of experience in working for one of the world's largest yacht brokers, that the amount by which a yacht depreciates, and indeed whether it depreciates at all, in its first few years of use is heavily dependent on the state of the market at the relevant time. There is accordingly no such thing as a typical or expected rate of depreciation. Mr Pontifex also placed considerable weight on his view of Riva as at the "absolute top end" of the range of yacht manufacturers, a view which I felt was probably influenced by the fact that his company represents Riva in Greece and his natural pride in the Riva brand. His view on this point was not shared by Mr Maclaurin nor by any other witness the general perception being that Riva is well regarded but not seen as being at the very top end.
- Mr Maclaurin's valuation was based on a review of the asking prices of yachts broadly similar to the Galatea which were on the market for sale in 2011. He compiled a list of 13 such yachts. These included the "Iona G", another Riva 115, built in 2008 with five cabins, which was advertised for sale in late 2011 at a price of 6.9m. (No sale was achieved and this yacht remains on the market with a lower asking price of 4.95m.) The average asking price of the 13 yachts was 5.68m, and Mr Maclaurin took the view that the asking price for the Galatea could sensibly have been set in a range of between 4.95m to 6.95m, depending on the owner's appetite to achieve a quick sale. To arrive at his estimated sale price, he applied a discount of 30% to the average asking price. This reflected the average discount to the asking price agreed on sales of second hand yachts broked by his company between 2010 and 2012. Applying this discount produced a figure of approximately 4m. Mr Maclaurin estimated that the sale price for the Galatea would fall within a range of 0.5m on either side of this figure.
- Mr Maclaurin did not include in his list of broadly comparable yachts another Riva 115, the "Cleopatra", which was built in 2009 (i.e. two years after the Galatea) and was on the market in 2011 with its list price on application. He had evidence, however, that the asking price for the Cleopatra was 9.8m and I cannot see that his view that this asking price was too high, which was the reason he gave, was a legitimate reason for excluding the Cleopatra from his analysis. The need to discount asking prices in estimating a sale price was already built into his approach and omitting the Cleopatra biased his sample. A further factor which seems to me likely to make his average asking price understated is his acknowledgement that the Riva brand is a higher quality yacht than some in his comparison table. Another bias occurred at the stage of calculating the 30% discount factor. Some 25% of the sales made in 2011 which were included in the calculation of this average were forced sales by banks a type of sale which, as Mr Maclaurin accepted, was likely to depress the price and which was not apposite to a sale of the Galatea. It is not possible to quantify the overall effect of these biases, but it seems to me that they make Mr Maclaurin's estimates too low.
- In making a judgment about the market value of the Yacht, two pieces of hard evidence are that the Galatea attracted little interest at the list price of 8m and that neither of the other (slightly newer) Riva 115 yachts marketed for sale in 2011 was sold, tending to suggest that their asking prices were also too high. I cannot regard the fact that the Galatea had four cabins and a sky lounge, whereas they each had five cabins, either as an advantage (as Mr Pontifex claimed) or a disadvantage (as Mr Maclaurin suggested); it seems to me that it must depend on the preference of the individual buyer. My sense of the matter, taking account of Mr Maclaurin's evidence but making allowance for the factors I have indicated, is that a realistic estimate of the price for which the Galatea could have been sold or a comparable yacht purchased in 2011 is in the range of 10-30% below the price at which the Iona G was listed or the figure of 7m which Mr Polemis told Mr Galchev he should be happy to get. That puts the market value of the Yacht in the region of 5-6m.
Why did the claimant insure the Yacht for 13m?
- When the decision was made on 13 April 2011 to accept the quotation from Travelers to insure the Yacht under the lineslip, the claimant did not of course have the benefit of the opinions of Mr Pontifex and Mr Maclaurin. The claimant had, however, received the MTC valuation and more recently the March 2011 email, both of which indicated that the market value of the Yacht was substantially less than 13m, and Mr Kaltsidis and Mr Galchev were considering the price at which the Yacht should be listed for sale. By 9 May 2011 at the latest, instructions had been given to A1 to put the Yacht on the market at an asking price of 8m. In these circumstances it is pertinent to ask why the claimant insured the Yacht for a much higher sum.
- The claimant's case at trial was that the Yacht was deliberately insured for her purchase price. Mr Nianias gave evidence that, when insuring the Yacht with Allianz, his instructions were to obtain insurance for the price paid to purchase the Yacht and he maintained the cover in this amount in order to preserve the value of Mr Galchev's investment and because this was what it would cost to buy a new yacht to replace the Galatea. He said that he never gave any thought to the Yacht's market value and, although he received the MTC valuation in November 2009 and passed it on to Mr Galchev's accountant, he did not see it as having anything to do with the insurance. Mr Kaltsidis also said in his witness statement that the Galatea was always insured for 13m because this was the purchase price paid for the Yacht. As it would also be the approximate cost of buying a new replacement yacht, there was no reason to consider the level of insurance as inappropriate. The decision taken by Mr Kaltsidis on 13 April 2011 to accept the Travelers quote was the first time that Mr Kaltsidis was directly involved in the renewal of the insurance. In his oral evidence he said that the question of the Yacht's market value never arose in the context of discussing the insurance and nobody suggested to him that it was relevant.
- In so far as Mr Nianias and Mr Kaltsidis suggested that a deliberate decision was made to insure the Yacht for a value higher than the current market value, I reject their evidence. The reality, as I see it, is that the Yacht was initially insured for the cost of purchase, which was the natural measure of value to take when the Yacht was new, and cover was then simply renewed in the same amount from year to year without any thought being given to whether it was still the appropriate value for insurance. I am sure that Mr Nianias and Mr Kaltsidis were truthful in saying that they never saw any connection between advice received about the market value of the Yacht and the renewal of the insurance. I do not accept the suggestion made by Mr Nianias, however, that he purposefully continued to insure the Yacht for the cost of purchase in order to preserve the value of Mr Galchev's investment. That suggestion makes no sense at all when the Yacht was known no longer to be worth what the claimant had paid for it: at that stage the value of the investment capable of being preserved was no longer the purchase price.
- Furthermore, whatever the position previously, once Mr Galchev was interested in selling the Yacht, there was no sensible reason to choose to insure the Yacht for an amount significantly higher than the maximum amount which the claimant could expect to receive from a sale. Nor is there any evidence to suggest that Mr Galchev and Mr Kaltsidis were looking to achieve a better result financially if the Yacht was lost than if the Yacht was sold. There is also no evidence, however, that Mr Polemis or anyone else pointed out to them that it was no longer necessary or appropriate to maintain the insurance cover at the same level as before. Had Mr Kaltsidis received such advice, I see no reason to think that he would not have acted on it and given instructions to renew the insurance for a lower amount. The logical amount of cover to buy would have been the amount which the claimant was hoping to get from a sale, that is, the asking price of 8m.
- I therefore find that the divergence which occurred in this case between the price at which the Yacht was put on the market for sale in May 2011 and the value for which the Yacht was insured came about by accident rather than design.
- As mentioned at the start of this judgment, on 3 December 2011 there was a fire on board the Yacht which caused extensive damage. Surveyors appointed by Insurers attended the scene that same day. They sent a preliminary report to underwriters on 5 December 2011 describing the extent of the damage and advising that "based on the current available evidence it is considered that the vessel will almost certainly prove to be a constructive total loss". A subsequent investigation by an expert appointed by Insurers into the cause of the fire concluded that it was an accident, and probably the result of an electrical fault.
- On 7 December 2011 Ince & Co wrote to OAMPS to say that they had been instructed by Insurers. Their letter contained a general reservation of rights.
- Also on 7 December 2011, Mr Polemis signed a notice of abandonment which had been drafted by Mr Birch. This document was not sent to Insurers, however, on the advice of Mr John Palios, a Greek lawyer who was instructed by the claimant at about that time.
- Arrangements on the claimant's side for handling the claim were formalised in a written Termination and Mandate Agreement between the claimant and A1 dated 20 December 2011. The effect of this agreement was to terminate the previous yacht management agreement between the parties and to appoint and mandate A1 to pursue and manage the insurance claim. Article 3 of the agreement gave A1 in carrying out this mandate a power of delegation to any agent approved in advance in writing by the claimant and specifically authorised A1 to appoint four named individuals. These included Mr Palios and Mr Paul Robson of JLJ Maritime SA (a claims consultant).
- On 22 December 2011 Ince & Co on behalf of Insurers sent a letter to OAMPS, copied to Mr Palios, raising concerns about the placement of the policy. The principal concern raised was that crew details had not been provided along with the proposal form within seven days of inception and the subjectivity in the declaration slip had therefore not been complied with. Other concerns raised in the letter included the facts, of which Insurers had learnt, that the claimant had received an expression of interest in buying the Yacht for 8m in March 2011 and that the Yacht had actually been marketed at that price in May/June 2011 shortly after the policy was placed. In these circumstances Ince & Co expressed concern that the Yacht's value appeared to have been misrepresented to Insurers and that the claimant had failed to disclose that it had decided to sell the Yacht or was at least was seriously considering doing so at the time the risk was bound. The letter then made a series of requests for further information and documentation.
- There had been no response to this letter when Ince & Co wrote again on 27 January 2012 declining cover on the ground that Insurers' liability under the policy had been discharged by reason of failure to comply with the subjectivity regarding the provision of crew details. This letter also repeated the Insurers' further concerns and requests for information and documentation. Mr Palios responded the same day taking strong exception to the Insurers' stance and threatening legal proceedings.
- On 8 May 2012 an English firm of solicitors, Bargate Murray, gave notice that they were now acting for the claimant. In their letter sent that day Bargate Murray pointed out that the proposal form presented to underwriters had contained various crew details and that, by scratching the proposal form, Mr Stephenson had accepted the information provided as sufficient. They invited Insurers to reconsider their position and said that they would be writing further about the quantum of loss.
- On 12 July 2012 Bargate Murray served a notice of abandonment on behalf of the claimant together with a sworn proof of loss. Ince & Co on behalf of Insurers reserved Insurers' rights in relation to both documents on the basis that they had been served late.
- This action was commenced on 28 November 2012. In their Defence served on 25 January 2013, Insurers maintained their contention that they were automatically discharged from liability on 21 May 2011 (seven days after the inception of the policy) because the claimant failed to fulfil the subjectivity. The pleaded grounds of this contention were that the claimant allegedly did not supply satisfactory crew details and that the proposal form was not satisfactory because it "stated, inaccurately, that the market value of the vessel was 13m when, in fact, it was in the region of 8m". Insurers did not, however, claim in the Defence to be entitled to avoid the policy.
- It was not until a year later, on 4 February 2014, that Ince & Co on behalf of Insurers wrote to the claimant's solicitors to give notice of avoidance on the grounds of the claimant's "failure to disclose the material fact that the Yacht's value as at placement was substantially less than 13m and/or the materially incorrect representation in the proposal form to the effect that her market value was 13m". Shortly afterwards, the Defence was amended to plead these defences. By this time, AIS and OAMPS had also been joined to the proceedings.
C. THE CLAIM AGAINST INSURERS
- After the oral opening statements at the start of the trial, the Insurers sensibly abandoned their argument based on the failure to provide satisfactory crew details. That argument was plainly unsustainable when the slip leader had expressly approved a proposal form which contained information about the crew of Galatea. The grounds on which the Insurers have continued to dispute liability are that:
i) They were entitled to and did avoid the policy on account of the claimant's failure to disclose before the insurance was agreed that it had been advised and believed the Yacht to be worth significantly less than the sum insured.
ii) They were in any event not on risk or were entitled to avoid the policy because of a misrepresentation in the proposal form that the market value of the Yacht was believed by its manager to be 13m.
iii) After the loss occurred the claimant lost any right to sue Insurers 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 Insurers.
iv) The claimant cannot in any event recover for a total loss, but only at most for a partial loss in the sum of 9.75m, because it failed to give a valid notice of abandonment.
- I will consider each of these defences in turn.
- For the purpose of this claim, the law governing the duty of disclosure is embodied in section 18 of the Marine Insurance Act 1906 (the Act). Section 18(1) provides that:
"the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract."
Although not explicitly stated in section 18, it has been settled law since the decision of the House of Lords in Pan Atlantic Insurance Co v Pine Top Insurance Co  1 AC 501 that, in order to establish a right to avoid the contract, the insurer must prove not only failure to make the relevant disclosure but also that such failure induced the making of the contract in the sense of causing the insurer to contract on the terms agreed.
- Section 18(3) sets out circumstances which need not be disclosed. These include matters known or presumed to be known to the insurer for which purpose the insurer is presumed to know "matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know". They also include any circumstance as to which information is waived by the insurer.
- The matters which Insurers maintain that the claimant ought to have disclosed in this case are:
i) The MTC valuation;
ii) The March 2011 email;
iii) The decision to market the Yacht and the fact that it was being marketed for sale at an asking price of 8m; and
iv) The belief of the claimant and its manager that the market value of the Yacht was significantly less than the insured value of 13m.
- It is not disputed that these matters were known to the claimant and were not known to Insurers. The claimant denies, however, that the matters were material and that the failure to disclose them induced Insurers to enter into the insurance contract. The claimant also argues that Insurers, by their conduct in handling the claim, waived any right which they otherwise had to avoid the policy by reason of non-disclosure.
- Section 18(2) states that a circumstance is material if it would "influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk". It is also established by the Pan Atlantic case that a circumstance may be material even though, if disclosed, it would not have made any difference to the decision that a prudent insurer would have reached. It is enough that it would have had "an effect on the thought processes of the insurer in weighing up the risk" or is a matter which "would have been taken into account by the underwriter": see Pan Atlantic v Pine Top  1 AC 501, 531, 544 (Lord Mustill).
- In their opening skeleton argument for the trial, counsel for Insurers discussed at considerable length some 18 authorities in which the materiality of over-valuations of vessels have been considered. Counsel for the claimant responded in kind in an annex to their written closing submissions. However, section 18(4) of the Act expressly provides that "whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact". The question of materiality must therefore be decided on the basis of the evidence adduced in this case. Past cases have no status as precedents on the question of materiality and their only relevance, as I see it, is in providing a sanity test or reasonableness check on the conclusions reached on the evidence.
- Although a question of fact as opposed to law, the question whether a particular circumstance is material requires the court to make a value judgment. In deciding whether a circumstance would affect the thinking of a prudent insurer, evidence of how reputable insurers experienced in the relevant class of business exercise their underwriting judgment, and what matters do in fact influence such insurers, is generally helpful and important to ensure that the court's findings are grounded in commercial reality. But such evidence cannot be conclusive of what the notional prudent insurer would regard as material. That can only be determined by forming a view about whether or not it is rational to take a particular matter into account. As stated in MacGillivray on Insurance Law (12th Edn, 2012) at para 17-041:
"The decision rests on the judge's own appraisal of the relevance of the disputed fact to the subject-matter of the insurance; it is not something which is settled automatically by the current practice or opinion of insurers."
The evidence regarding materiality
- As is usual when materiality is in issue, both the claimant and the Insurers called witnesses to give expert evidence on the question. The claimant's expert was Mr Trevor Hart, and the Insurers' expert was Mr Keith Potter. Both expert witnesses have had distinguished careers as marine underwriters. Both of them, however, are chiefly experienced in underwriting commercial hull risks. Neither of them has specialised in yacht business.
- Mr Potter has written some yacht risks over the years, but always as a following underwriter. He has no experience of leading yacht risks. Mr Potter was perfectly candid about this. When asked, for example, whether it is exceptional for underwriters to require valuations of yachts which they are asked to insure, he replied:
"Well, again, not being a leader and writing very few not a lot of yachts, I can't honestly say whether it is an exception or not."
And when asked whether, because of the imprecise nature of yacht values, underwriters will have some elasticity in the values they are prepared to accept, he gave an answer directed to commercial hulls and continued:
"So as far as yachts are concerned, it's a difficult one to say because I haven't really considered that, not being a you know, a major leader as far as yacht business is concerned."
- Mr Hart wrote some yacht risks as a sole insurer when he was employed by Sun Alliance, but that was over 30 years ago. In 1985 he became the active underwriter of a marine syndicate at Lloyd's. In that capacity Mr Hart wrote a few yacht risks but only as a follower. Since 2001, Mr Hart has not done any underwriting and his involvement in marine insurance has been in the insurance of fishing vessels and aquaculture. Although Mr Hart was less up front about the fact than Mr Potter, it was equally clear that Mr Hart had little or no relevant experience as a yacht leader.
- OAMPS also served a report from an underwriting expert, Mr Allan Norton. Mr Norton has specialised for many years in the insurance of super yachts and it is clear that he has far more directly relevant experience than either of the other underwriting experts. His reports, however, dealt only with the effect of the subjectivity and did not address the question of materiality, which is not an issue in the claim against OAMPS. Mr Norton was not called to give oral evidence.
- Accordingly, the only specialist yacht underwriters who gave oral evidence at the trial were the underwriters called as witnesses of fact. Mr Higham and Mr Absolom both gave evidence about their own underwriting practice, which was directly relevant to the issue of inducement. I found their evidence, based as it was on a wealth of experience of the relevant class of business, of considerably more assistance in understanding what information a prudent yacht underwriter would regard as material than that of the two witnesses called as experts. I bear in mind, of course, that they were not subject to the duties owed by expert witnesses. However, Mr Higham and Mr Absolom are no longer employed by the companies for which they worked when the risk was written in 2011; and both individuals gave their evidence in a straightforward and, as it seemed to me, unbiased way which, notwithstanding their duties to the court, all too often cannot be said of hired experts. That could not in my view be said of Mr Hart.
- Mr Higham said that his general approach to underwriting yacht risks is to offer a level of cover which represents the yacht's market value or, in the absence of objective evidence, what the assured subjectively believes the market value of a yacht to be. Provided the value put forward by the assured appears realistic in the sense of falling within the broad range of values that he would expect for a yacht of the relevant age and kind, Mr Higham will not generally question it. If, however, he thinks that the value put forward looks as if it may be too high or too low, he may look on the Yachtworld website to see the asking prices of any similar yachts which may be on the market or he may ask some questions of the broker. In rare cases, if he still has concerns, Mr Higham might require an independent valuation or simply decline to quote on the basis of the value put forward.
- Mr Higham said that, once he has taken on a risk at a particular insured value, he would often be willing to renew the policy at the same value without asking whether it needs to be reduced. That reflects, amongst other things, the fact that yachts do not invariably depreciate from one year to the next, that any such depreciation may be marginal and that the only way of measuring any such depreciation would be to require the assured to obtain annual valuations, which is not realistic.
- Mr Absolom has specialised in underwriting yachts for approximately 20 years. He gave evidence that it is his general practice to refuse to agree levels of insurance cover which he knows to exceed a yacht's market value. At the same time it is unusual for him to question the value of a super yacht put forward by an assured or to require an independent verification of value. He explained that his approach reflects the fact that a yacht owner is in a better position to reach a view on the estimated market value of his yacht and that it is not practical or economically feasible to require a valuation as a matter of course. As such, Mr Absolom is usually prepared to rely on the owner putting forward the value that he genuinely believes the yacht to have and will only require a valuation or make further enquiries if the value put forward seems unrealistic in the sense of being outside the broad range within which he would expect the value to fall or there is some other factor that calls into question the value put forward.
- I also gained some assistance from the evidence of the brokers both those called as witnesses of fact and those called as expert witnesses. They were unanimous in agreeing that the MTC valuation, the March 2011 email and the fact that the Yacht was up for sale at an asking price of 8m were matters which, had they or the broker placing the insurance been aware of them, it would have been necessary to disclose.
- The findings which follow as to what matters a prudent underwriter would have considered material in appraising the risk are based on my assessment of the whole of the evidence bearing on this issue.
Market value as the basic measure of indemnity
- I find, first of all, that yacht insurance in the London market is written on the basis that the value of a yacht agreed for insurance purposes is generally intended to reflect the yacht's estimated market value. Not only was this the evidence of the practitioners who specialise in this type of business, but it follows from the basic principle that an insurance of this kind is intended to indemnify the assured for the financial loss suffered in the event that the property insured is lost or damaged. Mr Hart expressed the principle in clear terms in a paper published in 2009:
"Insurers should ensure that their policy would place the owner in the same position as before the loss and not in an advantaged position because of a marine casualty."
