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"BRILLANTE VIRTUOSO": a cautionary tale for co-assured banks and mortgagees' interest insurers

The High Court has dismissed a claim by the mortgagee bank of the "BRILLANTE VIRTUOSO" under the terms of the vessel's war risks policy on the basis that the constructive total loss of the vessel was caused by the wilful misconduct of the owner.

Background

On 5 July 2011, "BRILLANTE VIRTUOSO" (the "Vessel") was damaged by fire following an alleged hijacking incident in the Gulf of Aden. The events gave rise to a claim on the Vessel's war risks policy by Suez Fortune Investments Limited ("SFIL") (the Vessel's owning company) and by Piraeus Bank AE, the Vessel's mortgagee (the "Bank") on the basis that the Vessel was a constructive total loss.

In 2016, the High Court found that Mr. Iliopoulos, the beneficial owner of the Vessel (the "Owner"), had breached a court order to provide his solicitors with an electronic archive of documents. As a result, the High Court struck out SFIL's claim. With SFIL barred from pursuing the claim, the Bank – which was a co-assured under the policy - took the claim forward.

The claim

The Bank argued that the loss of the Vessel was caused by one or more insured perils; namely, by piracy and/or persons acting maliciously and/or vandalism or sabotage and/or barratry and/or by capture seizure, arrest, restraint or detainment.

It was the defendant war underwriters' (the "Underwriters") case that the loss was caused by the wilful misconduct of the Owner who, with the assistance of the master and the chief engineer, had orchestrated a fake pirate attack on the Vessel and the deliberate starting of a fire on board. Underwriters submitted that such misconduct on behalf of the Owner barred any claim under the policy by the Bank because in such circumstances the loss was not caused by an insured peril.

The Underwriters also raised a number of alternative defences, including breaches of warranties in the policy relating to navigational limits and a breach of BMP3 (Industry Best Management Practices) with respect to anti-piracy measures that meant that cover under the policy was suspended.

Findings of fact

In his judgment, Mr. Justice Teare found that there was not " a plausible explanation of the events which befell BRILLANTE VIRTUOSO which is consistent with an innocent explanation". The Judge was left in no doubt of the following findings:

  1. The armed men who boarded the Vessel were pretending to be pirates and had no intention of hijacking the Vessel for ransom. Their intention was to start a fire with an explosive device they brought on board at the behest of the Owner.
  2. The master, the chief engineer and the local salvage company which assisted the Vessel were complicit in the fraud.
  3. Mr. Iliopoulos was the instigator of the conspiracy. His motive was to make a fraudulent claim for the total loss of the Vessel in the sum of approximately US$77 million; funds that could assist him and his companies with the financial difficulties they were experiencing at the time of the incident.

The lack of an insured peril

Piracy

The Bank argued that one of the consequences of the Bank's position as a co-assured under a composite policy with a separate contract of insurance was " as far as the Bank is concerned, the Owners' wilful misconduct constituted an act of a pirate in that the loss of the Bank's interest in the insured vessel resulted from a violent attack on that interest, motivated by personal gain".

The judgment contains a careful review of the definition of piracy in a marine insurance context. The Judge stressed that, for conduct to amount to piracy, it is not enough that the conduct involves an unlawful attack at sea. The conduct must be that which a businessperson would think amounts to piracy. The Judge concluded that "a business man would say that there was no attack by pirates, that the armed men only pretended to be pirates […] and that Mr. Iliopoulos, who authorised the actions of the armed men, was not a pirate but was a shipowner seeking to defraud his underwriters".

Persons acting maliciously

The Judge pointed out that the concept of " any person acting maliciously" is not designed to cater to situations where the state of mind of spite, ill will, or the like is absent.

The Judge found that the armed men who boarded the Vessel intended to damage it, but not out of spite or ill will: " the vessel was not lost or damaged because the armed men desired to harm the vessel or the Owner. The vessel was lost or damaged because the armed men desired to make money from their actions". Although he accepted that the threats of harm to crew not involved in the conspiracy could indicate an element of ill will, the Judge did not consider the element of ill will sufficient to "colour the operation as a whole".

