Marine Fraud – Scuttling by ship owners

With insurance fraud and its cost to the industry remaining a key issue for insurers, Clarissa Dumolo in our Marine, Ports & Offshore team takes a look at the impact it is having upon the marine industry. In this article Clarissa reviews two high profile cases with a combined value of $100 million.

We have all heard how fraudsters often consider insurance fraud to be a victimless crime with only the insurance companies losing out financially. However, as we have learnt in other lines of business such as Property, the impact of insurance fraud on the industry can lead to costs being passed on to customers by way of increased premiums. Therefore, deterring and tackling fraud remains a major focus, and due to the high burden on insurers to prove fraud, insurers must be thorough in their investigations to obtain all of the relevant facts and evidence. 

Whilst the marine industry will unfortunately bear witness to the full range of insurance fraud, the cost of fraud is particularly high when dealing with large commercial vessels carrying goods where the sums in issue are worth millions.  

This is particularly apparent in two recent cases involving scuttling, or deliberately sinking a vessel, which have a combined potential claims value of almost $100 million.  

In the case of Brillante Virtuoso, insurers successfully denied liability on the basis that the vessel had been scuttled, however, in the most recent case of Atlantik Confidence, insurers are currently left in a position where they cannot recover $22 million which was paid out on a claim which was later found to be a deliberate act. 

Insurers were granted leave to appeal the Court of Appeal decision and the claim was heard by a panel of seven Justices of the Supreme Court in November 2019. 

No doubt, the insurance industry will be keeping a close watch for the Supreme Court’s decision in the coming months.

Brillante Virtuoso – Suez Fortune Investments Ltd and Piraeus Bank AE v. Talbot Underwriting Ltd and others [2019]

On the evening of 5/6 July 2011, vessel Brillante Virtuoso carrying fuel oil was boarded by a group of armed men in a supposed Somali pirate attack just off the coast of Aden, Yemen.

Vessel owners initially said that during the Somali pirate attack the vessel had been hit by an RPG (rocket propelled grenade) and caught fire. However, investigations found that the engine had stopped shortly after the men had boarded and an improvised explosive incendiary device had detonated in the engine room causing a fire.  Brillante Virtuoso was deemed a constructive total loss.

There was also speculation during the investigation that the Yemeni navy/coastguard may have pretended to be Somali pirates to gain control of the vessel and ransom it.

The war risk insurers denied liability for the incident on the basis that the vessel had been scuttled by the owner of the vessel, Mr Iliopoulos.

A legal dispute arose between the owners and their mortgagee bank against the war risk underwriters.  The judgment was handed down in October 2019, following a 52 day trial.

Teare J found that the owner had destroyed the vessel in an attempt to commit insurance fraud.  The vessel was insured for $77 million which represents a significant win for insurers.

The judgment took into account the plausibility of the incident on the facts presented.  In particular:

• Brillante Virtuoso was awaiting three security guards from Aden to board the vessel for transit through the Gulf so when the armed men arrived they were let aboard the ship by the crew, without their ID being checked.
• There was also no previous risk of piracy in the area. As such, the probability of Somali pirates being in the area, knowing the location of the vessel and being aware that she was awaiting security to arrive on board was considered highly unlikely. 
• Once on board the men demanded that the vessel sail towards Somalia, however, the engine broke down shortly after. They then detonated the improvised explosive incendiary device in the engine room (which they happened to bring with them although it was believed that they were planning to hold the vessel to ransom) resulting in a fire.  The armed men then managed to leave the vessel without anyone seeing.
• When the salvage vessel, Poseidon, arrived early on 6 July photographs show that the fire was almost out. Only the chief engineer was left on the vessel at that point, the crew having abandoned ship earlier in the evening.  However, by mid-afternoon the fire had reignited which could not have happened of its own accord.  Evidence of tampering was found during the investigation.

Atlantik Confidence – Aspen Underwriting Limited v. Credit Bank [2018]

On 13 April 2013, vessel Atlantik Confidence sank in the Gulf of Aden. 

Various legal issues ensued following the vessel’s sinking including a legal action regarding limitation.  During the limitation claim in 2016, it was held that the vessel had been deliberately sunk by the master and chief engineer at the request of the vessel’s owner.

Hull and machinery underwriters had previously paid out under the policy in August 2013.  Given the ruling in the limitation claim and hull underwriters’ further investigations, they decided to seek a recovery of the funds previously paid out to the owners and the vessel’s mortgagees (“the Bank”) under the terms of an agreement (which had been signed before the limitation claim in 2016 and which contained a English jurisdiction clause) on the basis that the loss had been caused by the wilful misconduct of the owners.

The claim was for damages based on the fact that the loss had been misrepresented and had been caused by the deliberate acts of the owner and/or for restitution based on mistake.              

Proceedings were served on the Bank in the Netherlands, where they are based, but to be heard in the English courts.  At first instance, Teare J held that the English courts could deal with the misrepresentation claim but not the restitution claim. Both parties appealed the decision. 

The Court of Appeal held that underwriters’ misrepresentation claim could be heard by English courts, however, there is no jurisdiction to hear underwriters’ restitution claim against the Bank. 

Permission was given to appeal the Court of Appeal decision and we are currently awaiting the Supreme Court’s findings following the hearing which took place in November 2019. 

The decision will provide interesting commentary on insurance issues, jurisdiction and whether the claim for restitution will be allowed to proceed. We will issue further comment on this case once the decision is available.  

Keoghs Marine, Ports & Offshore team appreciate that fraud is a major challenge for the marine insurance market, especially in the current climate.

Our team brings together a wealth of knowledge and technical experience in marine specific claims together with the coverage expertise of senior insurance solicitors specialising in fraud and coverage disputes, to provide a fully comprehensive fraud service for the marine insurance industry. 

For more information, please contact Clarissa Dumolo on 0117 218 0244 or cdumolo@keoghs.co.uk.