Although the immediate context of this statement was discussion of the insurance of commercial fishing vessels, it is plain and Mr Hart expressly confirmed in evidence that the proposition is of much broader application and is equally applicable to the insurance of yachts.
- Where yachts differ from other vessels is that they are typically owned and used solely or mainly for their owner's recreation and pleasure rather than as assets employed in a business. When a commercial vessel is lost or damaged, the financial interest of the assured is generally not limited to the value of the vessel if bought or sold but includes lost capacity of the vessel to earn income. By contrast, although yachts can earn income from charters, any such income seldom does more than make a contribution towards the vessel's running costs. Owning a large yacht is usually an expensive luxury rather than an enterprise carried on for profit. That means that the financial loss suffered in the event of a casualty is generally limited to the amount for which the yacht could have been sold and an equivalent yacht purchased.
The indeterminacy of market value
- Although the basic measure of indemnity is the yacht's market value, however, the evidence showed that estimating the market value of a large luxury yacht is a very imprecise and subjective exercise. The main reasons for this are the lack of liquidity and transparency of the market for second hand yachts and the individuality and consequent lack of direct substitutability of the product. The following features are of note:
i) So called "super yachts" which are as large and expensive as the Galatea are produced in small numbers and the number of such yachts available on the market to purchase second hand at any given time is even smaller. Thus, the Galatea was one of only nine Riva 115 yachts built, and as at May 2011 there had not yet been a single second hand sale of this particular model.
ii) The prices at which second hand yachts are bought and sold are not published and are known only to the parties themselves and their agents involved in the transaction to whom the information is confidential. The only publicly available price information consists of asking prices, which may often differ substantially from actual sale prices.
iii) Although guidance in estimating market value can be derived from looking at asking prices (or actual sale prices, if known) of yachts of a similar size and age, there are many variables which make such comparisons difficult for example, the reputation of the manufacturer, the build and layout of the yacht, its performance in terms of cruising speed etc, the condition in which the vessel has been kept, the standard of equipment and furnishings and whether there have been any modifications or upgrades. There is also a large element of subjective preference regarding what makes one yacht more or less desirable than another.
iv) The market for luxury yachts, like other markets, is affected by changes in general economic conditions. For example, most witnesses agreed that the global financial crisis which followed the collapse of Lehman Brothers in late 2008 had a substantial impact on the yacht market, not least in reducing the number of sales which took place although some witnesses suggested that prices of bigger yachts may have been less badly affected than those of smaller craft.
- The result of these factors is that the scope for differences of opinion about the value of a large luxury yacht, even among experts, is substantial. This is illustrated by the wide divergence between the valuations of the Galatea made by the two witnesses called as valuation experts in this case (albeit that the valuation given by Mr Pontifex was, in my view, outside the reasonable range). I take it to be for this reason, and to avoid the huge potential for disputes about value that would otherwise exist after a loss has occurred, that yacht insurance is invariably written on the basis of agreed values.
- A further practical reality in writing yacht insurance is that owners do not necessarily have an informed view of their yacht's market value at any given time. Whereas the owner of a commercial vessel who is running a business may generally be expected to have a good idea of the current market value of vessels in his fleet, the same may often not be true of the owner of a private luxury yacht kept purely for personal enjoyment. The evidence indicated that it is not normal practice for yacht owners to obtain professional valuations in the ordinary course nor given the cost and delay that this would involve for insurers to require such valuations.
Determining the insured value
- Against this background it makes sense that the practice of experienced yacht underwriters such as Mr Higham and Mr Absolom is to accept the insured's estimate of the value of a large luxury yacht as its value for the purpose of insurance unless there is objective information which calls it into question. This approach reflects, amongst other things, the high degree of subjectivity and variance in opinions about yacht values and the fact that is not normal practice for yacht owners to obtain professional valuations of their vessels. It follows that retrospective valuations performed by experts, such as those made by Mr Pontifex and Mr Maclaurin for the purposes of these proceedings, are not, as I see it, relevant to the question of what matters ought to have been disclosed since ex hypothesi they were not information known to the assured at the time and could not have affected its subjective estimate of the Yacht's value.
- What, however, a prudent underwriter would not want to do at any rate without a good justification is agree an insurance value significantly higher than the insured's own estimate of the yacht's value. The reason for that is obvious and reflects the basic indemnity principle. A prudent underwriter does not want to create a situation in which the insured does not have the same interest as the insurer in avoiding a loss because it is clear that the insured would be better off financially if a loss occurred.
Relevance of the purchase price
- It is natural, and the evidence indicated that it is normal practice, for a brand new yacht (such as, for example, the Sapphire in this case) to be insured for the cost of purchase. Not only is this likely to be the best available evidence of the yacht's market value if sold but it reflects the fact that the nearest equivalent obtainable as a replacement if the yacht is lost at that stage is likely to be a new yacht of the same specification.
- There was also evidence including evidence from the two broking experts who specialise in yacht insurance, Mr Apostopoulos and Mr Marriner, and from Mr Ranson that it is common for yachts to stay insured at their purchase price for a number of years. That is understandable since, unless abnormally the owner obtains a professional valuation, the owner will often not have any other or better measure of the yacht's value.
- There would come a time when a prudent underwriter offered the risk for the first time would want to know that a yacht was still being insured at its purchase price and would be unlikely, unless a good reason was shown, to agree to such an insured value. It seems to me that the purchase price of the yacht would, in such a case, be information that it was material to disclose. I do not suppose that if, say, the Galatea had been 10 years old, a prudent underwriter would have accepted an insured value based on the original cost of purchase without a good justification such as evidence that substantial sums had been spent on improving the yacht, that a lender required the yacht to be insured for this amount, or positive evidence that this was a fair estimate of the yacht's current market value. I am not persuaded, however, that, after four years, the Galatea had reached such an age.
- That is not to say that a reasonably well informed underwriter specialising in yacht insurance would expect a valuation of the Galatea, in 2011, to value the Yacht at an amount as great as the original purchase price. In particular, such an underwriter could be presumed to know that:
i) Although rates of depreciation can vary greatly depending on market conditions, the value of a yacht will tend to diminish over time and, in the absence of exceptional circumstances such as an unusually buoyant market or a very expensive upgrade which did not exist here, a yacht will be worth less after four years than the original purchase price; and
ii) The global financial crisis following the collapse of Lehman Brothers in 2008 had tended to depress the value of yachts, like other assets, even if not all parts of the market were equally affected.
- Even though a prudent underwriter would reasonably assume, in these circumstances, that a super yacht being insured in 2011 for the price paid for her in 2007 was being insured for more than the amount which the owner would be likely to receive from selling the yacht, I find that an ordinarily prudent underwriter would nevertheless be willing to accept this amount as the insured value if the insured did not have a valuation or other independent evidence which would enable the market value to be estimated at some other more accurate figure. The only practical alternative would be to require a valuation or some other evidence of market value to be obtained which, as indicated earlier, would be an unusual course. The very absence of information about the market value of the yacht and to what extent it differed from the purchase price would also itself tend to minimise any moral hazard.
Relevance of valuations
- The position would be very different, however, if the insured had obtained a professional valuation or professional advice about the market value of the yacht which had valued the vessel at an amount significantly lower than the value put forward for insurance. I have no doubt that, in ordinary circumstances at least, a prudent underwriter would regard such information as material. Such an underwriter would want to know the reason for the discrepancy. The need for a cogent explanation would be all the stronger if the proposed insured value corresponded to the purchase price paid four years previously in circumstances where it was inherently unlikely to represent the yacht's current market value.
- It is not impossible that a prudent underwriter might agree to insure a yacht for an amount which was significantly higher than the amount of a professional valuation for example, if the owner could show good reasons for believing that the valuation figure was too low or could demonstrate a genuine commercial interest in insuring the yacht for a higher sum. But any prudent underwriter would want to make that judgment for him or herself.
- I have referred to an insured value which is "significantly higher" than a professional estimate of the yacht's market value, because unless the owner is deliberately choosing to over-insure the yacht it seems to me that the discrepancy would need to be of a certain size in order to affect a prudent insurer's perception of the risk. That is first of all because, given the time, trouble and cost potentially involved in dealing with a casualty and making an insurance claim, a yacht owner is unlikely to be incentivised to take less care of the vessel by a small difference between the sum insured and the sum which the owner could expect to receive from a sale. The second reason why a discrepancy needs to be of some size in order to be material is the inherent imprecision of yacht valuations, which means that an apparent difference between the insured value and the estimated market value of the vessel may in any case be illusory.
- What constitutes a "significant" difference which renders professional advice on a yacht's value material is a matter of degree, and may vary according to the circumstances. The present case, however, is not a hard case. I have no doubt at all that the MTC valuation, which valued the Yacht excluding VAT in November 2009 at around 7m was material. This information would certainly affect the thinking of a prudent insurer who would want to know why the claimant was seeking to insure the Yacht at a value approaching twice this sum some 18 months later. The same applies to the March 2011 email. Although Mr Polemis is not a professional valuer, he is a highly experienced manager of super yachts who knew the Galatea well and gave a valuation in the email after carrying out some market research. That valuation would be expected to inform, as I am sure it did, the owner's own belief about the Yacht's current market value.
Relevance of the yacht being for sale
- I do not consider the fact that a yacht is on the market itself to be material, provided that the yacht is still being operated normally and has not been specifically laid up for sale. Mr Higham explained that, if a yacht is known to have been laid up for sale and is only being used for demonstration purposes with a skeleton crew, the premium rating is generally higher because the chances are that the yacht will be less carefully looked after and maintained; whereas if the yacht is still navigating and being used, the fact that it is being advertised for sale is not seen as affecting the risk.
- Mr Higham nevertheless said that, if he is aware that a yacht offered to him as a new risk is for sale, it is his normal though not invariable practice to set a minimum premium equivalent to the premium for three or six months, which will be retained by insurers even if the yacht is sold within that time. Mr Higham said that he would be more likely to require such a retained premium if the yacht is laid up for sale with a skeleton crew than if it is not laid up, and that it is not his normal practice to require a retained premium on a renewal where he has insured the yacht, and hence had the benefit of premium, in previous years.
- While Mr Higham is of course perfectly entitled to conduct business in this way, there is no evidence that it represents the general practice of yacht insurers. Nor do I think it right to conclude that a prudent insurer would adopt this approach, given that the reason for it is based on Mr Higham's personal business strategy rather than any increased risk of claims.
- I am therefore not persuaded by the Insurers' contention that the fact that the Galatea was being marketed for sale by the time the contract of insurance was concluded was itself a material circumstance which ought to have been disclosed. The fact that the Yacht was being marketed with an asking price of 8m when the claimant was seeking to insure the Yacht for 13m was, however, in my view obviously material. A prudent insurer would undoubtedly want to take this information into account in assessing the risk and to know on what basis, if any, the owner thought it justifiable that he should be paid 13m under the insurance contract if the vessel was lost when he would apparently be happy to dispose of the vessel for a sale price of (at most) 8m.
The claimant's knowledge argument
- Although counsel for the claimant raised a variety of points on the issue of materiality, their arguments as to why it was unnecessary to disclose these matters essentially boiled down to two.
- The first argument rested on the premise that Mr Higham, when quoting for the insurance of the Galatea in April 2011, knew or may be presumed to have known that the amount of cover sought represented the purchase price of the Yacht. It was said that Mr Higham knew or may be presumed to have known this because he kept a record in a spreadsheet on the Travelers computer system of quotes that he had previously given. He had given a quotation in February 2009 to insure the Galatea for 13m (see paragraph 36 above). That quotation was listed in Mr Higham's spreadsheet, and Mr Higham agreed in evidence that it is likely that he looked back at its terms (as well as those of his more recent January 2011 quotation) when he was asked to quote again for the Galatea in April 2011. Mr Higham also accepted that a vessel under two years old as the Galatea was in February 2009 is likely to be insured for her purchase price. He therefore would naturally have understood from the fact that he was being asked to quote in April 2011 on the basis of the same insured value as in January 2009 that the Yacht was still being insured for her original purchase price.
- Counsel for the claimant then argued that it would or should have been apparent to Mr Higham that the market value of the Yacht in 2011 would inevitably be lower than the price paid to purchase the Yacht brand new in 2007, both because of natural depreciation and because of the economic effects of the global financial crisis which had occurred since then. On this basis they argued that disclosing the MTC valuation, the March 2011 email and the fact that the Yacht was being marketed for sale for 8m would only have told Mr Higham what he knew or must be presumed to have known already namely, that the claimant was seeking to insure the Yacht for a value significantly higher than its market value.
- I accept the premise of this argument that Mr Higham knew or may be presumed to have known that the value for which he was agreeing to insure the Yacht in 2011 probably represented the amount paid to purchase the Yacht in 2007. That was the natural implication of the fact, which his spreadsheet told him, that this was the amount of cover sought in February 2009. I also accept the next step of the argument that Mr Higham may be taken to have known that the market value of the Yacht in 2011 was probably less than 13m. I recognise that insurers are not experts in valuation and that yacht values can go up or down for a variety of reasons. I also recognise that the full effect of the global financial crisis on yacht values, while apparent to yacht brokers such as Mr Maclaurin, would not necessarily have been so clear to underwriters whose business is at one remove from the yacht market itself. Nevertheless, in the absence of information of which there was none to suggest that the Galatea had undergone some expensive upgrade, a reasonably well informed underwriter would have appreciated and I am sure that Mr Higham would have appreciated that the Yacht was most unlikely to be worth the same in 2011 as the original purchase cost. I do not consider, however, that an underwriter would be in any position to estimate the extent of the depreciation likely to have occurred.
- There is, however, a fundamental difference between, on the one hand, knowing in general terms that the market value of a yacht is likely to be less than the value proposed for insurance and, on the other hand, knowing that the insured has had the yacht professionally valued and that the valuer has certified a particular figure, significantly less than the proposed insured value, as the estimated market value. There is a further difference again in knowing that the insured has actually decided to put the yacht on the market for sale and has done so at a particular asking price which is significantly lower than the proposed insured value. I therefore reject as unfounded the inference which the claimant sought to draw that the specific facts about the valuation and marketing of the Yacht which the claimant knew but Insurers did not were not material and did not need to be disclosed.
The claimant's purchase price argument
- The claimant's other principal argument, which was much pressed by Mr Shah QC on its behalf, is that it was perfectly reasonable and legitimate for the claimant to insure the Yacht for its purchase price even when the claimant knew that the current market value of the Yacht was a significantly lower amount. Accordingly, as the underwriter knew or may be presumed to have known that the proposed insured value represented the purchase price, information about the market value of the Yacht was not material.
- I have accepted already that, in the absence of a valuation or other information which allows the owner to make a realistic estimate of current market value, it may indeed be reasonable to treat the price paid as an objective yardstick of value and to insure for this amount, even though the owner knows in general terms that the market value is probably less. Mr Shah sought to argue, however, that, even when the owner has had his yacht valued, has been advised of the maximum amount that he could hope to get from a sale, and has decided to advertise his yacht for sale at an asking price far lower than the original purchase price, it is still reasonable to insure for the cost of purchase.
- Mr Shah submitted that super yachts are different from other assets in that they are often bespoke, purchased as luxury items and valued as objects their own right. Super yachts are not purchased for commercial reasons and they are not purchased to be traded. The value to an owner is in the vessel itself. He submitted that, against this background, until such time as the yacht is actually sold, the cost of purchase represents the owner's financial interest, because "it encapsulates the yacht itself".
- Clearly, if the yacht is lost and a claim is made on the insurance, the owner will no longer have the physical object and can only expect to receive its monetary value. The monetary value of the Galatea in 2011 was, as Mr Galchev knew, substantially less than the price paid for the vessel when new, and therefore the cost of purchase did not represent the owner's financial interest. To the extent that the argument advanced by Mr Shah is coherent at all, it amounts to saying that super yachts are such special, personal and unique items that an owner who loses his yacht is unlikely to be able to find a satisfactory equivalent in the market for second hand yachts, and will want instead to replace it with a new yacht of similar specification. This was what I took Mr Shah to mean when he submitted that "the value of the thing insured, the 'dream', is logically the cost of replacing it with an equivalent 'dream' in the event of a total loss (i.e. another new yacht not a second hand one)".
- This argument seems to me, however, to exaggerate the extent to which a yacht of the size and general characteristics of the Galatea is a unique item. As Mr Maclaurin pointed out, there were and are on the market at any given time a variety of yachts of similar size and capable of delivering a broadly similar experience to the Galatea. An owner is unlikely to be wedded to owning a particular model of yacht built by a particular manufacturer; but even if he was, there were eight other Riva 115s built, two of which were also put on the market in 2011. If there are special features to which the owner attaches importance for example, if he prefers four cabins and a sky lounge instead of the five cabins which are standard for the model he can have some modifications made without having to incur the cost of having a brand new boat built.
- In any case, whatever coherence this line of argument might have in a situation where an owner wants nothing other than to keep his prized yacht or, if necessary, replace it with an exact replica, it has none whatever in the present case, where the owner had decided to try to sell his yacht and had no intention of replacing it with an equivalent vessel, having bought a new yacht with a very different specification. I therefore reject this argument also.
- I mentioned earlier that the question whether any particular matter is material is a question of fact and that the only relevance of decisions in other cases, in my view, is to operate as a reasonableness check on findings made on the basis of the evidence adduced in the case before the court. I will, by way of such a check, briefly refer to what seem to me the most significant of the numerous authorities cited.
- The leading case is Ionides v Pender (1874) LR 9 QB 531, a decision of the Court of Queen's Bench. In that case goods which cost less than £8,000 were insured under marine policies at values which amounted in total to about £14,000 (plus further insurances of £1,000 on commissions and £1,500 on safe arrival). The result was that "the assured stood to receive a very large profit if their venture was lost" (see 534). It was held that the over-valuation should have been disclosed. The court based this conclusion on evidence that "underwriters do in practice act on the principle that it is material to take into consideration whether the over-valuation is so great as to make the risk speculative." By "speculative", I take the court to have 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. Blackburn J, who gave the judgment of the court, explained the materiality of such excessive valuation as being that it "not only may lead to suspicion of foul play, but that it has a direct tendency to make the assured less careful in selecting the ship and captain, and to diminish the efforts which in case of disaster he ought to make to diminish the loss" (see 538-9).
- The test of whether the over-valuation was so great as to make the insurance "speculative" has been applied in a number of subsequent cases: see e.g. Mathie v The Argonaut Marine Insurance Co Ltd (1925) 21 Lloyd's Rep 145; Trading Company L&J Hoff v Union Insurance (1929) 34 Lloyd's Rep 81, 88; Berger v Pollock  2 Lloyd's Rep 442, 465. In the L&J Hoff case Scrutton LJ explained (at 89) one of the reasons why such over-valuation is material as being:
"the moral hazard, which is this, which I am afraid is inherent in human nature, that there is a tendency if you are insured to a very high value not to be diligent in trying to get the thing back because you do so well out of losing the thing that it is rather a disappointment if you do not lose it; and the underwriter is entitled in the view of underwriters, and as I understand the law, to judge for himself whether he will take the risk of insuring a thing at a value so much higher than the present value of the thing insured that it will be a considerable gain to the assured if he does lose the thing."
- Thames & Mersey Marine Insurance v Gunford Ship Company  AC 529 was another case in which insurances on hull, freight and disbursements had the effect that the owners of the ship would be a great deal better off if the ship was lost than if she completed the voyage. The House of Lords held that these circumstances were material and ought to have been disclosed. Some of the speeches recognised, however, that in the case of commercial vessels which are being used to earn profits in a business there are often legitimate reasons for valuing the vessel for the purpose of insurance at an amount which is significantly higher than the vessel's market value. As Lord Shaw put it (at 542):
"to the insurer using a ship as part of the going concern of business a statement of value going much beyond the amount to be realised if the concern was stopped and the asset put upon the market is intelligible and legitimate."
Similarly, Lord Robson said (at 548) that:
"there are often legitimate business reasons for this discrepancy between the selling value and the insured value, and it should not be assumed that it necessarily creates any actual conflict between the duty and interest on the part of the shipowner in regard to the safety of the thing insured."
Lord Robson further observed (at 549) that the insurer is "willing to undertake the risk of a certain amount of over-valuation, relying no doubt on the character of the assured and also on the interest that the managing owners or managers have in preserving the ship as a source of business profit to themselves."
