Brillante Virtuoso: co-assured status and indemnity costs
Suez Fortune Investments Ltd and Piraeus Bank AE v Talbot Underwriting Ltd and others [07.10.19] and [04.12.19]
It is not surprising that in a case that resulted in a 52 day trial, many legal issues were raised. In our previous articles, we reported on Mr Justice Teare’s findings that the Brillante Virtuoso was set on fire on the instructions of owners, and its beneficial owner, Mr Iliopoulos, in a failed attempt to defraud their underwriters (see here) and on issues of Aden Port Limits and Best Management Practice for protection against Somali pirates (see here).
In this article, we consider the Bank’s co-assured status and the award of indemnity costs in underwriters’ favour.
One argument raised by Piraeus Bank (the Bank) was in relation to the composite nature of the insurance. The Bank was an innocent co-assured. The Bank argued that if, contrary to their primary case, the owners did procure a “fake” piracy attack, then a “fake” pirate attack by the owners was still a piratical attack on its own interest as mortgagee.
If the Bank was right in that argument, then the meaning of insured perils for owners would have been entirely different to the meaning of the self-same perils so far as the Bank was concerned – and both owners and the Bank were insured under the same policy (or separate contracts embodied in the same policy).
Underwriters’ case was that a policy covering war risks on the vessel could not, by reason of the Bank’s position as a co-assured, be converted from a war risk policy into a fidelity policy - analogous to a mortgagee’s interest insurance.
This point did not need to be decided by the Judge, but underwriters’ concerns in 2019 were no different to those expressed by the hull market nearly 20 years ago, when German mortgagee banks sought agreement to the German Direct Mortgage Clause. A standard hull policy is not the same as a mortgagee’s interest policy.
On 4 December 2019, underwriters were awarded their costs of the liability proceedings on an indemnity basis. Indemnity costs are not punitive, but compensatory in nature. They provide the receiving party with a more generous basis of costs recovery. The decision is here.
Indemnity costs awards are rare (save in cases where Part 36 settlement offers “bite”). Teare J awarded indemnity costs on the basis that this claim was “out of the norm” and relied upon a number of supporting factors.
During oral argument, the question arose whether, as underwriters sometimes face claims by fraudulent assureds, fraudulent claims are “of the norm”. Although the Judge noted that marine underwriters have faced scuttling cases over many years (and fraudulent claims are a feature in other classes too), “Nevertheless such claims are not the norm. The norm consists of claims honestly made but where there are disputes about the extent of cover, the effect of a breach of a warranty and the like. The Bank's claim was honestly brought but it was in fact based upon a fraudulent conspiracy (and, it seems, one which was unprecedented in nature and scale). From the point of view of the Underwriters the claim of the Bank was as much out of the norm as the Owner's claim had been.”
In awarding indemnity costs, the Judge found that although the Bank was entitled to pursue its claim and argue every point, “it did so in circumstances where its claim was weak and there [was] a high risk of failure”. As a result, it could not “be unjust to order the Bank [to] pay all of the underwriters [liability] costs … on the indemnity basis”.
These are brief summaries of the legal issues in the case (and we have by no means addressed all of them).
There are further issues of principle to resolve on costs, relating to those incurred in the original quantum trial. Although underwriters lost the issues on quantum and were ordered to pay owners’ and the Bank’s costs, underwriters are seeking to reverse the costs order originally made, given that none of those costs would have been incurred but for the owners’ attempt to bring, through the English courts, a fraudulent claim on underwriters.