North Star Shipping Ltd & Ors v Sphere Drake Insurance Plc & Ors

Under war risks cover, deliberate or reckless damage caused by a person acting maliciously may constitute an insured peril, unless the assured was complicit in causing the loss. Complicity may be proved by inference, but the court must reach a high level of confidence and must assess the whole evidence. Motive alone is insufficient; the physical circumstances of the casualty and the assured’s conduct ordinarily require careful evaluation.

For marine insurance, allegations of fraud in pending criminal or civil proceedings may be material to moral hazard even where the assured possesses exculpatory evidence. Serious financial difficulties, prior premium defaults and excessive valuation may likewise be material when viewed together. Materiality is assessed by reference to the prudent underwriter, and inducement is assessed on the basis of full disclosure of the material circumstances.

The owners claimed under war risks policies after the bulk carrier North Star was damaged by an explosion while undergoing repairs at Drapetsona, near Piraeus. The insurers alleged that the owners had procured the explosion to make a fraudulent constructive total loss claim. They also alleged non-disclosure of criminal and civil fraud allegations, serious financial difficulties, premium defaults and the vessel’s excessive insured value.

The principal issues were whether the explosion was an insured peril, whether Harry Petrakakos or the owners were complicit, and whether the insurers were entitled to avoid the policy for material non-disclosure and inducement.

1. Complicity and insured peril. The court held that deliberate or reckless damage caused by a person acting maliciously, who was neither a terrorist nor acting from a political motive, was within the war risks cover, subject to the insurers proving fraudulent complicity by the assured. The phrase did not require an intention to injure the assured. Conduct amounting to barratry remained outside the relevant peril.
2. Inference of complicity. Complicity was to be proved on the balance of probabilities, but the court had to reach a high level of confidence. It was impermissible to exclude alternative explanations and treat the remaining explanation as established merely because it remained. Motive alone was insufficient. The physical evidence, the owners’ conduct, their financial position and witness credibility had to be assessed together.
3. The explosion was probably caused by an internal charge. The court found that Harry Petrakakos personally procured it. The finding rested on the location and effects of the explosion, the absence of a persuasive external perpetrator, the owners’ desperate financial position, Petrakakos’s conduct and his misleading evidence. The claim therefore failed for wilful misconduct and complicity.
4. Non-disclosure. Under section 18(2) of the Marine Insurance Act 1906, pending allegations of fraud were material to moral hazard. Exculpatory evidence did not remove their materiality, although it could bear on inducement. War risks insurance did not exclude moral-hazard considerations because malicious damage created a real opportunity for a fraudulent loss. The serious financial position, prior cancellation for unpaid premiums and excessive valuation were also material in combination. Section 53(1) did not make premium defaults incapable of materiality in every case.
5. The underwriters were induced by the non-disclosure to enter the policy and were entitled to avoid it. The claim was dismissed on both the complicity and non-disclosure grounds.