- More recent cases which have followed this theme include Strive Shipping v Hellenic Mutual War Risks Association (The "Grecia Express")  Lloyd's Rep IR 669, 745-746; and North Star Shipping v Sphere Drake Insurance  2 Lloyd's Rep 76. In these cases Colman J took the view that, provided the owner genuinely and reasonably believes that a commercial vessel ought to be insured for a particular value which is in excess of the market value and the proposed value is consistent with reasonably prudent ship management, the disparity is not material and does not need to be disclosed. In the North Star Shipping case Court of Appeal approved that statement of the relevant test: see  2 Lloyd's Rep 183, para 46.
- A case on which counsel for the claimant sought to place some reliance is The "Dora"  1 Lloyd's Rep 69, where a yacht purchased for US$480,000 and valued in this amount for insurance was found to have a market value of no more than US$400,000. The yacht caught fire and sank. The insurers sought to avoid the policy on grounds which included an alleged misrepresentation that the market value of the yacht was US$480,000. Phillips J was satisfied by expert evidence that "underwriters assume and accept that an insured insuring a yacht will put forward the value he subjectively believes the yacht to have" and that "the purchaser of a yacht will naturally insure the yacht for the price he pays": see  1 Lloyd's Rep 69, 92. On the basis of this evidence the judge found that:
"in the case of a valued policy, where a yacht owner insures for the price he has paid, a discrepancy between the insured value and the open market value is not material."
These findings need to be seen in the context, however, that (1) the Dora had only recently been purchased and was being insured for the first time and (2) the insured owner believed the yacht to be worth what he had paid for it the reason that it was worth less being that, unknown to him, the seller had been acting dishonestly.
- I do not perceive there to be any inconsistency between the approach taken in these cases and the conclusions which I have reached on the facts of the present case.
- Although Mr Higham quoted for the risk on 5 April 2011, Mr Stephenson was the underwriter who bound the insurance on behalf of Travelers by signing the declaration on 13 April and approving the proposal form on 17 May 2011. It is clear, however, that if Mr Stephenson had been informed on either occasion that the estimated market value of the Yacht was significantly less than the amount of cover for which Mr Higham had quoted, Mr Stephenson would have referred the matter back to Mr Higham.
- Mr Higham's evidence was that, if the MTC valuation and the March 2011 had been disclosed to him before the risk was bound or if he had been told that a decision had been taken to put the Galatea on the market for sale for 8m, he would not have agreed to insure the Yacht for 13m. I see no reason to doubt this, as to insure a yacht for considerably more than its owner has been advised and believes the yacht to be worth would be entirely inconsistent with Mr Higham's underwriting philosophy.
- Much of the cross-examination of Mr Higham was aimed at establishing that he was content to insure vessels for their purchase price for a number of years after the date of purchase, despite the fact that they would inevitably have depreciated in value; and that he was content to do this in the case of the Galatea, as evidenced by his willingness to quote in January and April 2011 to provide cover for the same insured value of 13m as his quotation given in February 2009. The suggestion was that Mr Higham would have been unconcerned to learn about the discrepancy between the insured value and the market value in circumstances where the figure of 13m reflected the purchase price.
- For reasons discussed in relation to materiality, I think it reasonable to infer that, if Mr Higham had been expressly told that 13m represented the purchase price of the Yacht, this would not have affected his underwriting decision. I also consider that, if Mr Higham had been asked at the time whether he thought it likely that the market value of the Yacht was still the same as the price paid on purchase, his answer would have been "no". However, for reasons that I have already given, it in no way follows that Mr Higham would have been content to insure the Yacht for the purchase price if he had been informed of the MTC valuation or the March 2011 email. At the very least, if shown either of those documents, he would have required a good explanation of why the claimant wanted to insure the Galatea for a significantly higher sum than the amount at which the Yacht had been valued, and no such explanation would have been forthcoming. Still less was there any reason which might have persuaded Mr Higham to agree to insure the Yacht for a value of 13m if he had been told that the owner had put the Yacht on the market for sale with an asking price of 8m.
- The points were made by Mr Shah that insuring the Yacht for a higher sum would generate more premium and also raise the threshold at which the vessel would become a constructive total loss. There is no reason to think, however, that Mr Higham would have abandoned his underwriting principles out of thirst for premium a suggestion which he strongly denied. A further suggestion made in cross-examination was that Mr Higham's decision-making was driven by his desire to win the order for the Sapphire, and that he was concerned to make his quotation for the Galatea as attractive as possible because the owner was likely to place both risks with the same insurer. It was suggested that, given this motivation, disclosure of circumstances showing that the Galatea had a lower market value would not have deterred Mr Higham from quoting the terms that he did.
- Mr Higham agreed that he wanted, if possible, to win both orders but did not accept that the two quotations were offered as a package. He said that when placing risks of such a size he would have expected Mr Ranson to obtain at least one other quote and that the insured would probably accept whichever quote offered the best terms for each vessel regardless of whether the same insurer had also quoted the best terms for the other yacht. Mr Higham also explained that, when he does offer insurance for two vessels as a package, as sometimes happens, he makes acceptance of each quotation expressly conditional on the acceptance of both: otherwise he could end up with the less desirable risk only. He further pointed out that he had already quoted for the Galatea in January 2011 before he knew about the Sapphire and said that the slightly better premium rate that he quoted for the Galatea in April was due to the geographical area of cover being narrowed, and not any perceived link to the Sapphire.
- I accept Mr Higham's evidence on these matters. Furthermore, even if hope of winning the order for the Sapphire had some influence on the terms he was willing to offer for the Galatea, there is again no reason to infer that it would have led him to compromise his underwriting principles to the extent of agreeing to insure the Galatea for a value which he knew to be substantially more than the owner believed his yacht to be worth on the open market.
- It was equally clear on the evidence that Mr Absolom would not have been willing to insure the Yacht for a value of 13m if the material circumstances had been disclosed to him. He would not in practice have had to make this decision, however, since, if Mr Higham had declined to insure the Yacht at that value, as I have found that he would, Mr Absolom would not have been asked to agree to such an insurance.
- All this assumes in any case that, if the relevance of the Yacht's market value to the insurance had been explained to Mr Kaltsidis, the claimant would still have attempted to insure the Yacht for a value higher than the amount of 8m at which she was put on the market for sale. Although this was the claimant's case at trial, I have rejected that case. I have found that, if consideration had been given to the appropriate insured value, the claimant would in fact have been content to insure the Yacht for an insured value of 8m. If full disclosure had been made, the probable outcome is in my view that Insurers would have agreed to insure the Yacht for this sum. According to Mr Higham, it was standard market practice at the time to split the total amount of cover between Hull and Machinery insured under Section A and the "Increased Value of Hull and Machinery" insured under Section B in a ratio of 75:25 (as was done in this case). If the total amount of cover had been 8m, the sum insured under Section A would therefore have been 6m and the sum insured under Section B would have been 2m.
- Insurers have accordingly proved that they were induced to enter into the contract of insurance on the terms agreed by the non-disclosure of which they complain.
- The claimant argued that, even if Insurers had a right to avoid the policy for non-disclosure, as I have held they did, that right was waived by Insurers.
- The form of waiver on which the claimant relies is waiver in the sense of election. As explained by Lord Goff in The "Kanchenjunga"  1 Lloyd's Rep 391, 398-399, the principle of election applies when one party to a contract becomes entitled, either under the terms of the contract or under the general law, to exercise a right and has to decide whether to exercise the right or not. When a party in this position communicates its choice to the other party to the contract, it is treated as having made an irrevocable election, on which it cannot afterwards go back. One situation in which this principle applies is where an insurer is entitled to avoid a contract of insurance on the ground of non-disclosure or misrepresentation. Thus, if an insurer in that situation elects to affirm the contract (that is, to treat it as valid), the insurer waives the right subsequently to avoid the contract.
The legal test
- The requirements which must be satisfied in order for a party to be held to have made such an election are summarised in Insurance Corp of the Channel Islands v Royal Hotel Ltd (No 2)  Lloyd's Rep IR 151, 161-3, and WISE Underwriting Agency Ltd v Grupo Nacional Provincial SA  EWHC 3038 (Comm);  2 All ER (Comm) 613 at para 46 (affirmed on appeal on this issue at  EWCA Civ 962;  2 Lloyd's Rep 483). The first requirement is knowledge of the facts which have given rise to the relevant right and of the right itself. Thus, where the relevant right is to avoid a contract of insurance for non-disclosure, the insurer must have actual knowledge of the facts which were not disclosed and of its right to avoid the contract on account of such non-disclosure.
- The need for knowledge of the legal right, although established by authority, is difficult to justify in principle. The requirement is inconsistent both with the principle that ignorance of the law is no defence and with the principle that in the field of commerce the existence and exercise of legal rights should depend on objective manifestations of intent and not on a party's private understanding. It is also potentially extremely difficult for the other party to prove such knowledge all the more so since any relevant legal advice which may have been received will be protected from disclosure by legal professional privilege. The unfairness of the rule is mitigated, however, by a presumption that a party which had a legal adviser at the relevant time received appropriate advice. That presumption can only be rebutted by waiving privilege and proving otherwise: see Moore Large & Co Ltd v Hermes Credit & Guarantee plc  Lloyd's Rep IR 315, 334-6, paras 92-100.
- The second requirement which must be satisfied before a party is held to have made an election is that its decision to exercise, or not to exercise, the right in question must be communicated unequivocally to the other party. For this purpose, the test is objective. Thus, an insurer will be treated as having elected to affirm and thereby lost the right to avoid the contract of insurance, if it speaks or acts 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.
The claimant's argument
- The claimant's waiver argument in this case is based on the fact that Insurers learnt very shortly after the fire that the Yacht had been advertised for sale at an asking price of 8m. Mr Shah QC argued that this told the Insurers that the claimant could not have believed at the time when the insurance was placed that the market value of the yacht was 13m and must have believed it to be worth substantially less. He submitted that, on the assumption that the Insurers' non-disclosure case is well-founded, such knowledge was sufficient to entitle Insurers to avoid the policy.
- In correspondence over the following year, Insurers repeatedly reserved all their rights pending completion of investigations. This reservation of rights was mentioned in every letter sent by the Insurers' solicitors during this period. When the time came for Insurers to plead their Defence, however, they relied on various defences based on failure to comply with conditions of the policy without pleading any reservation of the right to avoid. Mr Shah submitted that, by this conduct, Insurers unequivocally communicated an election to treat the policy as valid and thereby waived any right to avoid the policy on the basis of any non-disclosure of facts relating to the market value of the Yacht.
- For a number of reasons pointed out by Mr Schaff QC, this waiver argument is in my view ill-founded.
The Insurers' knowledge
- First, I am satisfied that, at the time when the Defence was pleaded, Insurers did not have sufficient knowledge of the relevant facts to entitle them to avoid the policy. Although they knew that the Yacht had been advertised for sale at an asking price of 8m, Insurers had no information which showed that the claimant had received advice about the market value of the Yacht or had taken the decision to put the Yacht up for sale before the contract of insurance was concluded. Indeed, they had been informed, inaccurately, by Mr Polemis when he was examined on oath around two weeks after the fire that he had first been instructed by the owners to market the vessel in June 2011, and that he had at that time suggested an asking price of 8m in circumstances where the owners did not have a clue about what would be an appropriate price. Furthermore, in response to requests for information made by Ince & Co in a letter dated 7 June 2012, the claimant's then solicitors, Bargate Murray, in a letter dated 26 October 2012 expressly confirmed that "at the time the risk was placed, our client believed that Galatea had an open market value of 13m". (That false assertion was maintained in correspondence and in statements of case until January 2015.) In the same letter, requests for the claimant to provide copies of all documents relating to the decision to put the yacht up for sale and to the marketing of the yacht were rejected as "not relevant", while a request to provide a copy of "all valuations (formal or informal) in respect of the boat in the possession of your client or its agents (including A1)" received the answer:
"We are instructed that neither our client nor its agents has copies of any valuations (formal or informal) in respect of Galatea."
That answer was given despite the fact that, as has since emerged, Mr Polemis had provided Bargate Murray with a copy of the MTC valuation in April 2012.
- Based on this (inaccurate) information given to the Insurers' solicitors, there was no reasonable basis on which to advise Insurers that they were entitled to avoid the policy. That remained the position at the time when the Defence was served.
- A critical discovery from the Insurers' point of view was made some time in late 2013 when their solicitors reviewed the meta-data from an advertisement for the sale of the Yacht which indicated that the advertisement had been prepared on 12 May 2011 that is, before the contract of insurance was concluded on 17 May 2011. It was on the basis of this discovery that the Insurers sought to avoid the policy by a letter from their solicitors dated 4 February 2014. Very shortly afterwards the Defence was amended to allege that Insurers were entitled to and had validly avoided the policy on the ground of non-disclosure. Even so, it was not until May 2014 that the claimant disclosed the MTC valuation and only in December 2014 that the March 2011 email was disclosed.
- In these circumstances I am satisfied that, at the time when the Defence was originally served, Insurers did not have sufficient knowledge of the relevant facts to know that they had a right to avoid the policy. They only acquired such knowledge subsequently.
- Even if that were wrong and Insurers had sufficient knowledge in February 2014 to entitle them to avoid the policy, and even if the view was taken that they elected to affirm the policy at that time, the additional information discovered subsequently would have given them a fresh right to avoid. The test for this purpose is whether the further facts subsequently discovered not to have been disclosed would make a material difference to the reasonable insurer's decision whether to affirm or to avoid the policy: see Spriggs v Wessington Court School Ltd  Lloyd's Rep IR 474, para 78. On my earlier findings as to materiality, the matters which came to light after the Insurers' Defence was served plainly satisfied that test.
The Insurers' conduct
- The second reason why the claimant's waiver argument fails is that there was no unequivocal communication of an election to affirm the policy.
Exercising a contractual right of inspection
- As one plank of his argument on this point, Mr Schaff QC cited dicta of Colman J in Strive Shipping v Hellenic Mutual War Risks Association (The "Grecia Express")  Lloyd's Rep IR 669, 750, paras 509-510, for the proposition that the exercise by an insurer of a contractual right to inspect documents will not normally amount to an unequivocal communication of an election to affirm the insurance contract. Colman J's reasoning was that a provision of a policy giving a right to inspect documents is "of an ancillary nature and not in the nature of a substantive or primary provision", such that reliance upon it "will be incapable of telling the other party anything about the future performance of the primary provisions of the contract and therefore of amounting to an election to affirm." He drew an analogy in this regard with an arbitration clause which is treated as separate from the contract in which it is incorporated and thus capable of surviving the termination of that contract. The observations were obiter, as Colman J had found on the facts (1) that the insurers did not have a right to avoid the policy and (2) that the relevant communications were in any case equivocal and so could not for that reason amount to an affirmation of the contract. The observations made by Colman J also seem to me to be inconsistent with the holding of Hobhouse J in Iron Trades Mutual v Compania de Seguros Imperio  1 Re LR 213, 223-224, that the invocation in that case without qualification or reservation of contractual rights in reinsurance treaties to inspect the records of the reinsured amounted to an unequivocal affirmation of the contracts.
- In analysing this issue, I think it instructive to examine the analogy drawn in The Grecia Express with arbitration clauses. In Heyman v Darwins Ltd  AC 356 the House of Lords held that a suitably drawn arbitration clause in a contract is capable of binding the parties to arbitrate a dispute about whether a party's liability has been discharged by acceptance of the other party's repudiatory breach or by frustration of the contract. In reaching this conclusion, the House rejected the argument that acceptance of a repudiatory breach or a frustrating event brought the whole contract, including the arbitration clause, to an end. The point was made that to refer to the contract as having been terminated or rescinded in such circumstances is potentially misleading. As Lord Porter observed (at 399):
"To say that the contract is rescinded or has come to an end or has ceased to exist may in individual cases convey the truth with sufficient accuracy, but the fuller expression that the injured party is thereby absolved from future performance of his obligations under the contract is a more exact description of the position. Strictly speaking, to say that on acceptance of the renunciation of a contract the contract is rescinded is incorrect
. By that acceptance [the injured party] is discharged from further performance and may bring an action for damages, but the contract itself is not rescinded. "
- Once it is recognised that the effect of accepting a repudiatory breach of contract is not to extinguish the whole contract but is only to excuse further performance of the parties' primary obligations (and give rise to a secondary obligation owed by the party in breach to pay damages), it is possible and necessary to distinguish between those rights and obligations established by the contract which are discharged and those which survive such "termination". In Heymans v Darwins the House of Lords reasoned that an arbitration clause which by its terms covered the resolution of disputes about the consequences of discharge was clearly intended to survive. There are other types of clause which may, expressly or by implication, be intended to survive what it is still convenient to call the "termination" of the contract for example, liquidated damages clauses, clauses which exclude or limit liability for damages and clauses which impose restrictive covenants or obligations of confidentiality post-termination. Whether a particular obligation is intended to survive termination of the contract is a question of construction in each case: see Chitty on Contracts (21st Edn, 2012), vol 1, para 24-050.
- In Yasuda Ltd v Orion Underwriting Ltd  QB 174 Colman J held that a clause in an agency agreement which gave the principal a right to inspect the agent's books and records survived the termination of the agreement for repudiatory breach. The rationale for this decision was that the inspection clause, like an arbitration clause, had a contractual function ancillary or collateral to the subject matter of the contract and which remained apposite after termination that function being to enable the principal to obtain information about transactions which the agent had undertaken on its behalf. In The Grecia Express  Lloyd's Rep IR 669, 750, at para 509, Colman J referred back to his earlier decision in the Yasuda case stating:
"Thus it has been held that, like arbitration clauses, such investigatory provisions are separate from the contract to which they are ancillary to the effect that they survive avoidance of the contract for repudiatory breach
- The use of the term "avoidance" in this passage risks eliding the important distinction between the discharge of contractual obligations for repudiatory breach and the avoidance or rescission of the contract for misrepresentation (or, in the case of an insurance contract, non-disclosure of material facts). It is very clear law that the effect of avoidance in contrast to termination for breach is not merely to absolve the parties from further performance of their primary obligations and substitute a secondary obligation to pay damages but is to extinguish the contract altogether so that it is treated as never having come into existence: see e.g. MacGillivray on Insurance Law (12th Edn, 2012) paras 17-031 17-032.
- In order to hold that an arbitration clause is capable of surviving even the avoidance / rescission ab initio of the contract and other cases of invalidity, the courts have had to develop further the characterisation of an arbitration clause as "collateral" or "ancillary" to the substantive obligations of the contract which had its origins in the speech of Lord Wright in Heyman v Darwins  AC 356 at 377. To achieve this result, it has been necessary to treat an arbitration clause as "collateral" or "ancillary" in the stronger sense of constituting a self-contained agreement which is separable from the main contract and therefore has an autonomous existence: see e.g. Harbour Assurance Ltd v Kansa Ltd  QB 701. This doctrine is now embodied in section 7 of the Arbitration Act 1996, which states:
"Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement."
- The doctrine of separability may also apply to exclusive jurisdiction clauses, which have close parallels with arbitration clauses. I see no justification, however, for extending the doctrine to a clause of a contract which gives a party a right to inspect documents in the possession of the other. Such a clause is properly described as "ancillary" in the sense that it does not contain obligations which form part of the main subject matter of the contract but establishes machinery designed to enable a party to investigate whether substantive or primary obligations of the contract have been performed or are required to be performed. The function of such a clause may support the inference that it is intended to remain binding even after the parties have been discharged from further performance of their substantive obligations by the "termination" of the contract. It would be another and far stronger thing, however, to infer that such a clause was intended to constitute an independent contract between the parties which will remain in existence even if the contract of which it forms part is retroactively avoided. In the case of arbitration clauses there are powerful commercial reasons for giving effect to the parties' choice of a tribunal to resolve all their disputes, including disputes about whether their contract exists. There are no comparable reasons which apply to a contractual right to inspect documents.