Vandalism or sabotage

With respect to the Bank's argument that the loss was caused by vandalism or sabotage, the Judge found neither of these terms apt to describe the conduct of those involved in a conspiracy to defraud the Underwriters.

Capture, seizure, arrest, restraint and detainment

The Judge found that, given the armed men who boarded the Vessel had acted in concert with the master, the Owner was never deprived of the possession of his ship. The Owner's orders were complied with at all times. Therefore, the Judge found that the language of " capture, seizure, arrest, restraint or detainment" did not apply.

In summary, the High Court dismissed the Bank's claim under the terms of the Vessel's war risks policy on the basis that the constructive total loss of the Vessel was caused by the wilful misconduct of the Owner and not by an insured peril.

Commentary

The Bank's position as co-assured

A striking feature of this case was the Bank's continued involvement as a co-assured under the policy following the strikeout of SFIL's claim. The Judge did not consider the question of whether the composite policy at issue contained a single or multiple contracts of insurance. The Judge reasoned that, even if the Bank had its own separate policy of insurance, the Bank would still be unable to establish a loss by piracy (or by any other insured peril).

The judgment places a co-assured mortgagee bank and consequentially its mortgagees' interest insurers in an invidious position when an assured ship owner is found to have acted with the intention to defraud its war risks underwriters. In addition to a mortgage on the Vessel, the Bank in this case had the benefit of a general assignment and Mr. Iliopoulos' personal guarantee. It is yet to be seen whether mortgagees' interest insurers amend their policies with their assureds to compel banks in a similar position to pursue other options available to them before falling back on their mortgagees' interest insurance.

Burden of proof in wilful misconduct / scuttling cases

Consistent with his judgment in Kairos Shipping and another v Enka Co. LLC and others (The "Atlantik Confidence") [2016], the Judge reiterated that scuttling is a serious charge and the standard of proof will not fall far short of the criminal standard. The Judge highlighted that the facts proved against an owner must be "sufficiently unambiguous" (Brownsville Holdings Ltd v Adamiee Insurance Co. ("The Milasan") [2000]) to establish that the Owner was complicit in the casting away of his vessel. The Judge accepted submissions from the Bank that "[…] if there is a plausible explanation which indicates the innocence of the person impugned of fraudulent or criminal conduct, no findings of such misconduct should be made". The Judge accepted this submission on the basis that the "plausible explanation is substantial as opposed to remote or fanciful and supported by the evidence or at least not inconsistent with it".

This is a useful restatement and development of the law on the burden of proof in scuttling cases where wilful misconduct on behalf of an owner is alleged.

The truth lies in "the tableau…the text with illustrations"

The judgment does nothing to dispel the reasoning long used in alleged scuttling cases that several events, which might not justify a finding of deliberate loss in isolation, can do so when looked at collectively. The Judge did not accept that this collective approach does not apply in a case where the court was to decide upon the identity of the person who caused the deliberate damage (such damage being common ground) rather than having to choose between deliberate damage on one hand and accidental damage on the other (as in the Atlantik Confidence). It is clear that the collective approach is not restricted to scuttling cases, nor to particular types of scuttling case.

Also consistent with the judgment in the Atlantik Confidence, the Judge considered all relevant indirect and circumstantial evidence in reaching his conclusion. It is clearer than ever that it will not be fatal to the insurer's case that parts of the canvas remain unlighted or blank.

Summary

The " BRILLANTE VIRTUOSO" saga has come to a suitably climactic end with some remarkable findings of fact. The factual findings aside, the case has proved a useful restatement of the law on the burden of proof in alleged scuttling cases and reiterated that, in cases such as this, underwriters cannot be expected to "light all parts of the canvas" and paint a complete picture of an intricate fraud by a ship owner. What is clear is that an inability to do so will by no means preclude a finding of wilful misconduct or fraud and such a finding will compromise the position of an innocent co-assured in the majority of cases in contemplation. We must wait and see how innocent co-assureds and their mortgagees' interest insurers respond.

For more information, please contact:

Alex Kemp
Partner, London
T +44 (0)20 7264 8432
E alex.kemp@hfw.com

Kirsten Wright
Associate, London
T +44 (0)20 7264 8098
E kirsten.wright@hfw.com

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