Shipping: Insurers Avoid Claim Because of Failure to Disclose

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How do the courts handle insurance claims where a vessel’s owner has failed to properly disclose the value of the vessel? At top Bahamas law firm ParrisWhittaker our expert maritime lawyers have many years of experience with advising commercial and shipping clients on insurance claims, including issues arising from failure to disclose information.A recent ruling of the UK’s High Court, in which the insurers of a motor yacht were entitled to avoid a claim from the owners after a fire, shows the importance of vessel owners being clear on the ‘market value’ of the vessel when securing insurance cover.

How do the courts handle insurance claims where a vessel’s owner has failed to properly disclose the value of the vessel? At top Bahamas law firm ParrisWhittaker our expert maritime lawyers have many years of experience with advising commercial and shipping clients on insurance claims, including issues arising from failure to disclose information.

A recent ruling¹ of the UK’s High Court, in which the insurers of a motor yacht were entitled to avoid a claim from the owners after a fire, shows the importance of vessel owners being clear on the ‘market value’ of the vessel when securing insurance cover.

What was the background?

In 2011. the river yacht ‘Galatea’ was totally destroyed by fire while moored in Athens. The vessel was insured against all risks for a value of €13 million, the sum for which it had been purchased in 2007. However, in 2009, the yacht had been valued at €7 million.

The insurers sought to avoid the claim on the basis of misrepresentation of the value of the yacht. The court held that using the 2007 purchase price rather than the market value in 2011 on the insurance form was a ‘material misrepresentation’.

This alone, however, was not sufficient to render the insurance policy void. Previous history between the vessel owner and the insurers  – including the insurers offering cover to another of the owner’s vessels despite the ‘purchase price’ section of the form being left incomplete – suggested that the misrepresentation had not induced the insurers to offer the policy.

What did the court decide?

Notwithstanding, the court decided that the insurers were entitled to avoid the claim since the owner had failed to disclose:

• that in 2009 the yacht had been professionally valued at €7 million, and
• that shortly before securing insurance the owner had advertised the yacht for sale for the sum of €8 million

In addition, the owner’s broker was found to have been negligent, since he had failed to ensure the owner had completed the insurance form correctly. This was of particular relevance since the cover comprised separate sums for hull and machinery, and for ‘increased value’ (IV) cover.

If the owner had correctly disclosed the relevant sums, the insurers would have been liable to pay the sum of €2 million (for increased value); the owners were therefore entitled to claim this sum from the broker.

The Insurance Act 2016

In August 2016, the new Insurance Act will come into force. Under the Act new rules would apply: since the owner had not recklessly and deliberately withheld the true market value of the vessel, the full insurance sum of €8 million would be held valid and the insurers liable.

There are lessons to be learned from this case. Vessel owners are not obliged to have their property valued immediately before obtaining insurance, and insurers would not generally insist on a valuation. However, owners should be absolutely clear on the ‘market value’ of the vessel and ensure all relevant information is properly disclosed.

How can we help?

For expert, incisive legal advice on all matters relating to maritime and shipping law, including regarding insurance claims, call the experienced shipping lawyers at ParrisWhittaker now. Whatever your circumstances and however complex your case, we are ready to act on your behalf.

¹Involnert Management Inc v. Aprilgrange Ltd & Others (The “Galatea”) [2015] EWHC 2225 (Comm)