- Turning to the present case, the provision in the R12 clauses which gives insurers a right to examine agents of the insured on oath and to require documents to be produced for examination serves a useful purpose in assisting the insurers to decide at an early stage and without having to resort to litigation whether they are liable to pay a claim. The clause is no longer needed for this purpose, however, after the insurers have decided to avoid the policy. Still less is there any basis for inferring that the clause is intended to establish a contract separate from the rest of the insurance contract and which is therefore capable of surviving its avoidance. It follows that the express invocation, without reservation, of a right to examine documents pursuant to this clause would in my view be inconsistent with treating the contract as having been avoided. Such conduct is therefore capable of constituting an election to affirm the contract. For the reasons which I have stated at some length, I therefore disagree with the contrary view put forward in The Grecia Express and believe that the Iron Trades case illustrates the true principle.
Service of the Defence
- All that said, I have pointed out earlier that throughout the correspondence in which their solicitors were pursuing requests for documents, all the Insurers' rights (including any right to avoid the policy for non-disclosure) were expressly reserved. In the face of this obstacle to finding an unequivocal communication of a decision to affirm the policy, counsel for the claimant sought to found their waiver argument on service of the Defence, which did not contain any express reservation of rights. Service of the Defence did not itself involve the invocation of the contractual right to require documents to be produced for examination. What the Defence did was to deny liability to pay the claim on the ground (amongst others) that the claimant had failed to comply with that requirement and other requirements of the policy. I do not accept that pleading a defence to the claim which could only operate if the contract was not avoided of itself demonstrated unequivocally that Insurers had chosen to affirm the contract. That is illustrated by the fact that Insurers could still have relied on that defence as one ground for resisting the claim if they had purported to avoid the policy as they subsequently have. The only point to be made about the Defence is that it did not itself give notice that Insurers had decided to avoid the policy. That, however, was consistent with a belief that they did not at that stage have sufficient grounds to do so. Indeed, it seems to me that a reasonable person in the claimant's position would have drawn this inference given the background that Insurers had been pursuing (under a reservation of rights) requests for information relevant to issues of potential misrepresentation and non-disclosure which were outstanding when the Defence was served and which they continued to pursue thereafter.
- For this reason, as well as lack of the requisite knowledge, I reject the contention that Insurers made an election to affirm, and thereby waived their right to avoid, the policy.
The "Misrepresentation or Fraud" clause
- Mr Schaff QC had a further argument that, even if Insurers had waived the right to avoid under section 18 of the Act, they would still have a defence based on non-disclosure of material facts pursuant to the terms of the policy. The R12 Clauses which were incorporated in the policy included the following provision:
"MISREPRESENTATION OR FRAUD
This entire Policy shall be void if the Assured or their representative has concealed or misrepresented any material fact of circumstance concerning this insurance or the subject thereof, or the interest of the Assured therein, or in case of fraud or false swearing by the Assured touching any matter relating to this insurance or the subject thereof whether before or after a loss."
Mr Schaff submitted that the effect of this clause is to render the entire policy void in the same circumstances as would give rise to a right of avoidance under the Act. Since, however, the clause makes the policy void and not merely voidable, no election is necessary: the clause applies automatically and its consequences could only be waived by conduct giving rise to an estoppel. That would require the claimant to show not only an unequivocal representation that the Insurers intended to treat the contract as valid despite the non-disclosure of material facts but also reliance by the claimant on that representation which makes it inequitable subsequently to treat the policy as void.
- On behalf of the claimant, Mr Shah QC accepted that the claimant's waiver argument could not succeed if the "Misrepresentation or Fraud" clause is applicable. He submitted, however, that the clause is limited in its scope to cases of fraudulent misrepresentation and deliberate concealment and does not cover innocent non-disclosure of material facts of the kind alleged here. I reject that interpretation. In the first place, it is clear from the heading as well as from the body of the clause that it covers two different things. One is fraud "touching any matter relating to this insurance or the subject thereof whether before or after a loss". The other is concealment or misrepresentation of any material fact which by clear implication need not be fraudulent. Nor do I accept that the use of the word "concealed" necessarily connotes that the concealment must be deliberate. As Mr Schaff pointed out, the use of the term "concealment" to refer to any non-disclosure of a material fact which constitutes a breach of the assured's duty of utmost good faith has a venerable history, which goes back to the judgment of Lord Mansfield in Carter v Boehm (1766) 3 Burr 1905. I note that the language of "concealment" was used for example in Ionides v Pender (1874) LR 9 QB 531 and Thames & Mersey Marine Insurance v Gunford Ship Company  AC 529, mentioned earlier. Furthermore, when the nature of the misrepresentations covered by the clause is not limited in any way and on its face includes purely innocent as well as deliberate conduct, there is no reason to interpret the word "concealed" as importing such a distinction. I therefore conclude that Insurers are entitled to rely on this clause where innocent non-disclosure of material facts which induced them to enter into the contract has been proved, as it has in this case.
- I must add one qualification. Although the R12 Clauses which include the Misrepresentation or Fraud clause apply to Section A of the policy covering Hull and Machinery in the sum of 9.75m, for reasons explained later in this judgment the R12 Clauses do not in my view apply to Section B of the policy, which provided cover for the Increased Value of Hull and Machinery in the sum of 3.25m. Accordingly, if it were necessary for Insurers to rely on the Misrepresentation or Fraud clause, I consider that it would only provide them with a defence to the claim under Section A.
Conclusions on non-disclosure
- On the issue of non-disclosure, I conclude that:
i) The MTC valuation, the March 2011 email and the fact that the claimant had decided to market the Yacht for sale with an asking price of 8m were material circumstances which ought to have been disclosed to Insurers;
ii) If these circumstances had been disclosed, the Insurers would not have agreed to insure the Yacht for 13m;
iii) In consequence, Insurers were entitled to avoid the policy; and
iv) The Insurers had not waived the right to avoid the policy before they exercised that right in February 2014.
- There is no suggestion that the claimant's failure to make disclosure was deliberate or reckless. I have found that it came about through inadvertence and indeed that, if attention had been given to the appropriate insured value, the claimant would probably have been content to insure the Yacht for the same amount of 8m for which the Yacht was put up for sale. I have also found that the Insurers would have agreed to insure the Yacht for that sum if all the material facts had been disclosed to them.
- The consequence of the claimant's breach of the duty of disclosure was therefore to induce the Insurers to insure the Yacht for 13m instead of 8m. The just result in these circumstances would be to treat the insurance as valid in a reduced amount of 8m. Such a result will be achieved in cases to which the new Insurance Act 2015 applies when the Act comes into force. Until then, however, it remains a blot on English insurance law that in a case of the present kind the insurer is permitted to avoid liability altogether. That is the law even though it puts the insurer in a better position as a result of the insured's innocent failure to make full disclosure than the insurer would have been in if full disclosure had been given.
- In addition to their non-disclosure argument, it is the Insurers' case that the proposal form for the Galatea when presented to the leading underwriter on 17 May 2011 contained a misrepresentation as to the market value of the Yacht and that the effect of this misrepresentation was that, when the 7 day period for presentation of a satisfactory proposal form expired, Insurers were no longer on risk.
What representation was made?
- The relevant section of the proposal form, when presented to Insurers, looked like this:
AMOUNT OF COVERAGE
HULL MARKET VALUE: 13,000,000
PROTECTION & INDEMNITY:
MEDICAL PAYMENTS: 100,000
UNINSURED BOATERS: 2,000,000
- Insurers argue that the entry of the figure "13,000,000" opposite the description "hull market value" amounted to a representation that the applicant for insurance believed the market value of the Yacht to be 13m. The proposal form was completed in the name of A1 "as managers" and the form was signed by Ms Koronaiou and stamped with A1's corporate stamp in the place for "signature of insured". It is common ground that in these circumstances any statements of opinion or belief made in the proposal form were statements as to the opinion or belief of A1. On behalf of Insurers Mr Schaff QC submitted that the individual whose opinion or belief counted as that of A1 for this purpose was Mr Polemis, as he was its directing mind. As evidenced by the March 2011 email, Mr Polemis believed the market value of the Yacht to be around 7m. Alternatively, if the relevant individual was Ms Koronaiou, her evidence was to the effect that, while she knew that the Yacht was insured for 13m, she did not know the basis of this figure nor did she know what the market value of the Yacht was. Thus, in either case, argued Mr Schaff, the representation that A1 believed the hull market value to be 13m was false.
- Mr Shah QC on behalf of the claimant, supported on this point by Mr Shapiro on behalf of AIS, denied that any representation was made in the proposal form that the Yacht had or was believed to have a market value of 13m. He emphasised that the relevant section of the form was headed "Amount of Coverage" and submitted that each item in that section referred to a type of cover or interest of the insured for which insurance could be sought. So, for example, the cover provided by the policy in this case included medical payments incurred as a result of an accident up to a limit of 100,000 per person. The policy also covered "uninsured boaters" (i.e. injuries caused by other boats which have no liability insurance) up to an amount of 2m for any one accident. The numbers entered on the proposal form for medical payments and uninsured boaters reflected these agreed amounts of cover. The claimant and AIS argued that, read in this context, the phrase "hull market value" like all the other items in this section would reasonably be understood as no more than a request for the amount of coverage which the applicant was seeking in respect of its interest in hull and machinery.
- Alternatively, Mr Shah submitted that the proposal form was, at best, ambiguous. He relied on a principle of law that, where a question asked in a proposal form is ambiguous, the insurer cannot complain of misrepresentation if on one possible meaning the answer given is true. As authority for this principle, Mr Shah cited Revell v London General Insurance Co Ltd (1934) 50 Ll L Rep 114, 116, where MacKinnon J said:
"I think Mr Samuels is right when he says indeed, it is elementary that if there is an ambiguity in this question so that upon one view of the reasonable meaning which is conveyed to the reasonable reader of it the answer was not false, the company cannot say that on the other meaning of the words the answer was untrue so as to invalidate the policy."
- MacGillivray on Insurance Law (12th Edn, 2012) at para 16-026 summarises the legal principle as follows:
"If there is genuine ambiguity in a question put to an applicant by insurers in a proposal form or elsewhere, the latter cannot rely upon the answer as a misrepresentation of fact if that answer is true having regard to the construction which a reasonable man might put upon the question and which the applicant did in fact put upon it." [emphasis added]
- In R & R Developments Ltd v Axa Insurance UK Plc  EWHC 2429 (Ch) Mr Nicholas Strauss QC (sitting as a deputy judge) analysed the authorities cited in the footnote to this passage, including Revell, and concluded that they do not support the suggestion made in the text that the applicant's subjective understanding is relevant. In his view, with which I respectfully agree, the meaning of what is said in a proposal form like any other question of interpretation in English law is to be determined objectively. If two applicants for insurance answer the same question in a proposal form in the same way, it would be capricious if one of them was found to have made a misrepresentation but the other was not because, unknown to the insurer, they privately understood the question in different ways. In this context, as in commerce generally, uncommunicated private meanings are not a secure or satisfactory basis on which to found legal rights and obligations. I understood it indeed to be common ground between all the parties in this case that the meaning of the statements made in the proposal form should be ascertained objectively.
- In R & R Developments, at para 26, the deputy judge regarded the approach of the law to ambiguity in proposal forms as an application of the contra proferentem principle. He expressed some doubt about how satisfactory this is, noting that the contra proferentem principle is generally seen as the last resort (para 27). While that is true when interpreting the terms of an insurance contract, there seems to me to be a legitimate reason to treat proposal forms differently. Whereas the wording of the contract, even if drafted by the insurer, is binding only if agreed by both parties, the questions asked in a proposal form are the unilateral choice of the insurer. (That is so even where, as in the present case, the form is drafted by the broker, since it is always open to the insurer to stipulate what information the proposal form must contain.) If an insurer accepts a proposal form containing a question which is reasonably capable of being understood in more than one way, it is fair that it should be treated as bearing the meaning least favourable to the insurer, who should not be advantaged by the ambiguity.
- If the proposal form used in this case had asked simply for the "hull value" or "vessel value" to be insured, I would have accepted that this item on the form could reasonably be understood as asking only to know the amount which the applicant is asking the insurer to agree to treat as the value of the yacht for the purpose of the insurance cover. I cannot see any ambiguity, however, in the phrase "hull market value" (my emphasis). The inclusion of the word "market" makes it clear that the information required is the applicant's estimate of the price which the yacht would fetch if sold in the open market. The fact that the place in the form where the "hull market value" must be entered is under the heading "Amount of Coverage" signifies that the amount of cover sought for the vessel must reflect the applicant's estimate of the vessel's market value. Should the applicant want cover in some different amount which does not correspond to its estimate of the vessel's market value, it would not be possible simply to enter a figure on the form in this space: a further or separate explanation would be required.
- I accordingly conclude that the proposal form used in this case was not ambiguous and that the figure of "13,000,000" entered on the form could only reasonably be understood as a representation that A1 believed the market value of the Yacht to be 13m. The fact that the other items in the section such as medical payments and uninsured boaters only required the applicant to identify the amount of cover which it wanted and not to make an estimate of market value does not detract from the clear meaning of the words used.
- As for whose belief counts as that of A1 for this purpose, I agree with Mr Shah QC that, where a statement of belief is made in a proposal form signed by an individual on behalf of a company, the ordinary implication must be that the belief stated is that of the individual who has been given responsibility to complete the form on the company's behalf. That in the present case was Ms Koronaiou.
- I find that Ms Koronaiou did not believe that the market value of the Yacht in April 2011 was 13m since, if someone had asked her when she signed the proposal form what she believed the market value of the Yacht to be, her answer would have been that she had no real idea. It follows that representation made in the proposal form that the market value of the Yacht was believed by A1 to be 13m was untrue.
Section 20 of the Act
- If the proposal form had been provided to underwriters before the declaration was signed and the insurance had in consequence been bound unconditionally at that point, a defence founded on an alleged misrepresentation in the proposal form would have to have been based on section 20 of the Act. Section 20(1) states:
"Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract."
As in the case of non-disclosure, although not expressly stated, it is an implied requirement of section 20 that the misrepresentation must have induced the insurer to enter into the contract: see Pan Atlantic v Pine Top  1 AC 501, 549.
- Because, however, a proposal form had not yet been completed when the declaration was signed, the requirement for a proposal form was addressed by including a "subjectivity" in the declaration slip. In order to determine the effect of the misrepresentation made in the proposal form, it is therefore necessary first to ascertain the effect of the subjectivity.
The effect of the subjectivity
- The subjectivity in the declaration stated:
"Subject to satisfactory proposal form ... within 7 days of inception."
I interpret these words to mean that Insurers (1) agreed unconditionally to insure the claimant for the first seven days after the inception date stated in the declaration, and (2) agreed to insure the claimant for the rest of the policy year if the claimant presented a satisfactory proposal form within that seven day period.
- Counsel for the Insurers argued that, to qualify as "satisfactory", the proposal form submitted on behalf of the claimant had to contain information which was accurate. Thus, a proposal form containing a misrepresentation did not fulfil the subjectivity, with the result that cover lapsed seven days after the inception date and the Yacht was not insured after that time.
- I do not regard this as a tenable interpretation. Whether something is "satisfactory" is an inherently subjective question and can only be judged by reference to the satisfaction or otherwise of a particular person. It is clear that under the form of subjectivity agreed in this case the person who must be satisfied with the proposal form is the underwriter. Thus, if the broker presents a proposal form which the underwriter rejects as unsatisfactory, then provided at least that the underwriter is acting in good faith, there can be no scope for arguing that the subjectivity has been complied with. Conversely, if the underwriter accepts a proposal form as satisfactory, there can be no scope for subsequent argument that the subjectivity has not been fulfilled. An interpretation which allowed for such a possibility would lack commercial sense because of the uncertainty to which it would give rise, as well as being inconsistent with the natural meaning of the words used. Thus the phrase "satisfactory proposal form" in my view simply means a proposal form which Insurers accept as satisfactory. Such acceptance was unequivocally communicated in the present case when the proposal form was scratched by Mr Stephenson on 17 May 2011.
- A further reason why I do not accept the Insurers' interpretation is that, if correct, it would have the result that a misrepresentation in the proposal form would relieve them of liability without the need to show materiality, inducement and the valid exercise of an election to avoid the policy. If the proposal form had been presented before the declaration was made in this case, a misrepresentation in the proposal form of which Insurers subsequently became aware would only enable them to avoid liability if these requirements were satisfied. The obvious purpose of the subjectivity was to protect Insurers by putting them in as good a position as if the proposal form had been provided before the declaration was made, but not to put them in a better position.
- Mr Schaff QC in his closing submissions sought to overcome this objection, at least in part, by glossing a "satisfactory proposal form" as one which is not only in fact considered satisfactory by the underwriter but also, if it contains a misrepresentation, would still have been considered satisfactory by the underwriter if it had been accurate. This in effect builds into the expression "satisfactory proposal form" a test of inducement. It does so, however, at the expense of artificiality and giving the words a meaning which in my view they cannot reasonably bear.
- As I see it, the effect of the Insurers' acceptance of the proposal form as satisfactory was, by fulfilling the subjectivity, to conclude a binding contract of insurance for the rest of the policy period. The effect of a misrepresentation in the proposal form was to give Insurers a right to avoid the contract, if the requirements of section 20 of the Act were satisfied. The position is exactly the same, in other words, as in the case of any misrepresentation made before the contract of insurance is concluded.
- The Insurers sought to draw support for their interpretation of the subjectivity from a comment made by Christopher Clarke J in Beazley Underwriting v The Travelers Companies  EWHC 1520 (Comm);  2 Lloyd's Rep IR 78. In that case quotations for insurance were given subject to (amongst other things) satisfactory proposal forms. The judge observed (at para 173):
"One effect of such subjectivities is that the information provided had to be accurate as at the date when the proposal forms were signed
Counsel for the Insurers relied on this comment as indicating that, if there was any inaccuracy in the information provided in the proposal forms, this would ipso facto mean that the subjectivity was not satisfied so that no contracts of insurance would come into existence even if the proposal forms were accepted as apparently satisfactory by the underwriters.
- This, however, seems to me to read far more than is warranted into the judge's observation. He was not addressing the issue about the legal analysis of the subjectivity which the Insurers have raised in this case. I see no reason to think that Christopher Clarke J had in mind anything other than the ordinary potential effect of a misrepresentation made before a contract of insurance is concluded. In other words, the information provided in the proposal forms had to be accurate because otherwise the underwriter would be induced to remove the subjectivity and to contract on the basis of a misrepresentation which would render the contract voidable.
- Section 20(2) of the Act states:
"A representation is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk."
It follows from my conclusions on materiality in the context of non-disclosure that this test is satisfied in the present case.
Inducement: the legal test
- Counsel for the Insurers submitted that the test of inducement is the same for misrepresentation as it is for non-disclosure: the Insurers must show that they were induced by the misrepresentation to enter into the contract on terms that they would not have accepted if all the material facts had been made known to them. In support of this contention they referred to MacGillivray on Insurance Law (12th Edn, 2012) at para 16-047 and St Paul Fire and Marine Insurance v McConnell Dowell  2 Lloyd's Rep 116, 124.
- MacGillivray in the passage cited states the law as follows:
"The claimant must show that the misrepresentation was a real and substantial cause of his entering into the contract on terms that he would not have accepted if he had been appraised of the truth. It may well be reasonable to infer, in the absence of evidence from the claimant, that he would not have contracted, either on the same terms or at all, if the misrepresentation had not been made."
Two different tests are in fact identified in this passage. One is whether the insurer would have entered into the contract on the terms agreed "if he had been appraised of the truth". The other is whether the insurer would have contracted "if the misrepresentation had not been made". As shown by Christopher Clarke J in his penetrating analysis of this question in Raiffeisen Zentral Bank Osterreich AG v The Royal Bank of Scotland Plc  1 Lloyd's Rep 123, 156-159, paras 174-194, these tests are not the same and do not necessarily lead to the same conclusion.
- I respectfully agree with Christopher Clarke J that, in order to determine whether the making of a misrepresentation induced the representee to enter into a contract, the critical counterfactual question to ask must in principle be whether the representee would still have contracted (on the same terms) if the representation had not been made. The question of what the representee would have done if told the truth can only be relevant in so far as the answer bears on this critical question. This follows from the fact that the wrong complained of where the complaint made is one of misrepresentation as opposed to non-disclosure consists in saying something false rather than failing to inform the other party of the truth.
