A “WIN WIN” for Policyholders

Background

Delos Shipholding S.A. v Allianz Global Corporate and Specialty S.E. [2024] EWHC 719 (Comm) is one of several recent judgments to consider the scope of an insured’s duty of fair presentation under the English Insurance Act 2015 (the “Act”) and helpfully applies that duty in a manner likely to favour policyholders; also noteworthy are the Commercial Court’s observations on the concept of fortuity and on the duty to sue and labour. The Court additionally considered and rejected the insureds’ claim under section 13A of the Act for damages arising from late payment, which is not covered in this article.

Facts

The bulk carrier ‘WIN WIN’ (the “Vessel”) was insured under a policy (the “Policy”) incorporating an amended form of the American Institute Hull War Risks and Strikes clause.

In February 2019, the Master unknowingly anchored the Vessel in Indonesian territorial waters without permission. Some days later, the Indonesian Navy detained the Vessel for having done so illegally. The Master was prosecuted for contravening Indonesian shipping law, with the Vessel only being redelivered to the insureds in January 2020. The insureds alleged that the Vessel had become a constructive total loss and served several Notices of Abandonment on insurers, all of which were rejected. The insureds then commenced suit to claim for total loss of the Vessel under the Policy, as well as damages for late payment of their claim under section 13A of the Act.

At trial, insurers accepted that the conditions for a total loss had had been met, but alleged that (i) they were entitled to avoid the Policy for material non-disclosure, (ii) the detainment was not fortuitous, and (iii) the delay in release was materially caused by the insureds’ unreasonable conduct in breach of their duty to sue and labour. None of the defences succeeded and the Court allowed the insureds’ claim. The insureds’ claim for damages under section 13A of the Act was, however, dismissed.

Material non-disclosure

At the time the Policy was renewed on 29 June 2018, one Mr Bairactaris, who was the sole director of the first claimant (the shipowner), was being prosecuted by the Greek authorities on charges relating to a shipment of heroin (the “Charges”). Mr Bairactaris was also at all material times a nominee director of the first claimant. In other words, he exercised no independent judgment as director and instead acted on the instructions of other persons, who in this case where the second claimant (the Vessel’s commercial managers) and its owner.

Insurers sought to avoid the Policy on the basis that the insureds had breached their duty of fair presentation. Accordingly, Insurershad to establish that:

• the insureds had actual or constructive knowledge of the Charges;
• the Charges were a material circumstance that should have been (but was not) disclosed at the time of renewal; and
• the relevant underwriter had been induced by the non-disclosure of the Charges to write the risk.

(i) Knowledge

So far as actual knowledge was concerned, since Mr Bairactaris was the only individual within the claimants who knew of the Charges, the key issue was whether the first claimant had been fixed with knowledge of the Charges via section 4(3)(a) of the Act, which attributes to an insured “what is known to … the insured’s senior management”. Section 4(8)(c) of the Act defines senior management as “those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised”.

Notwithstanding his position as nominee director, the Court found that Mr Bairactaris was not part of senior management. It was the substance of the role played by him which was determinative, and since his responsibilities as sole nominee director were confined to executing administrative formalities (rather than the organisation of the first claimant’s activities), he could not be regarded as senior management.

This case thus demonstrates the key principles regarding the “knowledge” of a corporate policyholder and re-states the balance under English insurance law between the rights of the insurer to be provided with the material facts prior to inception of a policy against the practical challenges faced by those responsible for the insurance of corporate policyholders in ensuring they are in possession of the material facts in the first place.

As the Court also found that the insureds also did not have any constructive knowledge of the Charges, the defence of material non-disclosure failed at the first hurdle. The Court nevertheless continued to consider the remaining issues

(ii) Materiality

The parties agreed that the test for materiality was substantively unchanged by the Act, i.e. it was whether a prudent underwriter would have wanted to take the undisclosed circumstances (here, the Charges) into account.

The more controversial issue was whether the hypothetical prudent underwriter could also take into account exculpatory circumstances under the test for materiality. These consisted of information that the insureds would also have made known to insurers had the Charges been disclosed, including in this case:

• Mr Bairactaris’ firm belief that the charges were without foundation; and
• the fact that Mr Bairactaris was a nominee director fulfilling only an administrative function and had no role in the operation of the Vessel.

