The owners of the ‘Brillante Virtuoso’ claimed that, in an attack by Somali pirates, the vessel had been hit by RPGs and caught fire in July 2011. Later investigations established that an “improvised explosive incendiary device” (IEID) had been detonated in the purifier room, within the vessel’s engine room.
More recently, it was suggested that renegade members of the Yemeni navy or coastguard masqueraded as pirates, and speculated that they might be able to ransom the vessel or trade it with Somali pirates.
The legal dispute which followed owners’, and their mortgagee bank’s, claim against war risks underwriters started in 2012. In October 2019, the Admiralty Judge handed down a judgment that established that underwriters’ initial scepticism about the claim, and their later allegation of fraud against owners, were entirely vindicated.
The judge found that the vessel’s beneficial owner, was the “instigator of the conspiracy” to destroy the vessel in order to commit insurance fraud. The judge was not “left in any doubt as to that conclusion”.
The vessel was insured for USD77 million. An earlier judgment of the Commercial Court had found the vessel to be a Constructive Total Loss (CTL) with owners entitled to an additional USD8 million in expenses.
The judge said underwriters established “a powerful and… compelling case, based upon the series of events”. The bank’s account of events, in their totality and when “tested in the light of the probabilities and the evidence as a whole” amounted to “an account which I ‘simply cannot swallow’.”
Following the Supreme Court decision in the B Atlantic , “persons acting maliciously” requires an element of “spite, ill will or the like”.
The judge found that 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.
The bank therefore failed to establish loss by an insured peril.
Australian decision takes opposite view to the English court on whether depreciation amounts to a saving in Business Interruption calculation
An Australian state Court of Appeal decision has expressly rejected the reasoning of the English High Court in a previous case, finding that depreciation is not to be deducted as a ‘saving’ when quantifying loss of Gross Profit under a business interruption policy.
A warehouse owned by the policyholder collapsed during a severe storm, causing damage to plant and equipment.
The policyholder claimed indemnity for losses arising from the collapse under its property damage and business interruption insurance policy. Under the policy, the policyholder was covered for loss of “Gross Profit” as a result of business interruption consequential upon loss of, or damage to, insured property.
The policy provided for the assessment of loss of Gross Profit on the following basis:
“The insurance under this chapter is limited to loss of Gross Profit due to (a) Reduction in Turnover and (b) Increase in Costs of Working, and the amount payable as indemnity under this Policy shall be:
(a) in respect of the reduction in Turnover: the sum produced by applying the Rate of Gross Profit to the amount by which the Turnover during the Indemnity Period shall in consequence of the Damage fall short of the Standard Turnover less any sum saved during the Indemnity Period in consequence of the Damage in respect of such of the charges and expenses of the Business payable out of Gross Profit”. (emphasis added)
The parties agreed that, in the 12 month period after the damage to the warehouse had occurred, the policyholder would have, but did not, make provisions for depreciation of plant and equipment destroyed in the collapse.
One of the issues in the case was whether a reduction on non-cash costs such as depreciation following insured damage amounts to a ‘saving’ to the policyholder which is to be deducted from insured Gross Profit when calculating business interruption losses.
At first instance, the trial judge followed a previous decision in the English High Court (in relation to a policy which had terms indistinguishable from those under consideration in this case), finding that the depreciation expense, which was no longer recorded in the policyholder’s financial records because the assets in question were destroyed, was an ‘expense…payable out of Gross Profit’ which had been ‘saved’ for the purpose of quantifying the indemnity under the policy.
This meant that the depreciation expense was to be offset against any indemnity.
The NSW Court of Appeal defined depreciation as: “the systematic allocation of a tangible asset’s cost (less its anticipated scrap value) as a series of expenses over its expected useful life…Each depreciation expense appears in the income statement as an expense deducted from gross profit for the purpose of calculating net profit…but the process of depreciation has no direct impact on cash flows”.
The NSW Court of Appeal concluded that the use of the word “payable” in the phrase “payable out of Gross Profit” as opposed to the word “deducted” suggested the exclusion of charges and expenses that are not liable to be paid away, such as depreciation.
The English High Court had found that the policyholder would “recover an indemnity for more than its actual loss in respect of business interruption” if depreciation was not deducted from Gross Profit and concluded that such an outcome should not be reached “unless no other conclusion is possible”.
The result somewhat stretched the language in the policy. In effect, the English High Court determined that the indemnity principle coloured the meaning of the language of the provisions for the assessment of loss.
In contrast, the NSW Court of Appeal placed greater weight on the importance of upholding the bargain that was struck between the contracting parties, as expressed by the words of the insurance contract. It concluded that the formula for the assessment of insured loss of Gross Profit qualified the application of the indemnity principle insofar as it might be said to depart from perfect indemnification.
English Law decision on WELCAR form
In what is understood to be the first English law decision on a policy underwritten on the WELCAR form, a UK Court has found in favour of reinsurers in a dispute over the original contract’s period and the interaction of the Maintenance cover.
The project insured was a floating production project in the Gulf of Mexico that suffered a loss during installation and hooking up of the unit to its mooring systems.
As is often the case with offshore construction projects, construction delays led to three extensions of the project period by the original insurers prior to transferring to operational insurances.
An original insurer had purchased a facultative excess of loss reinsurance on the project which was intended to be ‘back to back’ with the original policy (the court noted the original policy was subject to Texas law and the reinsurance was subject to English law – although this does not appear to be a factor in the case) however, for whatever reason, these extensions to period were not made to the reinsurance policy.
The original insurer first claimed that despite the reinsurance not being specifically extended, it was intended to be ‘back to back’ so it should have been deemed to have been automatically extended.
However, they dropped this argument and chose to pursue a claim on the basis that the original policy (and hence the reinsurance) had a 12 month Maintenance cover after completion of the project, and the loss in question occurred during this period of the reinsurance.
The original insurer argued that the language of the Maintenance cover was clear – the Maintenance Period commenced immediately thereafter the policy expired.
The reinsurer argued that the parties, at inception, intended that cover provided during the Maintenance Period would apply to the completed project, after an acceptance certificate had been issued on completion of the floating platform.
The essential nature of that cover did not change simply because the original insurer omitted to ask for the project period in the reinsurance contract to be extended.
The Court decided that the Maintenance period had not started under the original policy when the loss had occurred, and therefore there could be no cover under the Maintenance period under the reinsurance policy.
The loss occurred under the Construction phase of the original policy and the reinsurance covered had expired (had not been extended) at the time of the loss.