- In the Raiffeisen case, which did not itself involve a contract of insurance, Christopher Clarke J accepted a submission that, if a witness is to be asked what he would have done if he had been told the truth as an aid to discovery of what he would have done if the representation had not been made, it is necessary to be exact as to what "the truth" means. In this regard he drew a distinction between contracts of insurance and other contracts. He said (at para 193):
"In the case of contracts of insurance the position is different. The insured has a duty of disclosure of all material facts and, when non-disclosure is relied on no reliance on any statement has to be proved. In that context the question 'what would you have done if you had been told the truth?' is directly relevant and the 'truth' constitutes everything that it is material for the insurer to know. But in a non insurance context liability arises because of the falsity of the statement. The relevant test is what would have been done in the absence of the statement and a relevant question is what would the representee have done if given sufficient information to dispel its inaccuracy?"
- While the point made is plainly correct, there is still in the insurance context a conceptual distinction between a claim based on non-disclosure and a claim based on misrepresentation. The former is governed by the section 18 of the Act and the latter by section 20. The relevant principles, although similar, are not the same. Plainly, where the claim is based on non-disclosure of a material fact, the relevant question when considering inducement is what the insurer would have done if told that fact. In so far, however, as the claim is based on a misrepresentation, then in the insurance context just as in any other context it is what was actually said to the insurer rather than what was not said which is the foundation of the claim, and the relevant test is therefore what the insurer would have done in the absence of that representation.
- The distinction is not merely theoretical. Not only may the consequences of misrepresentation and non-disclosure differ but, when a misrepresentation is made to insurers, the facts which insurers would have been told if told the truth do not necessarily coincide with facts which the insured had a duty to disclose. This is illustrated by the fact that, in the present case, Insurers do not contend that the claimant had a duty to disclose its own or its manager's opinion of the market value of the yacht. Rather, as discussed earlier, their case on non-disclosure is that the claimant had a duty to disclose facts within its knowledge which indicated that the market value of the Yacht was significantly less than the amount of cover sought. Thus, if Insurers are right that a representation was made in the proposal form that A1 believed the market value of the Yacht to be 13m, the question of what the Insurers would have done if told what A1 in fact believed the market value of the Yacht to be is not the same question as what Insurers would have done if the duty of disclosure had been complied with. Moreover, both questions are different from the question of what would have happened if the relevant representation had not been made.
- I do not regard the St Paul Fire case, which was cited by Insurers, as inconsistent with this analysis, as in that case it was common ground between the parties that "the insurer must prove that he was induced by the non-disclosure or misrepresentation to enter into a contract on terms which he would not have accepted if all the material facts had been made known to him": see  2 Lloyd's Rep 116, 124. No consideration was given to any relevant differences between the defences of non-disclosure and misrepresentation, which were dealt with together.
- I conclude that in considering, as I am at present, a defence of misrepresentation based on section 20 of the Act the question of inducement depends on whether Insurers would still have accepted the proposal form as satisfactory if it had not contained a representation that A1 believed the market value of the Yacht to be 13m.
Inducement: factual findings
- One way of approaching this question is to ask what Mr Stephenson would have done when shown the proposal form for the Galatea on 17 May 2011 if the figure of 13m had not been inserted opposite the description "hull market value" under the heading "Amount of Coverage" and that part of the form had instead been left blank.
- Mr Stephenson said in evidence that, if that section of the form had been blank, he would have referred the question whether to accept the proposal form as satisfactory to Mr Higham. When asked why, in that case, he had approved the Sapphire proposal form without reference to Mr Higham despite the fact that the section headed "Amount of Coverage" on that form had been left blank, his answer was that he had previously scratched the declaration for the Sapphire and was sure that he would have understood at that time that the yacht was being insured for the purchase price. In the case of the Sapphire, he therefore did not need to seek confirmation of the market value and the position was different from the position in relation to the Galatea.
- Although I do not doubt the sincerity of what Mr Stephenson now thinks he would have done, I do not attach much weight to an opinion expressed on this question several years after the relevant events, in the context of a court case, and with the knowledge which he now has. I find that, if the proposal form for the Galatea had been presented with the section headed "Amount of Coverage" blank, the probability is that Mr Stephenson would simply have recorded on the form himself the amounts of cover agreed for Hull and Machinery and Increased Value, as he did on the proposal form for the Sapphire, and would then have scratched the form without referring it to Mr Higham. My reasons for this finding are the following:
i) Although Mr Stephenson is obviously aware now that the amount for which the Sapphire was insured represented her purchase price, there is nothing in the contemporaneous documents to support his assertion that he must have been told this when he scratched the declaration. The details of the Sapphire which Mr Birch sent by email to Mr Ranson when requesting a quotation included the amount of cover requested but did not state that this was the price paid for the yacht. Nor was any information provided subsequently, at least in writing, about the purchase price of the Sapphire. In any case, Mr Higham had already given a quotation and it was only necessary for Mr Stephenson, in order to approve the declaration, to satisfy himself that it corresponded to Mr Higham's quote. It was not necessary for Mr Stephenson to probe the basis on which the amount of cover had been set and I think it unlikely that he did.
ii) Even if Mr Stephenson was told orally, or assumed, when he scratched the declaration for the Sapphire, that the amount of cover for which Mr Higham had quoted reflected the purchase price of the yacht, he accepted the proposal form for the Sapphire as satisfactory even though it did not contain any representation by the assured confirming either the purchase price or the market value of the vessel. In circumstances where Mr Stephenson did not require such confirmation for the Sapphire, I see no reason why he would have required written confirmation in the proposal form of the fact that the sum for which the Galatea was insured reflected her manager's estimate of the yacht's market value.
iii) Mr Ranson said in evidence that he regarded the proposal form as a "formality". This attitude is borne out by his conduct in sending a cover note for the Galatea to AIS on 13 May 2011 in which he had removed the subjectivity even though he had not yet presented the proposal form to underwriters for their approval. It is also reflected in his relaxed, not to say lackadaisical, approach in presenting the Sapphire proposal form 26 days late, even though he had had the form in his possession all that time. Given that Mr Ranson had on his estimate placed over 1,000 yachts (amounting to several thousand policies including renewals) with Mr Higham and Mr Stephenson, I infer that his view of how Travelers' treated the proposal form was based on extensive experience of their approach.
iv) The fact that Mr Stephenson evidently expressed no concern about the late presentation of the Sapphire form or the fact that both proposal forms presented on 17 May 2011 had information missing confirms that he did indeed treat the provision of proposal forms after risks had already been declared under the lineslip as something of a formality.
v) While the OAMPS proposal form had a line for entering the "hull market value", Travelers did not require proposal forms to contain this information. This is shown by documents relating to a sample of other risks written under the lineslip which were included in the trial bundles. In many of these cases differently worded proposal forms were used in which the equivalent section to that headed "Amount of Coverage" in the OAMPS form was headed "Value to be insured" and had lines for "vessels" and other items with a space underneath to enter "Total sum to be insured". I do not think that those proposal forms could reasonably be interpreted as requesting a statement of the estimated market value of the vessel as opposed simply to a statement of the sum to be insured. I infer from this that Travelers did not regard it as essential that a proposal form should contain a representation regarding the yacht's market value.
- I have mentioned that a variety of different proposal forms appear to have been accepted which varied in their contents and that there was no standard proposal form which Travelers required to be used. Another legitimate approach to the question of inducement in these circumstances is to ask what Mr Stephenson would have done if the proposal form presented for the Galatea had not contained a line for "hull market value" but had instead requested only the value for which the vessel was to be insured as some proposal forms did. If such a form had been used for the Galatea and the figure of 13m entered in the relevant place, then for the reasons indicated I infer that Mr Stephenson would have been satisfied with it.
- Furthermore, even if Mr Stephenson was correct in saying that, if the Galatea proposal form had been presented with the hull market value left blank, he would have referred the matter to Mr Higham, that merely raises the question of what Mr Higham would have done. I see no reason to suppose that Mr Higham would have rejected the proposal form as unsatisfactory. I think it more likely that Mr Higham, who had already agreed to the amount of cover for the Galatea, would have signed off the proposal form.
- I conclude that Insurers have failed to prove that the misrepresentation made in the proposal form induced them to accept the proposal form as satisfactory and agree to insure the Yacht for the full policy period.
- It follows from this conclusion that Insurers were not entitled to avoid the policy for misrepresentation (as well as for non-disclosure). In these circumstances the question whether Insurers waived the right to avoid the policy on this ground does not arise. If it had been necessary to decide that question, I would have found that there was no waiver for similar reasons to those which have led me to reject the argument that Insurers waived the right to avoid the policy for non-disclosure.
(3) Non-compliance with policy requirements
- As mentioned earlier, the policy incorporated the American Yacht Form 12 (the "R12 Clauses"). The Insurers' third line of defence is that the claimant failed to comply with requirements of the R12 Clauses regarding proof of loss and the production of documents, with the result that the claimant is contractually barred by a term of the R12 Clauses from suing under the policy.
The "Filing of Proof" clause
- The first requirement of the R12 Clauses with which the claimant allegedly failed to comply is contained in the following clause:
"NOTICE OF LOSS AND FILING OF PROOF
It is agreed by the Assured to report immediately to the Assurers or their representative who shall have issued this Policy every occurrence which may become a claim under this Policy, and shall also file with the Assurers or their representative, a detailed sworn proof of loss and proof of interest and/or receipted bills in case of a partial loss, within ninety (90) days from date of loss."
The date of loss was 3 December 2011 and the 90 day period specified in this clause therefore expired on 2 March 2012. The claimant reported the casualty immediately to the Insurers but did not provide a sworn proof of loss until 10 July 2012, more than four months after the expiry of the 90 day period.
The "Examination under Oath" clause
- Insurers further rely on what they say was the claimant's persistent failure, despite requests, to provide documents relating to the valuation, putting up for sale and marketing of the Yacht in breach of the following clause:
"EXAMINATION UNDER OATH
The Assured, as often as may be reasonably required, shall exhibit to any person designated by the Assurers all that remains of any property herein described and shall submit, and in so far as is within his or their power cause his or their employees, members of the household and others to submit to examinations under oath by any person named by the Assurers and subscribe the same; and as often as may be reasonably required, shall produce for examination all writings, books of account, bills, invoices and other vouchers, or certified copied [sic] thereof if originals be lost, at such reasonable time and place as may be designated by the Assurers or their representative, and shall permit extracts and copies thereof to be made. ..."
The "Time for Suit" clause
- The Insurers' argument that the claim is contractually barred is based on a clause which states:
"TIME FOR SUIT AGAINST THE ASSURERS
No suit or action on this Policy for the recovery of any claim shall be sustainable in any court of law or equity unless the Assured shall have fully complied with all the requirements of this Policy, nor unless commenced within one (1) year from the date of happening or the occurrence out of which the claim arose, provided that where such limitation of time is prohibited by the laws of the state wherein this Policy is issued, then, and in that event, no suit or action under this Policy shall be sustainable unless commenced within the shortest limitation permitted by the laws of such state."
Insurers argue that, although this clause does not use the phrase "condition precedent" or state in terms that Insurers will be relieved of liability if any of the requirements of the policy is not complied with, this is its clear effect. The effect is achieved by barring the insured from bringing a suit for the recovery of any claim under the policy if the insured has not complied with all the requirements of the policy.
The claimant's response
- Counsel for the claimant rejected the Insurers' case on this issue on two grounds:
i) There has been no failure to comply with the relevant requirements; and
ii) Any failure to comply does not give rise to the consequence alleged.
I will consider the second ground first.
The effect of the "Time for Suit" clause
- Counsel for the claimant argued that, where the assured has not fully complied with all the requirements of the policy, the effect of the "Time for Suit" clause on its proper interpretation is not permanently to prevent the assured from bringing proceedings against the Insurers but is to entitle Insurers to apply for a stay of any proceedings until such time as there has been full compliance. This treats the word "unless" where it first appears in the clause as meaning "unless and until". I cannot accept this interpretation. If correct, it would potentially allow proceedings to be suspended, perhaps for years, before later coming back to life when a requirement of the policy had been complied with thus leading to delay rather than the swift resolution of disputes at which the clause seems to me clearly to be aimed. Such an interpretation would also be inconsistent with the clear intention of the clause that the time limit of one year for the commencement of suit is to be an absolute cut off date and not merely suspensory in its effect. Accordingly, the word "sustainable", as it is used in this clause, must in my view mean "capable of being pursued at all" and not merely "capable of being pursued for the time being".
- I would add that, even if the claimant's interpretation of the clause were to be accepted, I cannot see that it would assist the claimant. If the prohibition on suit was merely suspensory and resulted in a stay which was in principle capable of being lifted, the stay resulting from a failure, for example, to provide a sworn proof of loss within 90 days from the date of loss would still inevitably be permanent. That is because, once there has been a failure to comply with this requirement, nothing done subsequently can alter that fact and rewrite history: later provision of a sworn proof of loss would not constitute compliance with the requirement to provide it within 90 days.
The effect of litigation
- The primary basis on which the claimant argued that there has been no failure to comply with the relevant requirements involved reliance by analogy on the decision of the House of Lords in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The "Star Sea")  1 AC 469. In that case the House of Lords held that the duty of utmost good faith under section 17 of the Act, which may amongst other things entitle the insurer to require disclosure of documents relevant to a claim, comes to an end when litigation is commenced. From that point on, it is the rules of civil procedure which exclusively govern the extent to which disclosure should be given. On behalf of the claimant, Mr Shah QC sought to rely on the fact that on 10 February 2012 Insurers issued a claim form seeking negative declaratory relief. The evident reason for doing this was to enable Insurers to argue that the English courts were first seized of the dispute in the event that the claimant decided to commence proceedings in Greece. A second claim form was issued for a similar purpose on 10 August 2012. Neither claim form was ever served on the claimant, however, and the claimant was not aware of their existence until they were disclosed in the present action. Nevertheless, on the strength of these earlier proceedings Mr Shah argued that from 10 February 2012 onwards the claimant's obligations with regard to disclosure of documents and the provision of evidence were governed exclusively by the Civil Procedure Rules and not by the requirements contained in the insurance policy. He submitted that, for this reason, Insurers cannot rely on the alleged failures to comply with policy requirements which took place after that date.
- The case of The "Star Sea" was concerned with the general duty of good faith and not with the meaning of an express contractual provision. I see no reason to construe the "Time for Suit" clause or the R12 Clauses generally as containing any implied qualification which makes it unnecessary for the assured to comply with any relevant requirement in circumstances where the insurer, without the knowledge of the assured, has issued precautionary proceedings for negative declaratory relief which have not been served.
- That said, I would not interpret the provisions in the R12 Clauses on which Insurers rely as applicable after the present proceedings were commenced. I think it clear that the contractual regime is designed to facilitate the speedy resolution of claims. To this end the policy requires the assured to give immediate notice of a potential claim and to provide a detailed proof of its loss within a short timescale and gives the insurer powers to require further information to be provided. The object of the "Time for Suit" clause, as I see it, is to give teeth to this regime by preventing the insured from suing unless it has complied with the relevant requirements, while at the same time further promoting the speedy resolution of any disputed claim by imposing a contractual time limit of one year for the commencement of proceedings.
- In that context it seems to me that, by the time an action to recover a claim under the policy has been commenced which is not barred by the contractual time limit, the insurer's contractual powers to examine witnesses on oath and inspect documents have served their purpose. I do not think it reasonable to interpret the clause headed "Examination under Oath" as providing the insurer with an additional set of powers to obtain evidence and documents which are intended to operate in parallel with the rules of civil procedure after such litigation is on foot. To that extent, I consider that there is an analogy with the reasoning of The Star Sea. That result is most readily achieved by holding that it is no longer reasonable to require examination of witnesses on oath or examination of documents once the assured has commenced an action for the recovery of a claim. I see no reason to extend this, however, to circumstances in which proceedings for negative declaratory relief have been issued but not yet served and there is no present intention to serve the proceedings on the other party.
Alleged non-compliance with the "Filing of Proof" clause
- It is a matter of record that the claimant did not provide a sworn proof of loss within 90 days as required by the clause headed "Notice of Loss and Filing of Proof". Counsel for the claimant submitted that service of a sworn proof of loss was a pure formality given that Insurers' agents attended the scene of the fire almost immediately and were well aware of the seriousness of the damage to the Vessel. Insurers were therefore notified of the loss, and the fact that the Vessel was a constructive total loss, well within the 90 days required. Serving a sworn proof of loss would not have added anything significant to Insurers' understanding of the claim.
- Insurers responded that the purpose of requiring the assured to file a detailed sworn proof of loss is not to serve as an alternative to Insurers carrying out their own enquiries but is to obtain sight at an early stage of the evidence on which the assured relies to make its claim. That seems to me a perfectly legitimate purpose. But in any event whether serving a sworn proof of loss would have been useful or not, the clause is quite specific and was not complied with. There is no basis for reading into the clause any dispensation from the requirement in a situation where the provision of a detailed proof of loss is not thought to be useful. The contention that this requirement of the policy was not complied with is unanswerable.
Alleged non-compliance with the "Examination under Oath" clause
- Counsel for the claimant also disputed that the claimant failed to comply with the "Examination under Oath" clause. They argued that, once Insurers had declined cover, as they did by a letter from their solicitors dated 27 January 2012, it was not reasonable for Insurers thereafter to require the claimant to produce documents for examination. Hence no obligation to do so arose.
- I do not accept this argument. The ground on which Insurers denied liability for the loss in their letter dated 27 January 2012 was that the subjectivity in the policy was allegedly not complied with. The letter nevertheless continued:
"Entirely without prejudice to the above position, Underwriters note that the various other issues raised in our letter of 22 December also remain unanswered and their position with regard to those matters remains reserved; in particular, Underwriters reserve the right to pursue those enquiries in due course in the event that the Assured disputes Underwriters' position as expressed above."
The issues raised in the letter of 22 December 2011 included requests for copies of all valuations of the Yacht and all documents relating to the decision to put the Yacht up for sale and to the marketing of the Yacht. In circumstances where the claimant did indeed strongly dispute the Insurers' position that the subjectivity had not been fulfilled, I can see nothing unreasonable in the Insurers continuing to pursue requests for documents which would potentially show whether there were material facts known to the claimant when the policy was placed which were not disclosed. I thus consider that the documents which Insurers asked the claimant to produce were "reasonably required" pursuant to the "Examination under Oath" clause.
- There is, however, as it seems to me, a different objection to the Insurers' argument that this clause was not complied with. The clause imposes an obligation on the assured to produce the documents required for examination "at such reasonable time and place as may be designated by the Assurers or their representative". Insurers did not in any of their relevant requests for documents designate a time and place at which the documents were required to be produced. There was accordingly no default in compliance with the requirements of this clause on which Insurers can rely.
- Mr Walsh, who dealt with this issue in the Insurers' oral closing submissions, submitted that, although no time and place were designated, the requests for documents made on behalf of the Insurers impliedly called upon the claimant to produce the documents in question for examination at the offices of the Insurers' solicitors within a reasonable time after the request was made. I do not think that the requests can fairly be read in this way. The requirement of a "reasonable time" is built into the clause in any event and the provision for a time to be designated by Insurers is an additional requirement. Nor do I think it reasonable to interpret the clause in a way which dispenses with the need for an express designation in circumstances where the potential result of non-compliance with its requirements is the drastic one of being barred from bringing suit. Certainty is also of the utmost importance in this context. The clear purpose of requiring a time and place to be designated is to make it clear and leave no scope for argument about whether or not the requirement has been complied with just as there is a precise time within which the assured has to provide a sworn proof of loss.
- I therefore consider that Insurers cannot establish that there was a failure to comply with the requirements relating to the production of documents for examination when no time and place were designated for this purpose.
- I conclude that, although there was no relevant breach of the "Examination under Oath" clause, the claimant's failure to provide a sworn proof of loss within 90 days from the date of loss had the result of barring the claimant from bringing proceedings for the recovery of its claim.
Relationship of the R12 and IV Clauses
- There is no doubt that the R12 Clauses, and hence this contractual bar to suit, apply to the claim under Section A of the policy. A question arises, however, as to whether the R12 Clauses apply to Section B of the policy, which provided cover for the Increased Value of Hull and Machinery in the sum of 3.25m. The terms of that cover are contained in the American Institute Increased Value and Excess Liabilities Clauses (November 3 1977) (the "IV Clauses"), which were incorporated in the policy with "Coverage (1) extended to include the settlement of a claim for Total Loss under the American Yacht Form R12".
