“The Brillante Virtuoso Was Scuttled by Those Operating under the Instructions of the Owner” is the View of the Commercial Court

On 21 February 2019, a piece was published on this blog posing the question: “What really happened to the Brillante Virtuoso”? A meticulously drafted judgment of Teare, J ([2019] EWHC 2599 (Comm)) provides an answer to that burning question.

Now briefly the facts!  On 5 July 2011, on route to China with a cargo of fuel oil, the Brillante Virtuoso was boarded by pirates off Gulf of Aden. The pirates directed the vessel to Somalia but when the engine stopped and could not be re-started, they allegedly placed a detonator in the engine room causing huge damage to the vessel. The vessel was insured for $US 55 million with an additional $US 22 million increased cover with ten Lloyd’s underwriters. The underwriters refused to indemnify the assured (Suez Fortune Investments Ltd). The assured and its bank (Pireus Bank AE) as a co-assured under a composite policy brought a claim against the insurers.

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In the first stage of the trial, the claimants were successful and Flaux, J, (as he then was) held that the vessel was a constructive total loss under s. 60(2)(i) of the Marine Insurance Act 1906 as she was damaged by an insured peril and the cost of repairs would exceed the insured value of the ship when repaired [2015] EWHC 42 (Comm).  In 2015, war risk underwriters alleged wilful misconduct. As the case proceeded the owner of the vessel, Mr Marios Iliopoulos, declined to provide electronic documents related to the case to his own counsel or to the counsel of underwriters, raising questions for the court. In 2016, the owner’s claim was struck out for a failure to comply with disclosure obligations and Flaux, J, was adamant that Mr Iliopoulos had invented a false story in an attempt to explain his failure to make disclosure. The claim was then pursued by the bank alone. The underwriters resisted the claim put forward by the bank alleging that the loss was caused deliberately by the assured and hence was not covered by the policy.  

The case does not alter established legal principles in any significant manner. The burden of proving wilful misconduct or scuttling, on balance of probabilities, lies upon the insurers and as stressed by Neill, LJ, in The Captain Panagos DP [1989] 1 Lloyd’s Reports 33 at p. 43, “an inference of the owner’s guilt can properly be drawn if the probabilities point clearly and irresistibly towards his complicity.” On that premise, Teare, J, was convinced that the cause of loss was on balance of probability was “wilful miscounduct” of the assured. He pointed out to several inconsistencies in the owners’ account of the attack. For example, the incident occurred within Yemeni waters off Aden, a location where Somali pirates had never attempted a boarding before (and have not since). In VDR recordings, the attackers identified themselves as “security,” suggesting that if they were pirates, they would have had to have known that the vessel was awaiting a security detail. They brought with them an incendiary device. The master allowed them to come aboard, even though they were masked and armed and the ship was awaiting an unarmed security team. When directed to steer towards Somalia, the master selected a very different course, but the attackers did not detect this or correct it!

Accordingly, it was held that the supposed attack by pirates was a “fake attack”, and that in reality it was a charade orchestrated by the owner of the vessel, Mr Iliopoulos. It was also held that the vessel’s master and chief engineer were complicit in the scheme, alongside local Aden-based salvors, Poseidon Salvage, and current or former members of the Yemeni coast guard or navy.

An interesting point was raised by the bank in its submissions. On the assumption that the bank is insured under the policy as a composite co-assured, was it possible to argue that in the popular or business sense the owner of the vessel was a pirate, since they carried out the attack on a vessel (or instructed that the attack was to be carried out) with a motive of personal gain/to satisfy personal senses of vengeance/hatred? Teare, J was quick to dismiss this argument indicating that the violence to the vessel and the threat of violence to the crew would not qualify as piracy if carried out by the owners (or the conspirators) with the intention to defraud the insurers. This might seem an obvious point to some but is another clarification on the meaning of “piracy” for the purposes of marine insurance law. The bank’s attempt to argue that the loss was caused by “persons acting maliciously” also failed. Teare, J, quoting from the Supreme Court judgment in The B Atlantic [2018] UKSC 26 stressed that this peril involves an element of “spite or ill-will or the like in relation to the property insured or at least to other property or perhaps even a person” but he rightly indicated that those who were permitted to board the vessel did not act out of “spite or ill-will or the like” in relation to the vessel but did so on the request of the owner in order to assist him in his fraudulent plan to deceive the underwriters. Put differently, here the owner sought to damage his own property and the armed men sought to assist the owner, not to harm him.

The finding of the trial judge on the “wilful misconduct” point was adequate to decide the case in favour of the war risk underwriters insurers but it was briefly stated in the judgment that underwriters were also successful on a number of subsidiary and alternative defences such as the insured vessel being outside the geographical limits of policy (the so called “Aden agreement” point) at the time of the alleged loss and breach of a warranty that required compliance with advice and recommendations of an IMO Circular concerning planning and operational practices for ship operators and masters of ships transiting the Gulf of Aden and the Arabian Sea.

The case does not necessarily establish novel legal points but a 52 day trial and a very lengthy judgment is a good illustration of the work that needs to be carried out by lawyers and judges in cases where insurers raise “fraud” as a defence to a claim under the policy.     

Insurance and fraudulent claims

Hard on the heels of legislation in the Insurance Act 2015 about fraudulent claims by the insured, readers may like to know that insurers can now take comfort from s.57 of the Criminal Justice and Courts Act 2015 concerning third party dishonesty. Essentially where there is substantial dishonesty in or about an injury claim the entire claim falls to be dismissed, subject to a “substantial injustice” exception.

Andrew Tettenborn