The Court observed that, had it been necessary to decide, it would have held that that exculpatory circumstances could be taken into account; were it otherwise, an insurer “could … be as selective as it liked in how it defined the circumstances which it alleged could be disclosed”. On the facts, the Court observed that the Charges (considered with the said exculpatory circumstances) would have been material and would have led a prudent underwriter to consider imposing a condition, e.g. that Mr Bairactaris should be replaced as a nominee director.

(iii) Inducement & Remedy

The Court found that, had the Charges been disclosed, the actual underwriter would have imposed a condition requiring replacement of Mr Bairactaris as nominee director. The test for inducement under section 8(1)(b) of the Act would thus have been satisfied – the situation was one where, but for the non-disclosure of the Charges, insurers would only have entered into the Policy on different terms.

Insurers would thus have been entitled to treat the Policy as though it included the above condition (per paragraph 5 of Schedule 1 of the Act). The more interesting issue was whether, in this case, it was equally open to the insured to then prove that it could and would have complied with the condition. The Court, accepting that “sauce for the goose [was] … equally sauce for the gander”, opined that insureds could, and that on the facts the insureds would, have complied with a condition requiring replacement of Mr Bairactaris in any event; as such, insurers would have been without a remedy even if they had successfully proved knowledge of the Charges.

Other issues

This wide-ranging judgment covered several other issues, two of which are dealt with below.

(i) Fortuity

Insurers relied on the proposition set out in The Wondrous [1991] 1 Lloyd’s Rep 400, that the ordinary consequences of an assured’s deliberate and voluntary conduct are not fortuitous and do not fall within the cover provided by all risks policies. Insurers argued that, by anchoring in Indonesian waters, the Vessel had voluntarily exposed herself to the operation of local law. The consequent detention was simply an ordinary consequence of that voluntary conduct.

These arguments failed. The Court declined to read the proposition in The Wondrous so widely and instead clarified that the proposition had two aspects:

• First, there must be some choice by the insured. This implies awareness that a decision is being made between two or more options which are different in some relevant sense.
• Second, the consequences must be such as to flow in the ordinary course of events. This requires the consequence to be “inevitable in the sense that it is bound to eventuate in the ordinary course”.

Neither aspect was satisfied on the facts. Since the Master did not realise that the Vessel was in Indonesian waters to begin with, there was no conscious choice by the Master to anchor there. Further, since at the time of detention the Indonesian navy had only just begun to arrest vessels that had been anchored in Indonesian waters without permission (whereas previously there no reported cases of such detention), the detention was neither inevitable nor an ordinary consequence of the Vessel’s conduct.

(ii) Sue and Labour

Both the terms of the Policy and section 78(4) of the Marine Insurance Act 1906 imposed on the insureds a duty to sue and labour. In simple terms, this duty is analogous to a contract party’s duty to mitigate its losses caused by a breach of contract and in the same way, the duty to Sue and Labour requires the insured to make every attempt to reduce the possible exposure to loss.

Insurers argued that, by being side-tracked into discussions with the Navy which involved considerations of a bribe or something similar (which the insureds were ultimately not prepared to do), the insureds had unreasonably protracted Indonesian Court proceedings against the Master and delayed the release of the Vessel.

The Court reiterated the well-established principle that an alleged breach of the duty to sue and labour would only afford insurers a defence where the breach breaks the chain of causation between the insured peril and the loss. This required the insured to act in a way in which no prudent uninsured would have acted; a mere error of judgment or negligence would not suffice. On the facts, there was no breach of the duty – given the uncertain circumstances faced by the insureds, there was no way of their knowing that engaging in discussions with the Navy would “slow things down”, so it could not be said that the insureds had acted in a way that no prudent uninsured would have acted.

Comment

The Court’s policyholder-friendly reading of both the elements of the duty of fair presentation, as well as of the meaning of the “ordinary consequences of an assured’s deliberate and voluntary conduct”, are welcome developments for policyholders. That said, many of the Court’s observations – particularly in relation to the issues of materiality and insurers’ remedies – were obiter, and it remains to be seen if future judgments will follow the lead established here.

Authors

Eugene Lee

Toby Nabarro