- The R12 Clauses are stated in their heading to comprise warranties and general conditions which are "applicable to all coverages unless otherwise indicated" (emphasis added). The IV Clauses begin as follows:
"The terms and conditions of the following clauses are to be regarded as substituted for those of the policy form to which they are attached, the latter being hereby waived, except provisions required by law to be inserted in the policy."
It seems to me that the clear effect of these words is to render the R12 Clauses inapplicable (by indicating otherwise) to the Increased Value section of the policy and to substitute for them the IV Clauses for the purposes of the cover provided by that section.
- I do not accept the submission made by Mr Walsh on behalf of Insurers that the "policy form" referred to in the opening words of the IV Clauses should be understood to mean the declaration. It seems to me more natural to interpret this phrase as referring to the American Yacht Form R12 (i.e. the R12 Clauses) which contain the general policy conditions. Even if the phrase is construed as referring to the declaration, however, I cannot see that this assists Insurers. On this interpretation the terms and conditions of the "policy form" would be the terms and conditions incorporated in the declaration (necessarily excluding, to avoid contradiction, the IV Clauses themselves). Those terms and conditions include the R12 Clauses. The R12 Clauses are therefore on any view clauses for which the IV Clauses are to be regarded as substituted and which do not apply to the Increased Value section of the policy.
- The intention that the IV Clauses should operate (to the extent permitted by law) as a comprehensive code in relation to the Increased Value cover is further confirmed by consideration of their content. They include provisions dealing with all aspects of the cover, including the rights of the assured, the amount insured, the duration of risk and the premium. The scope of coverage provided by the IV Clauses is independently defined, albeit that (as noted earlier) it has in this case been extended by the declaration to include the settlement of a claim for total loss under the R12 Clauses. The IV Clauses also contain their own notice provision, which is in different terms from the notice provision in the R12 Clauses and states:
"NOTICE OF CLAIM
When it becomes evident that any accident or occurrence could give rise to a claim under this policy, prompt notice thereof shall be given to the Underwriters."
Although it would be possible in principle to have two notice provisions operating concurrently, the more natural and reasonable implication is that in keeping with the clear meaning of their opening words the IV Clauses are intended to constitute a separate and self-contained regime.
- The IV Clauses do not contain any requirement to file a sworn proof of loss or to produce documents for examination at the request of the insurer. Nor do they contain any equivalent of the "Time for Suit" provision in the R12 Clauses which makes compliance with policy requirements a condition precedent to suing the insurers. As I interpret the policy, those provisions therefore do not apply to the Increased Value cover.
The claim settlement provisions
- On behalf of Insurers, Mr Walsh submitted that, even if the provisions of the R12 Clauses on which Insurers rely do not apply directly to the Increased Value cover, where the R12 Clauses operate so as to prevent the assured from pursuing a claim under Section A of the policy, this has the indirect result of preventing a relevant recovery under Section B. This argument was based on the following provisions of Section (1) of the IV Clauses:
"Provided that the policies on Hull and Machinery contain the above clauses with respect to the method of ascertaining whether the vessel is a constructive Total Loss (or clauses having a similar effect), the settlement of a claim for Total Loss under the policies on Hull and Machinery shall be accepted as proof of the Total Loss of the vessel under this policy; and in the event of a claim for Total Loss being settled under the policies on Hull and Machinery as a compromised total loss, the amount payable hereunder shall be the same percentage of the amount hereby insured as the percentage paid on the amount insured under the said policies.
Should the vessel be a constructive Total Loss but the claim on the policies on Hull and Machinery be settled as a claim for partial loss, no payment shall be due under this Section (1). "
- It is common ground that the proviso at the start of these provisions is satisfied in the present case, as the R12 Clauses which apply to the Hull and Machinery section of the cover contain clauses having a similar effect to the IV Clauses with respect to the method of ascertaining whether the vessel is a constructive total loss. Mr Walsh submitted that in these circumstances the effect of the provisions quoted above (which I will call the "claim settlement provisions") is to make the assured's right to recover under the Increased Value cover conditional on settlement of a claim for total loss under the Hull and Machinery cover.
- I do not accept that the claim settlement provisions have this effect. It is clear from their wording that the claim settlement provisions contemplate a situation in which the Hull and Machinery insurance and the Increased Value insurance are provided under separate policies which may be underwritten by different insurers. This does not make the provisions inapplicable where, as in the present case, the insurances are in fact contained in separate sections of the same policy: the references to "policies" must be read accordingly as denoting what are in this case different sections of the same policy. It does, however, inform the purpose of the claim settlement provisions, which are evidently concerned with problems that may arise where the underwriters of the Hull and Machinery cover and of the Increased Value cover are different. As I interpret them, the effect of the claim settlement provisions is threefold.
- First, they dispense with the need, in a case where there has been settlement of a claim under the Hull and Machinery insurance on the basis that the vessel is a total loss, for the assured to prove independently that the vessel is a total loss in order to recover under the Increased Value cover. The phrase "settlement of a claim for Total Loss" must mean settlement of such a claim on the basis that a total loss is established or admitted, as any other interpretation would produce nonsensical results. It cannot, for example, have been intended that settlement of a claim by way of a judgment rejecting the assured's case that the vessel is a total loss should be accepted as proof of the total loss of the vessel under the Increased Value cover. There is nothing which says, however, that relying on such a settlement is the only way in which the assured may prove that the vessel is a total loss when making a claim under the Increased Value cover. If the intention had been to restrict the right of the assured to recover under the Increased Value cover rather than simply extending the ability of the assured to do so, it would have been necessary to say so clearly. As it is, the wording does not say this clearly or at all.
- The second effect of the claim settlement provisions is restrictive but is limited in scope, applying only where a claim for total loss under the Hull and Machinery cover is compromised. Where that happens, the amount payable under the Increased Value cover is stipulated to be the same percentage of the amount insured under that cover as the percentage paid on the amount insured under the Hull and Machinery cover.
- The third element of the claim settlement provisions is also limited in its effect. This prevents the assured from recovering under the Increased Value cover when a claim under the Hull and Machinery cover is settled as a partial loss.
- There is nothing in these provisions which says that, if no claim under the Hull and Machinery cover is made at all or if a claim is made under that cover which fails for example, because of failure to comply with a condition precedent to suit for the recovery of a claim under that cover, this prevents the assured from making a recovery under the Increased Value insurance.
- It follows that, if the policy had not been avoided, the claimant's failure to file a sworn proof of loss would not in my view have prevented recovery under Section B.
(4) Notice of Abandonment
- The final defence on which Insurers rely, if necessary, is an argument that the claimant cannot treat the loss of the Yacht as a total loss because it did not give a valid notice of abandonment. Insurers accept that this does not prevent the claimant from treating the loss as a partial loss and recovering the full amount insured under Section A of the policy (i.e. 9.75m). Insurers argue, however, that the inability to treat the loss as a total loss means that the claimant cannot recover anything under Section B as that section only provides cover for a total loss.
The relevant law
- The relevant law is codified in sections 57 to 63 of the Act, which include the following provisions:
"LOSS AND ABANDONMENT
57. Actual total loss
(1) Where the subject-matter insured is destroyed, or so damaged as to cease to be a thing of the kind insured, or where the assured is irretrievably deprived thereof, there is an actual total loss.
(2) In the case of an actual total loss no notice of abandonment need be given.
60. Constructive total loss defined
(1) Subject to any express provision in the policy, there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.
(2) In particular, there is a constructive total loss
(ii) In the case of damage to a ship, where she is so damaged by a peril insured against, that the cost of repairing the damage would exceed the value of the ship when repaired.
61 Effect of constructive total loss.
Where there is a constructive total loss the assured may either treat the loss as a partial loss, or abandon the subject-matter insured to the insurer and treat the loss as if it were an actual total loss.
62 Notice of abandonment.
(1) Subject to the provisions of this section, where the assured elects to abandon the subject-matter insured to the insurer, he must give notice of abandonment. If he fails to do so the loss can only be treated as a partial loss.
(2) Notice of abandonment may be given in writing, or by word of mouth, or partly in writing and partly by word of mouth, and may be given in any terms which indicate the intention of the assured to abandon his insured interest in the subject-matter insured unconditionally to the insurer.
(3) Notice of abandonment must be given with reasonable diligence after the receipt of reliable information of the loss, but where the information is of a doubtful character the assured is entitled to a reasonable time to make inquiry.
(4) Where notice of abandonment is properly given, the rights of the assured are not prejudiced by the fact that the insurer refuses to accept the abandonment.
(5) The acceptance of an abandonment may be either express or implied from the conduct of the insurer. The mere silence of the insurer after notice is not an acceptance.
(6) Where notice of abandonment is accepted the abandonment is irrevocable. The acceptance of the notice conclusively admits liability for the loss and the sufficiency of the notice.
(7) Notice of abandonment is unnecessary where, at the time when the assured receives information of the loss, there would be no possibility of benefit to the insurer if notice were given to him.
63 Effect of abandonment.
(1) Where there is a valid abandonment the insurer is entitled to take over the interest of the assured in whatever may remain of the subject-matter insured, and all proprietary rights incidental thereto.
- The relevant effect of these provisions has been clearly summarised by Tomlinson J (as he then was) in Dornoch Ltd v Westminster International BV (The "WD Fairway")  EWHC 889 (Admlty);  2 Lloyd's Rep 191 at para 31. In the case of an actual total loss, no notice of abandonment need be given: see section 57(2) of the Act. Where there is a constructive total loss, the assured may either treat the loss as a partial loss or treat it as if it were an actual total loss: section 61 of the Act. However, the right of the assured to treat a constructive total loss as if it were an actual total loss is dependent on abandoning the subject-matter insured to the insurer: section 61 of the Act. Where the assured elects to abandon the subject-matter to the insurer, he must give notice of abandonment section 62(1), subject only to the exception provided by section 62(7) where at the time the assured receives information of the loss there would be no possibility of benefit to the insurer if notice were given to him, in which case notice of abandonment is unnecessary.
The threshold for a constructive total loss
- The R12 Clauses provide:
"No recovery for a constructive total loss shall be had hereunder unless the expense of recovery and repairing the vessel shall exceed the amount of insurance on hull and machinery."
Similarly, the IV clauses provide that "in ascertaining whether the vessel is a constructive total loss the Agreed Value in the policies on Hull and Machinery shall be taken as the repaired value". The relevant cost of repair threshold for establishing a constructive total loss in this case was therefore the amount insured under Section A of the policy that is, 9.75m.
Was notice given in time?
- On 14 May 2012 naval architects instructed by the claimant produced a report which estimated that the total cost of repairing the damage to the Yacht would be 12,250,800. It is common ground that, once this report was received, even if not before, the claimant had reliable information which clearly demonstrated that the Yacht was a constructive total loss. On 12 July 2012 the claimant's served a formal notice of abandonment. Insurers maintain that notice of abandonment was not given with reasonable diligence after the receipt of reliable information of the loss, as required by section 62(3) of the Act. They argue that, in consequence, the claimant lost the right to abandon the Yacht to Insurers and treat the loss as a total loss and is instead restricted by section 62(1) of the Act to treating the loss as a partial loss.
- In their written opening submissions for the trial, counsel for the claimant sought to rely on a letter from the claimant's solicitors dated 8 May 2012 which they argued gave sufficient notice of abandonment. That was not a tenable contention. The letter in question contained a statement that the Yacht was "almost certainly" a constructive total loss. On that basis the claimant had the right under section 61 of the Act to elect either to treat the loss as a partial loss or to abandon the Yacht to Insurers and treat the loss as if it were an actual total loss. Nothing in the letter said or implied, however, that it was the claimant's intention to abandon its interest in the Yacht unconditionally to Insurers. The letter therefore did not fulfil the requirements of a notice of abandonment as defined in section 62(2) of the Act.
- In Allwood v Henckell (1795) 1 Park 399, 400, Lord Kenyon said that "the assured must make his election speedily". Counsel for Insurers cited a number of cases in which delays of only a few days or weeks in giving notice of abandonment were held to be fatal to the insured.
- In the present case no reason has been put forward for the claimant's failure to give notice of abandonment in the letter dated 8 May 2012 or, at latest, upon receipt of the naval architect's report on 14 May 2012. Even if a period of a few days, or perhaps a little longer, might be justified on the basis of the need for the claimant to take legal advice and give instructions to its solicitors, it is difficult to envisage how a delay of two months could possibly be consistent with the exercise of reasonable diligence. In the absence of any explanation for the delay, I am bound to conclude that it was not.
Was notice necessary?
- The main argument advanced by the claimant was that, pursuant to section 62(7) of the Act, notice of abandonment was unnecessary because there would have been no possibility of benefit to Insurers if notice had been given to them (or given sooner). One way in which this argument was put was to say that an earlier notice of abandonment would not have made any difference to Insurers because they had appointed their own advisers immediately to investigate the loss and protect their interests and were aware from a very early stage that the Yacht would almost certainly prove to be a constructive total loss. This argument, however, misunderstands the purpose of a notice of abandonment, which is not to enable insurers to investigate the casualty. Its purpose is to enable them, if they choose to accept the abandonment, to take over the assured's interest in the vessel and any rights incidental to it. As Cotton LJ explained in Kaltenbach v Mackenzie (1878) 3 CPD 467, 480:
"the object of notice, which is entirely different from abandonment, is that [the assured] may tell the underwriters at once what he has done, and not keep it secret in his mind, to see if there will be a change of circumstances. There is another reason: the thing in various ways may be profitably dealt with, as the ship was in this case. Therefore, the second reason for requiring notice of abandonment to be given to the underwriters is, that they may do, if they think fit, what in their opinion is best, and make the most they can out of that which is abandoned to them as the consequence of the election which the assured has come to."
- The second and more promising way in which the argument was put by counsel for the claimant relied on the Insurers' decision to decline cover on 27 January 2012 on the basis of alleged non-compliance with the subjectivity in the declaration. If Insurers had accepted notice of abandonment, they would thereby have been treated pursuant to section 62(6) of the Act as having irrevocably and conclusively admitted liability for the loss. Mr Shah QC argued that there was in these circumstances no realistic possibility that Insurers might accept notice of abandonment because the result of doing so would be to forfeit the defence which they were asserting to the insurance claim. There was thus no possibility of benefit to the Insurers from the giving of notice.
- On behalf of Insurers, Mr Walsh submitted that the circumstances in which section 62(7) applies are very narrow indeed. An example of a case in which it has been successfully invoked is Black King Shipping Corp v Massie (The "Litsion Pride")  1 Lloyd's Rep 437, 478, where any notion of salvage was found to be completely impracticable, with the vessel lying wrecked on a sandbank at the head of the Persian Gulf in a very active war zone. Another example is The "Kastor Too"  2 Lloyd's Rep 119, where a constructive total loss by fire was followed a few hours later by the vessel's sinking. The assured did not learn of the earlier casualty until after the actual total loss of the vessel. Mr Walsh argued that, by contrast with these examples, there was at least a possibility of benefit to the Insurers in the present case as the wreck was available and had some potential scrap value. I note in this regard that A1 obtained an estimate which valued the Yacht after the fire at between US$300,000 and US$600,000 (although this did not take account of the cost of cleaning which would usually be incurred before a sale).
- It may in practice be extremely improbable that an insurer who has declined cover for a casualty which has almost certainly rendered the vessel a constructive total loss will choose to accept the opportunity to take over the assured's interest in the wreck in return for relinquishing its potential defence and admitting liability to pay the claim. I judge that to be so here. Nevertheless, it seems to me that the choice is one which the insurer must be entitled to make for itself. It is not impossible that an insurer who has declined cover could, in circumstances where the wreck has some possible residual value, choose to accept the abandonment in preference to continuing to deny liability if, for example, the insurer perceives its prospects of successfully defending a claim to be too weak to justify the costs and risks of litigation. At any rate, it is not for the assured, nor for the court, to pre-empt that decision. I have therefore concluded that Mr Walsh was correct in submitting that section 62(7) does not apply in this situation.
- There is, however, a different reason why there was, in my view, no possibility of benefit to the Insurers if notice of abandonment were given to them as regards the Increased Value cover. The IV Clauses include a provision that:
"In the event of Total Loss, the Underwriters waive interest in any proceeds from the sale or other disposition of the vessel or wreck."
It has not been suggested that there was any benefit which Insurers could possibly have gained from accepting the abandonment of the Yacht apart from any proceeds from disposing of the wreck. Hence this waiver of interest meant that, so far as the Increased Value cover was concerned, notice of abandonment was unnecessary as there would indeed be no possibility of benefit to the Insurers if notice were given to them.
- This point does not apply to the Hull and Machinery cover under Section A as there is no corresponding waiver of interest in the vessel contained in the R12 Clauses. The purpose of the waiver, as I see it, is to make it clear that, where there is a constructive total loss, the insurers to whom the assured may elect to abandon the wreck are the underwriters of the Hull and Machinery policy and not the underwriters of the Increased Value insurance. As the interest of the latter has been waived, it is not necessary for the assured to abandon the wreck in order to treat the loss as if it were an actual total loss for the purpose of the Increased Value insurance. By the same token there is no need for the assured to give notice of abandonment to those insurers.
- If, then, the Hull and Machinery cover and the Increased Value cover had been placed under separate policies, I consider that it would have been necessary for the claimant to give notice of abandonment to the underwriters of the Hull and Machinery policy but not to the underwriters of the Increased Value policy (whether the insurers concerned were the same or different).
- What is the position where the coverages are contained in different sections of the same policy? As mentioned earlier, the IV Clauses are drafted and are plainly intended to function as a self-contained insurance. It is clear that a policy document can embody more than one contract. That is so, for example, where more than one insurer subscribes to the policy, as in this case. As a matter of legal analysis, each insurer is treated as having a separate contract with the assured so that if, for instance, one insurer successfully avoids its contract for misrepresentation or non-disclosure, this does not of itself affect the validity of the cover provided by the other subscribing insurers. The Hull and Machinery and Increased Value coverages are, in my view, as a matter of construction intended to constitute separate and severable contracts of insurance for the purpose of the Act, including the provisions dealing with abandonment. I have concluded that, if the Hull and Machinery and Increased Value coverages had been placed separately, the absence of a notice of abandonment would not have prevented the assured from treating the loss as a total loss under section 61 of the Act for the purpose of the Increased Value cover. It cannot in my view reasonably have been intended that the position should be different and Insurers advantaged simply because the two coverages were combined in a single policy document. Thus, I do not consider that the omission to give a notice of abandonment which was unnecessary so far as the Increased Value cover was concerned prevents the assured from treating the loss as a total loss for the purpose of a claim under Section B of the policy.
- It is still necessary to consider the linkages between the two insurances created by the claim settlement provisions. I have noted that the failure to give a valid notice of abandonment did not prevent the claimant from recovering the full sum insured under Section A of the policy on the basis of a claim for a partial loss. However, the settlement of such a claim would have the consequence that no payment was due under the Increased Value cover (see paragraph 254 above). In this way, the failure to give a valid notice of abandonment and the consequent inability of the claimant to treat the loss as a total loss under the Hull and Machinery cover is capable of affecting, albeit indirectly, the claimant's ability to make a recovery under Section B.
- Accordingly, if I had held that the claimant is entitled in this case to recover under Section A of the policy, the failure to give a valid notice of abandonment would have limited the claimant to recovering for a partial loss, which would in turn have prevented the claimant from making any recovery under Section B of the policy. The position would be different, however, if I had held that the Insurers' avoidance arguments failed and that the policy was valid, but the claimant was nevertheless barred from recovering under Section A of the policy because of its failure to comply with a requirement of the R12 Clauses. The claim under Section A would not, in that event, have been settled either as a claim for total loss or as a claim for partial loss. It would have been barred altogether. In those circumstances the failure to give a valid notice of abandonment would not have prevented the claimant from recovering the sum insured under Section B by proving that the Yacht was a constructive total loss.
D. THE CLAIMS AGAINST THE BROKERS
- I turn to the claims against the two brokers, AIS and OAMPS. I start by considering their legal relationships with the claimant and with each other and what duties they owed by virtue of those relationships.
Relationship between the claimant and AIS
- Although AIS is a Greek company, which was instructed in Greece by a Greek yacht manager, the parties have proceeded on the basis that the legal relationship between the claimant and AIS is governed by English law. Nor did either the claimant or AIS suggest that the duties owed by AIS differed in any way from those which would have been owed if AIS had been an English insurance broker. AIS called as its expert witness on broking issues a Greek insurance broker, Mr Nicolas Apostolopoulos, who is experienced in acting as a producing broker for marine insurance placed in the London market. He gave evidence that the role and duties of an insurance intermediary in Greece do not differ in any significant respect from those of a similar intermediary in the UK.
- As described earlier, AIS was instructed by A1 to obtain a quotation for insurance of the Galatea and then, on 13 April 2011, to place insurance in accordance with the quotation which AIS had obtained via OAMPS. It was made clear in the email correspondence that A1, as the manager of the Yacht, was giving these instructions on behalf of the company which owned the Yacht, that is to say the claimant. The instructions were accepted by AIS. The effect of the communications was to establish a contract between the claimant and AIS under which AIS agreed, first to obtain a quotation, and then to place insurance on the quoted terms, in return for brokerage in the event that a contract of insurance was concluded. In the absence of any formal written agreement between the claimant and AIS, the full extent of the services which AIS agreed to provide as a result of accepting these instructions is partly defined by the custom and practice.
- A broker who agrees to supply services to a client impliedly undertakes to carry out the services with reasonable care and skill. On settled principles, the same communications as established the contract between the claimant and AIS involved an assumption of responsibility by AIS which gave rise to a concurrent duty of care owed to the claimant in tort.
The use of a sub-broker
- In this case AIS used the services of another broker, OAMPS, to place the insurance in the London market. It is commonly assumed that, when a sub-broker is employed in this way, the producing broker will be liable to its client for any negligent act or omission of the sub-broker. That is the footing on which the claimant has pleaded its claim against AIS. The particulars of claim, as amended following an application made at the start of the trial, make a series of allegations that AIS "acting by itself and/or its agent OAMPS" was negligent and/or in breach of contract.
- Any liability of AIS for negligent acts or omissions of OAMPS cannot, however, be a vicarious liability, as it is a basic principle that a person is not vicariously liable for the negligence or other wrongful act or omission of an independent contractor. Where the producing broker is responsible for negligence of the sub-broker, it can only be because the producing broker is under duties of a "non-delegable" kind. Thus, the producing broker will normally be taken to have contracted on the basis of an implied promise that the work required to carry out the client's instructions will be done carefully by whomever the broker gets to do it whether that person is its own employee or a sub-contractor: see Photo Production Ltd v Securicor Transport Ltd  AC 827, 848. In such a case the responsibility assumed by the broker which gives rise to a concurrent liability in tort will generally be co-extensive with what has been contractually agreed: see Woodland v Swimming Teachers Association  AC 537, 573, para 7. It is possible to envisage a case, however, in which what the producing broker agrees to do is not to arrange insurance for its client, but to get another broker to do so. In such a case the duty of the producing broker, both in contract and in tort, would be limited to taking care to choose a competent sub-broker and giving appropriate instructions to the sub-broker. It is such a situation that I take Atkin LJ to have had in mind in Thomas Cheshire v Vaughan Brothers  3 KB 240, 259, when he said that he could imagine circumstances in which a country broker who employed a London sub-broker might not be responsible for the latter's negligence if the country broker had used reasonable care in the selection of the sub-broker.
- In the present case it is clear from the email correspondence that AIS undertook itself to obtain a quote and then arrange insurance in accordance with the quote. There was no restriction on using another, independent broker for this purpose; but there is nothing to suggest that the claimant or A1 were informed of the intention to employ OAMPS or had knowledge of OAMPS' involvement other than from the fact that its name was printed on the quote slip, proposal form and cover note for the insurance. In these circumstances it is to be inferred that the responsibility which AIS undertook towards the claimant in contract and in tort was a responsibility for the performance of the work with reasonable care and skill, whether the work was carried out by an employee of AIS itself or by an agent to whom it entrusted any particular task.
The relationship between AIS and OAMPS
- Like the contract between the claimant and AIS, the contract by which AIS engaged OAMPS to act as a sub-broker was made informally by telephone and email and was not embodied in any formal document. It is not in dispute that the sub-agency relationship thus established was back to back with the main agency relationship in the sense that any breach by AIS of its duties owed to the claimant under the contract between them or in tort which was committed through negligence of OAMPS would also constitute a breach of the duties which OAMPS owed in contract and in tort to AIS.
The relationship between the claimant and OAMPS
- It was argued on behalf of the claimant that, although there was no contractual relationship between them, OAMPS in carrying out its work owed a duty in tort to the claimant, as well as to AIS, to exercise reasonable care and skill.
- The question of when a sub-agent owes a duty of care in tort to avoid economic loss to the agent's principal can give rise to considerable difficulty. The leading case is Henderson v Merrett  2 AC 145.
Henderson v Merrett
- In Henderson v Merrett the House of Lords held that managing agents of Lloyd's syndicates, who had acted as sub-agents of members' agents and had no direct contractual relationship with names who were members of their syndicates, nevertheless owed a duty of care to the names when performing the relevant services. Lord Goff, who gave the leading speech, approached the matter in two stages. First, he held that, leaving aside the contractual context, there was plainly an assumption of responsibility by the managing agents towards the names deriving from the fact that the managing agents had accepted the names as members of a syndicate under their management and had held themselves out as possessing a special expertise on which, as they knew, the names had relied in authorising them to bind contracts of insurance and settle claims on the names' behalf. Lord Goff also drew an analogy with insurance brokers and referred to the case Punjab National Bank v De Boinville  1 WLR 1138, where the Court of Appeal held that a duty of care was owed by an insurance broker not only to his client but also to a specific person whom he knew was to become an assignee of the policy.
- Lord Goff then considered the impact of the contractual context and an argument that finding an assumption of responsibility by the managing agents to the names was inconsistent with the way in which, contractually, the parties had structured their relationship. Lord Goff found no such inconsistency on the facts of that case. He indicated, however, that in his view the situation in Henderson v Merrett was unusual and added (at 195) that:
"in many cases in which a contractual chain comparable to that in the present case is constructed it may well prove to be inconsistent with an assumption of responsibility which has the effect of, so to speak, short circuiting the contractual structure so put in place by the parties. It cannot therefore be inferred from the present case that other sub-agents will be held directly liable to the agent's principal in tort."
Lord Goff gave the example of a building contract under which the main contractor enters into sub-contracts for the performance of work. In such a situation it can generally be inferred that the parties have chosen to structure their relationships in the form of a chain whereby the building owner has no recourse directly against sub-contractors for their defaults. In circumstances where the building owner could have bargained for a contractual remedy directly against the sub-contractor, but did not, it would "short circuit", to use Lord Goff's metaphor or "cut across" or "circumvent", as it is also sometimes said the contractual structure as it would reasonably have been intended and expected by the parties to operate to infer that the sub-contractor had assumed a responsibility directly to the owner.
- It is fair to say that Lord Goff did not spell out expressly the features which distinguished the contractual arrangements for underwriting at Lloyd's from cases such as his example of an ordinary building contract where the existence of a comparable contractual chain is inconsistent with an assumption of responsibility. It is noteworthy, however, that in Henderson v Merrett the relevant contractual structure was fixed by law: under the Lloyd's byelaws, a name was required to contract with a members' agent by entering into a prescribed form of agency agreement, and the members' agent was in turn required to enter into a prescribed form of sub-agency agreement with a managing agent. The names therefore had no choice about the extent of the contractual rights conferred on them and no opportunity to bargain for any contractual rights directly against the managing agents. Nor was there anything in the terms of the relevant contracts which conflicted with the existence of a direct tortious duty. In particular, as Lord Goff specifically mentioned (at 195), there was no material difference between the content of the relevant contractual duties and any duty of care owed to the names by the managing agents in tort.
The position of a sub-broker
- The question of when the contractual chain created by the appointment of a sub-broker is inconsistent with an assumption of responsibility by the sub-broker to the prospective insured is not clearly answered by Henderson v Merrett. Unlike the arrangements for underwriting at Lloyd's, such a contractual structure is not fixed by law and there is generally nothing which would in principle prevent the insured from contracting directly with the placing broker. On the other hand, there will generally be no conflict between the duties owed by the placing broker to the producing broker and the content of any duty of care owed by the placing broker directly to the insured. There may, moreover, be little or no basis for drawing any positive inference that the parties have deliberately structured their relationships in a way which is intended to preclude the existence of such a direct duty.
- The case in which the position of a sub-broker has been most extensively considered is BP Plc v AON Ltd (No 2)  EWHC 424 (Comm);  Lloyd's Rep IR 577. There was in that case a service agreement between BP and a particular company in the Aon Group, Aon Texas, under which Aon Texas agreed to provide broking services to BP and its subsidiaries on a worldwide basis. The service agreement contained a cap on liability. Aon Texas delegated the task of placing the particular insurance in issue to Aon London, which negligently failed to arrange effective cover. Aon London disputed BP's claim that it owed a duty of care in tort to BP, arguing that there had been no assumption of responsibility by Aon London to BP and that BP's claim was an attempt to circumvent the agreed contractual structure. Colman J identified the essential question as being whether in all the circumstances, judged objectively, the sub-broker's conduct amounts to a representation to the insured that the sub-broker assumes responsibility to the insured for the provision of services "as explicitly as if he were personally contractually binding himself to provide ... the services" (see para 167). He found that on the particular facts of that case this test was satisfied. There was such a close relationship between Aon London and BP involving repeated direct contact between them that BP was entitled to infer that Aon London was undertaking a direct responsibility, independently of Aon Texas, to provide its services in accordance with the proper professional standards of an insurance broker (see para 181).
- The present case is very different from the BP case. OAMPS had no contact at all with the claimant or its manager, A1, and dealt exclusively with AIS. The role of OAMPS was analogous to that of the Lloyd's broker in Pangood Ltd v Barclay Brown & Co Ltd  Lloyd's Rep IR 405, where the Court of Appeal held (at 408) that:
"an instruction by an insurance broker to a Lloyd's broker to obtain a quotation and subsequently to effect insurance in accordance with the terms of the quotation, is an inadequate basis upon which to infer the assumption of direct responsibility by the Lloyd's broker to the broker's principal."
- In the present case it seems to me that the argument that there was an assumption of responsibility by OAMPS to the claimant fails at the first stage of the analysis, before account is taken of the impact, if any, of the contractual structure. Certainly, OAMPS held themselves out as possessing a special expertise and knew that the claimant was liable to suffer harm if they failed to carry out the task delegated to them of placing insurance on the claimant's behalf with reasonable care and skill. There is no evidence, however, that the claimant was relying on the expertise of OAMPS. The claimant's manager, A1, communicated only with AIS, whom A1 instructed first to obtain a quotation and then to place the insurance. It was a matter of indifference to them whether AIS performed these tasks itself or sub-contracted them and, if the latter, whom AIS chose to use for that purpose. To the extent that A1 learnt that AIS had delegated tasks to OAMPS at all, they did so only after the tasks had been performed, when they received the quotation slip and cover note for the insurance. Even then, it was not explained in those documents whether OAMPS was acting as an agent of the insurers or of AIS. It cannot in these circumstances reasonably be inferred that the claimant was looking to OAMPS to obtain the quotation or place the insurance which the claimant required and to exercise reasonable care and skill in doing so. It was relying solely on AIS for that purpose.
- I conclude that OAMPS did not owe a duty of care directly to the claimant in this case.
Expert broking evidence
- The claimant, AIS and OAMPS each adduced expert evidence on broking issues. The claimant's expert was Mr Nigel Miller. As already mentioned, AIS instructed Mr Nicolas Apostolopoulos, a marine insurance broker based in Greece. The expert instructed by OAMPS was Mr Stephen Marriner.
- Without any disrespect to these witnesses, all of whom are clearly very experienced brokers, I am doubtful of the value of much of the evidence from broking experts which was adduced in this case and is typically adduced in cases of this kind. It is common place, and this case was no exception, for broking experts to be asked to give their opinions on whether the defendant brokers owed duties to do the various things which they were allegedly negligent in failing to do. The general duties of insurance brokers have, however, been considered by the courts in many cases and, to a substantial extent, have become a matter of law. There is thus a danger that the evidence of an insurance broker called as an expert witness will involve expressing opinions about the broker's understanding of the law. That is exemplified in the present case by some evidence which Mr Miller gave of his understanding of a broker's duty to warn the assured about its obligation to disclose material facts which, as he explained, derived from advice which had been drilled into him at the company for whom he used to work by a firm of solicitors.
- Certainly there are circumstances in which the question whether a broker owes a duty to do something which he has not been expressly asked to do depends at least in part upon the scope of the responsibilities which a broker ordinarily expects and is expected to perform. Areas where such evidence is potentially relevant in this case include the issues of whether or when a broker instructed to arrange insurance of a yacht has a duty to question the value of the yacht given to him by the owner or manager and what responsibilities, if any, a broker has following a loss to offer advice about the requirements for making a claim under the policy.
- Once the relevant general principle or accepted practice has been identified, however, the question becomes one of its application to the circumstances of the particular case. This is frequently a fact-sensitive exercise. For example, what matters a broker has a duty to explain to the client or is entitled to assume or accept without question is likely to depend on the level of knowledge and sophistication of the client or of the individual(s) giving instructions on the client's behalf, as reasonably perceived by the broker. At this level of specificity, there will necessarily be no practice that all competent brokers in the particular situation normally follow. There is a danger that a broking expert who addresses such issues will stray into commenting on the evidence, which is not the function of an expert witness. Even if that danger is avoided and the witness keeps to the expert's proper role of expressing opinions on the basis of assumed facts, such opinions are often of limited assistance to the court. The facts assumed by the expert may not match the facts found and in any case cannot reflect the granularity of the evidence. Nor is the application of the relevant standard of care to the individual facts usually an exercise which the broker's professional experience gives him a special skill in performing.
- I make these observations partly to emphasise that I do not think it should be automatically assumed that in every case where an allegation of negligence is made against an insurance broker expert evidence is reasonably required to resolve the proceedings; and where expert evidence is necessary, careful thought always needs to be given to its legitimate and useful scope. That said, although the reports of the three broking experts in the present case contained a fair amount of discursive and irrelevant material, their cross-examination was efficiently conducted. It was, however, a major refrain of the submissions made by counsel for AIS that there was no expert evidence to support the claimant's allegations. There are indeed instances, which I mention below, where the absence of any supporting expert evidence in my view undermines allegations made by the claimant about the scope of the duty owed by AIS. The mere fact, however, that an allegation of negligence was not supported by the opinion of a broking expert that the relevant act or omission fell below the standard expected of a competent and careful insurance broker is not a deficiency in the claimant's case.
Alleged negligence of AIS
- Although in the particulars of its claim against the brokers the claimant adopted something of a scattergun approach, some obviously untenable allegations were dropped after the opening statements, and in closing submissions the claimant's case was much more focussed. Five allegations of breach of duty were ultimately pursued against AIS.
(1) Alleged failure to establish the basis of insurance
- The first of these allegations is that Mr Birch was negligent in failing to ask A1 to explain why insurance cover for the Yacht was being sought in the amount of 13m.
- Although there is no email recording the instructions given to Mr Birch about the cover required for the Galatea, his own email instructing Mr Ranson to obtain a quotation (mentioned at paragraph 43 above) gave details of the Yacht's current insurance and stated that "the vessel is currently valued at 13,000,000 Euros". I have found that the probable source of Mr Birch's information given in that email was a telephone conversation with Ms Koronaiou of A1. It appears that the instructions given to Mr Birch were to see if he could obtain a quotation for insurance of the Yacht for the coming year which was more competitive than the terms of the current Allianz policy. Mr Birch accepted in his evidence that he did not ask any questions about the value for which the Yacht was at that time currently insured and whether that value required any adjustment. He simply proceeded on the basis that the amount of 13m for which the Yacht was insured under the existing Allianz policy was the amount of cover required.
- All three broking experts agreed that, ordinarily, a broker does not have a duty to question the value placed on the vessel for insurance purposes by the assured or its manager and, if told that the assured wants to insure the vessel for a particular amount, will simply act on that instruction. The claimant's expert, Mr Miller, expressed the qualification that, if Mr Birch was aware that the value for which the Yacht was insured had remained unchanged since 2008, then the circumstances were not ordinary because Mr Birch was on notice that 13m was unlikely still to be the market value of the Yacht in 2011 and he should therefore have queried this figure. This leads into the second way in which the claimant's case was put.
(2) Alleged failure with regard to market value
- The claimant contended that, even if a broker in Mr Birch's position would not ordinarily be expected to question the insured value put forward by the yacht's manager, Mr Birch should have done so in this case. That was said to be because he knew or ought to have realised that the Galatea had been insured for 13m since 2008 and that her market value would inevitably have declined since then. Mr Shah QC made it clear in his oral closing submissions that this allegation depended upon Mr Birch having had knowledge in April 2011 of the amount for which the Yacht was insured in 2008/09. The basis of such knowledge was said to be that Mr Birch had been instructed in January / February 2009 to obtain a quote for insurance of the Galatea and had been informed at that time that the Yacht was insured for the 2008/09 year for an agreed value of 13m.
- I have found that it is improbable that Mr Birch looked back in April 2011 at any documents relating to that earlier instruction. Nor do I think it at all likely, even if he had a recollection at that time of having previously been instructed to obtain a quotation for insurance of the Yacht, that Mr Birch would have remembered the value for which the Yacht had been insured two years earlier or thought it relevant to his current instructions. I do not think that Mr Birch can be criticised for this. There was no expert evidence to support the proposition that it is a broker's duty, when instructed to obtain a quote for insurance of a yacht, to identify the fact that he received a similar instruction previously and to compare the information given to him on that occasion with his current instructions. Nor do I see any reason why a client should expect the broker to do this unless the client has expressly asked the broker to refer back to information provided on the earlier occasion. There is no suggestion that that happened here.
- Accordingly, the assumption with regard to the knowledge of Mr Birch on which Mr Miller based his view that AIS should have queried the insured value of the Yacht is misplaced.
- In any case, even if I had found that Mr Birch was aware that the Yacht had been insured for 13m since 2008, I would not have accepted that this information should have led him to question the appropriateness of that figure. Mr Birch was receiving his instructions from a professional manager of luxury yachts. Moreover, he knew A1 to be a substantial organisation with offices throughout Greece and involved in yacht brokerage as well as providing a full range of management services to clients. They were, as he described them to Mr Ranson, "very serious people". It was clear that A1 had far greater expertise in determining the value of yachts than Mr Birch. He was entitled to assume, unless there was some strong indication to the contrary, that they had in conjunction with their client determined an appropriate value for which to insure the Yacht. Nor, on the evidence, was the fact that a four year old yacht was still being insured for an amount equivalent to the original purchase price so unusual or inherently unlikely to be appropriate that a broker would be at fault in failing to question the valuation of the assured or its manager.
(3) Alleged failures with regard to the proposal form
- The complaint on which counsel for the claimant placed most weight was that of failing properly to complete the proposal form. There are two limbs to this complaint. The first and "most glaring" failure is said to be failing to ensure that the proposal form was fully completed by including the purchase price of the Yacht.
- The broking experts all agreed and it seems to me common sense that it is good practice for a producing broker to ensure that the proposal form is fully completed and all the questions answered by the assured. Mr Birch accepted that under normal circumstances he ought to have ensured that the proposal form was fully completed. He maintained, however, that this did not apply in the present case, as the underwriters had already written the business and completing the proposal form for the Yacht was a mere formality. I do not consider this to be a reasonable approach. There was evidence, which I have mentioned earlier, that the underwriters did in fact treat the proposal form as something of a formality. But Mr Birch did not know this and had no reason to assume that it would be the case. Although the business had already been written, it had been written expressly subject to a satisfactory proposal form. Indeed, the instruction given by Mr Birch to Mr Ranson on 13 April 2011 the day before the proposal form was filled out in part and signed by A1 was to hold the Yacht covered "sub prop". It was in immediate response to that instruction that Mr Ranson sent Mr Birch by email the blank proposal form which needed to be completed. Mr Birch therefore knew that, although the risk had been bound, it had been bound only on a temporary and conditional basis and that the proposal form was required in order to secure the cover. There was no justification in these circumstances for treating the completion of the proposal form as any less important than it would have been if the form had been submitted before the Insurers went on risk.
- The response given by Mr Birch to the criticism that he ought to have ensured that the purchase price was entered on the proposal form was that he has had quite a few other clients who have not completed certain parts of the proposal form but the underwriters have accepted it nonetheless. I cannot accept that a reasonably competent and careful broker would adopt this attitude, which seems to me cavalier. If Mr Birch had been aware of the general practice of Travelers, he might reasonably have taken the view as did Mr Ranson that they would not in fact consider the purchase price necessary information to provide in relation to a four year old vessel. Mr Birch did not suggest, however, that this was his thinking or that the omission of the purchase price as well as several other pieces of information requested on the form was the result of a considered decision on his part. I find it hard in these circumstances to regard his approach as consistent with the standard of care expected of him.
- As it turned out, however, the failure to ensure that the purchase price was entered on the proposal form did not in fact prejudice the claimant. When the proposal form was presented, Mr Stephenson accepted it as satisfactory despite the absence of this information. Furthermore, by accepting the form with the place for entering the purchase price left blank, Insurers clearly waived any duty which the claimant would otherwise have had to disclose this information. The failure to ensure that this information was provided cannot in these circumstances found a claim against AIS.
- It was argued on behalf of the claimant that, if AIS had ensured that the purchase price of the Yacht was disclosed on the proposal form, this would have caused the underwriter to realise that the amount of cover which the claimant was seeking did not represent the current market value of the Galatea because its market value after four years would necessarily be less than the purchase price. This argument fails, however, both as a matter of law and on the facts. It fails on the facts because, as I have already found, Insurers knew anyway or may be taken to have known that the value for which the Yacht was being insured corresponded to the purchase price; so including the purchase price on the proposal form would not have told them something new. It would therefore not have removed or affected the Insurers' right to avoid the policy for non-disclosure. It would also not have caused them to act any differently. It was not suggested to Mr Stephenson that, if the purchase price in the proposal form had been filled in, he would have questioned the amount stated on the form for the hull market value, and I think it clear that he would not have done so.
- The argument also fails as a matter of law because it cannot, normally at least, be part of a broker's duty to protect the assured from adverse consequences of failing to disclose to the insurer information which the assured does not need to disclose (for example, because disclosure of the information is waived). At all events, before any such duty could arise the broker would have to be aware of particular circumstances which made it foreseeable that the assured would be prejudiced by not disclosing information which it was not required to disclose, and no such circumstances existed here.
- The second limb of the claimant's complaint in relation to the completion of the proposal form concerns the insertion by Mr Birch of the figure of 13m as representing the Yacht's market value. Counsel for the claimant submitted that if as I have found the request for the "hull market value" unambiguously referred to the vessel's current market value, Mr Birch was negligent in failing to ensure that A1 specifically confirmed what the current market value of the Galatea was.
- I have found that Mr Birch wrote the figure of 13m on the form himself without the agreement or knowledge of A1. That itself was plainly negligent. Mr Marriner, the broking expert instructed by OAMPS, said in his report that it would be regarded as particularly unacceptable in the market for anything to be filled in by the producing broker on the proposal form after it had been stamped and signed by the assured. Mr Apostolopoulos, the broking expert instructed by AIS, said that, if information is added to the proposal form at a later date, then provided the yacht manager confirms the accuracy of that information, there is no need for the proposal form to be re-signed. He did not suggest, however, nor could he credibly have done, that it is acceptable for a broker to add information to a form which his client has previously signed without telling the client.
- The harder question is to determine what response Mr Birch would have received if, as he clearly should have done, he had asked Ms Koronaiou to confirm the current market value of the Yacht. It is possible that Ms Koronaiou, if she had been asked the question, would have stated that the market value of the Yacht was 13m on the assumption that the value for which the Yacht was insured under the Allianz policy represented its current market value. Ms Koronaiou's evidence, however, which I see no reason to reject, is that she had no idea what the market value of the Galatea was. If it had been explained to her as it seems to me that it should have been explained by Mr Birch that, in order to complete the proposal form properly, it was necessary to certify that the amount of cover being sought reflected A1's view of the current market value of the Yacht, then I think it probable that Ms Koronaiou would have thought it necessary to raise this question with Mr Polemis.
- It is plain that Mr Polemis did not believe the current market value of the Yacht in April 2011 to be 13m. He had only very recently advised the owners in his March 2011 email that the Yacht should be marketed for sale with an asking price of no more than 8.5m and that the owners should be happy to get 7m on a sale. If he had appreciated that it was necessary for the purpose of obtaining the insurance to give A1's opinion of the Yacht's market value, I see no reason to think that he would have withheld that information.
- Accordingly, although it is impossible to be sure what would have happened if Mr Birch had exercised reasonable care and skill in assisting A1 to complete the proposal form, I find that on the balance of probability the consequence would have been to bring to light the discrepancy between A1's view of the Yacht's market value and the proposed insured value. For the reasons given earlier, that in turn would probably have led to the amount of cover being revised and to the insurance being written with an agreed value for the Yacht of 8m.
(4) Alleged failure to advise on duty of disclosure
- The next allegation pursued by the claimant is that Mr Birch was negligent in failing to advise A1 about the duty of the assured to disclose all material facts and the potential consequence of not doing so.
- There is no doubt that an insurance broker owes a duty to take reasonable care to ensure that the client is aware of and understands the duty of disclosure: see e.g. Jones v Environcom Ltd (No 2)  EWHC 759 (Comm) at para 54; Synergy Health (UK) Ltd v CGU Insurance Plc  EWHC 2583 (Comm) at paras 204-6. Mr Birch did not claim to have given any advice about the duty of disclosure to A1. His position was that he did not need to do so, as A1 were very experienced professional yacht managers and he naturally assumed that they were familiar with the duty.
- While such an assumption might have been reasonable in relation to Mr Polemis, I cannot see that Mr Birch had any reasonable basis for making it in relation to Ms Koronaiou who, as Mr Birch knew, was dealing with the insurance and was responsible for completing the proposal form. Mr Birch had never previously dealt with Ms Koronaiou in connection with the completion of a proposal form or the disclosure of information to insurers. He therefore had no experience from which to judge her level of knowledge. It seems to me that in these circumstances Mr Birch ought to have made sure that Ms Koronaiou was aware of and understood the duty to disclose all material facts when he met her on 14 April 2011 to assist with the completion of the proposal form. I am unimpressed by the suggestion that such advice was unnecessary because, although the proposal form did not contain any disclosure warning, such a warning was printed in the cover note sent by OAMPS a week later in relation to the Sapphire insurance. A broker cannot reasonably rely on a standard clause printed in some other document as a substitute for giving direct advice, particularly when that document does not yet exist.
- I see no reason to think, however, that advice about the duty of disclosure would have made any difference to anything which A1 did. Knowing that there was a legal duty to disclose all material facts would not have prompted Ms Koronaiou to disclose any information which she did not in fact disclose on the proposal form unless she had appreciated that it was material. Although she had received the MTC valuation some 17 months earlier, it is clear that she did not have it in mind in April 2011 or appreciate its relevance to the insurance. Nor was Ms Koronaiou privy to the March 2011 email and the discussions with the owner about putting the Yacht on the market for sale.
- The broker's duty is not limited to advising the client in general terms of the duty to disclose material facts. He should also seek to elicit from the client matters which ought to be disclosed, bearing in mind that the client may not realise without assistance that a particular matter is or is arguably material. I have already found that Mr Birch ought to have asked Ms Koronaiou about the market value of the Yacht in order to address the question in the proposal form about the "hull market value". That aside, however, I do not consider that Mr Birch can fairly be criticised for not eliciting the matters which I have held ought to have been disclosed to Insurers. Mr Birch had no reason to suspect the possibility that there might have been a professional valuation which valued the Yacht in an amount significantly lower than the proposed insured value, nor that the owner might be planning to market the Yacht for sale at an asking price significantly less than the proposed insured value.
- I conclude that, although Mr Birch was in breach of duty in failing to advise Ms Koronaiou about the duty of disclosure, the duty of which he was in breach did not extend to asking A1 whether there had been a recent valuation of the Yacht or whether, and if so at what price, the Yacht was to be marketed for sale.
(5) Alleged failures post-loss
- The final allegation pursued against AIS is that AIS negligently failed to advise the claimant after the loss occurred about the requirements for making a claim and, in particular, of the requirement to file a sworn proof of loss within 90 days. It was suggested that, had such advice been given, the 90 day time limit would not have been missed and Insurers would then not have had a defence under the R12 Clauses based on the claimant's failure to comply with this policy requirement.
- I do not consider this a tenable complaint. There is no evidence that Mr Birch was asked by A1 to advise on the requirements for making a claim under the policy. Nor was any expert evidence adduced by the claimant to support the proposition that a broker has a duty as a matter of custom and practice to give such advice, even if not asked to do so. Mr Shah QC submitted that no expert evidence was necessary as the existence and scope of such a duty is a matter of law for the court, which can decide the point simply on legal principles. No relevant legal principle or authority was cited, however, and I do not believe that there is any rule of law which obliges a broker who has not been asked to assist the assured in dealing with a potential claim to volunteer advice on claim procedures.
- The suggestion was made to Mr Apostolopoulos in cross-examination that, on the hypothesis that no lawyer was instructed, a competent producing broker in the position of AIS should have checked the requirements of the R12 Clauses and advised his client about the requirements for making a claim including the need to provide a sworn proof of loss within 90 days. Mr Apostolopoulos indicated that he would probably have done so in such a situation. That evidence, however, which was not supported by any evidence from the claimant's own expert, falls a long way short of demonstrating that any reasonably competent broker should have given such advice without being asked within the first few days after the loss.
- In any case the hypothesis that no lawyer was instructed does not correspond to the facts. As described earlier (see paragraphs 82-83 above), within a few days of the fire the claimant had instructed a Greek lawyer, Mr John Palios, to give advice in relation to the insurance claim. Other advisers were also appointed to assist in that regard. They included Mr Robson of JLJ Maritime SA, a claims consultant, but did not include Mr Birch. In circumstances where the claimant chose not to instruct AIS to assist in relation to the insurance claim and to rely on other advisers instead, the attempt to blame Mr Birch for failing to give advice seems to me to be specious.
- I understand the claimant's argument to be that Mr Birch should have given advice before the other advisers were instructed. Even assuming, however, that it was part of his duty to give advice about claim procedures immediately after the casualty, the focus of attention at that stage would naturally be on notifying the potential claim and taking steps to assess the extent of the damage and its consequences. Given the extent of the damage, it may also have been appropriate to consider giving notice of abandonment of the Yacht to Insurers which Mr Birch did indeed consider (see paragraph 82 above). It cannot sensibly be maintained, however, that it was negligent not to address within the first few days a requirement which had to be satisfied within 90 days of the loss.
- Moreover, even if Mr Birch had drawn attention to the requirement to file a proof of loss, I think it unlikely that this would have made any difference to what was done subsequently any more than did his assistance in providing A1 with a draft notice of abandonment. The view would almost certainly have been taken that more information about the loss was needed first. The claimant would have relied thereafter on its chosen advisers to do whatever was necessary in that regard. I see no reason to infer that those advisers, incompetent as they appear to have been, would have given greater attention to the matter before the 90 day deadline expired on 2 March 2012 than they in fact did.
Quantum of loss
- Although I have rejected most of the claimant's allegations, I have found that there is one ground of the claim against AIS which is well founded. That is the complaint that Mr Birch failed to exercise reasonable care and skill to ensure that the proposal form was properly completed. In particular, I have found that Mr Birch was negligent in failing to take care to ensure that the proposal form submitted to Insurers gave A1's opinion of the current market value of the Yacht. I have also found that, if AIS had properly performed its duty in this regard, the claimant would probably have obtained a valid policy of insurance with cover of 8m instead of a voidable policy with cover of 13m.
- There is no reason to suppose, however, that, in that scenario, events after the fire would have unfolded differently in any relevant way from the way in which those events did in fact unfold. In particular, I see no reason to think that the difference in cover would have altered the claimant's failure to comply with the requirement under the R12 Clauses to file a sworn proof of loss within 90 days or the Insurers' willingness to rely on that failure as a defence to the insurance claim. I have, in addition, rejected the claimant's allegation that the failure to comply with this requirement was itself attributable to a breach of duty by AIS.
- I have held earlier in this judgment that the claimant's failure to comply with the time limit for filing a sworn proof of loss resulted in its claim under Section A of the policy becoming barred, but did not prevent the claimant from pursuing a claim under Section B. I have also held that the claimant's failure to give notice of abandonment with reasonable diligence after the receipt of reliable information of the loss prevented the claimant from treating the loss as a total loss for the purpose of a claim under Section A, but not for the purpose of a claim under Section B as it was not necessary to give notice of abandonment in order to make a claim under that section. If the policy had been valid, the claim under Section A would not have been settled as a total loss nor as a partial loss, as it would have been barred altogether by reason of the claimant's failure to comply with the R12 Clauses. I have held that there would not in these circumstances have been any bar to treating the loss as a total loss for the purpose of claiming under Section B of the policy. As it is common ground that the Yacht was a constructive total loss, the claim under Section B would have succeeded.
- I therefore conclude that the negligence of AIS has deprived the claimant of the sum for which the Yacht would have been insured under Section B of the policy if AIS had performed its duty. That sum would have been 25% of the total hull cover, that is, 2m. I accordingly decide that AIS is liable to pay damages to the claimant in this amount.
The claim against OAMPS
- In its statement of case the claimant made wide-ranging allegations of negligence against OAMPS. By the end of the trial, however, those allegations had been reduced to two both relating to the proposal form for the Galatea. One allegation was that the blank proposal form which OAMPS sent to AIS to arrange for its client to complete did not contain a warning about the duty of the insured to disclose all material facts. The second and principal allegation pursued against OAMPS was that Mr Ranson was negligent in presenting to underwriters a proposal form in which the question which asked the insured to state the purchase price of the vessel had not been answered.
(1) Alleged failure to warn of duty of disclosure
- Mr Ranson accepted in cross-examination that it would be good practice to include a warning about the duty of disclosure on a proposal form. In addition, the claimant's broking expert, Mr Miller, expressed the view that a prudent broker would put such a warning on any document of significance sent to the insured in connection with arranging insurance. It is one thing, however, to recognise this as good practice. It is quite another to say that it is the responsibility of a placing broker who receives instructions from a producing broker to take care to ensure that the client of the producing broker is warned of its duty to disclose all material facts when applying for insurance. None of the broking experts provided any support for such a contention, and it is unsustainable on the facts of the present case.
- Mr Ranson knew that Mr Birch was an experienced insurance broker who had worked in the London market before moving to Greece. In these circumstances Mr Ranson was entitled to assume, and the evidence showed that he was correct in assuming, that Mr Birch was familiar with the duty of disclosure owed by an insured under English law. He was accordingly entitled to expect that Mr Birch would advise his client of its duty of disclosure. There was no need for Mr Ranson to remind Mr Birch about this, let alone for Mr Ranson to take it upon himself to try to ensure that the client of AIS received the appropriate advice. It cannot, therefore, be said to have been a breach of its duty to AIS for OAMPS not to include a warning about the duty of disclosure on the blank proposal form and other documents sent to AIS.
- In any event, there was no reason to suppose at the time, and there is no reason to suppose now, that the inclusion of such a warning would have made any difference to anything done by Mr Birch or by A1 in dealing with the claimant's application for insurance.
(2) Alleged failure with regard to the proposal form
- The complaint pursued most strongly against OAMPS, as against AIS, was that of failing to ensure that the purchase price of the Yacht was entered on the proposal form before it was presented to underwriters. The claimant alleged that it was negligent for OAMPS to present the proposal form to underwriters with this information missing and that, if the purchase price had been included on the form, Insurers would either not have agreed to insure the Yacht for 13m or would have done so knowing that it represented the purchase price of the Yacht and would not in those circumstances have been entitled to avoid the policy.
- I do not accept any part of this argument. When Mr Birch sent the second version of the proposal form to Mr Ranson on 9 May 2011, Mr Ranson had already asked for more information to be included on the form (see paragraph 58 above). When he found that the purchase price and purchase date were still missing, Mr Ranson had the option either to go back to Mr Birch again and ask for these details to be added before he presented the proposal form to Travelers or to present the proposal form without this information. Mr Ranson's experience was that Mr Higham and Mr Stephenson, with whom he had a long-standing relationship, were not normally interested in the purchase price of a yacht which was several years old, such as the Galatea, where they had been given the insured's estimate of the market value. Mr Higham and Mr Stephenson both confirmed that this was the case. That this was indeed their practice was further confirmed by the examples of proposal forms for other risks included in the trial bundle. On several of these forms the purchase price had been left blank but the form had nevertheless been accepted as satisfactory by Travelers. From Mr Ranson's point of view, if Travelers accepted the proposal form for the Galatea with the space for entering the purchase price left blank as did indeed happen, Insurers could not subsequently complain that they ought to have been informed of the purchase price: they would be deemed to have waived disclosure of that information. On the other hand, if unusually Travelers had insisted on the purchase price being filled in, Mr Ranson could always have reverted to AIS at that stage and explained that underwriters required the purchase price to be inserted.
- In these circumstances, I am satisfied that it was reasonable for Mr Ranson to present the proposal form to underwriters without the purchase price filled in. I therefore reject the allegation that Mr Ranson was negligent in this regard. In any event, even if presenting the proposal form with the purchase price missing had been negligent, for the reasons I have already given in considering the corresponding allegation of negligence against AIS (see paragraphs 308-310 above), it is clear that it had no relevant causative effect.
- In his oral closing submissions on behalf of AIS, Mr Shapiro stated that AIS did not pursue any claim against OAMPS save in respect of any point on which AIS is found to have been in breach of its duty to the claimant. It was not and could not have been suggested that the negligence of Mr Birch which has given rise to liability on the part of AIS was attributable to any fault on the part of OAMPS. There is accordingly no claim over against OAMPS pursued by AIS. No claim lies directly against OAMPS as I have held that OAMPS did not owe any duty to the claimant. I have in any event found that OAMPS was not negligent in either of the respects maintained by the claimant.
- For the reasons stated in this judgment, my conclusions on the issues disputed at the trial are, in summary, as follows:
i) It was material for the claimant to disclose to Insurers, before the contract of insurance was concluded on 17 May 2011, the facts (a) that it had been advised by a professional valuer and by the Yacht's manager that the market value of the Yacht was around 7m and therefore significantly less than the proposed insured value of 13m and (b) that the claimant had decided to market the Yacht for sale with an asking price of 8m. If these facts had been disclosed, Insurers would not have agreed to insure the Yacht at an agreed value of 13m but would probably have agreed to do so at an agreed value of 8m instead. As a result of this non-disclosure, Insurers were entitled to avoid the policy, and they did not waive that right.
ii) In addition, the proposal form contained a misrepresentation that the claimant's manager, A1, believed the market value of the Yacht to be 13m. That misrepresentation, however, although material, did not induce Insurers to enter into the policy on the terms agreed, as they would probably have done so even if the proposal form had not contained any such representation.
iii) The claimant failed to comply with the requirement of the R12 Clauses incorporated in the policy to file a sworn proof of loss within 90 days of the casualty. In consequence, the claimant became contractually barred from suing to recover the sum insured under Section A of the policy, though not the sum insured under Section B to which the R12 Clauses did not apply.
iv) As a result of its failure to give a valid notice of abandonment, the claimant was prevented in any event from treating the Yacht as a total loss for the purpose of a claim under Section A, though not for the purpose of a claim under Section B for which giving notice of abandonment was unnecessary.
v) AIS owed a duty of care to the claimant in contract and in tort and was in breach of those duties in failing to take care to ensure that the proposal form for insurance of the Yacht stated A1's opinion of the market value of the Yacht. This breach of duty caused the claimant to enter into a voidable contract to insure the Yacht for 13m instead of a valid contract to insure the Yacht for 8m.
vi) The claimant's failure to file a sworn proof of loss before the expiry of the 90 day time limit was not attributable to any breach of duty by AIS and would have prevented the claimant from recovering under Section A of the policy in any event. If AIS had not been negligent, however, the claimant would probably have recovered the sum of 2m under Section B of the policy.
vii) OAMPS did not owe any duty of care directly to the claimant and did not commit any breach of the duty of care which it owed to AIS.
- In the result, the claims against Insurers and OAMPS fail and will be dismissed. The claim against AIS succeeds to the extent that the claimant is entitled to recover damages from AIS in the sum of 2m.