“The vessel has been built to a good specification throughout but has experienced a period of operation at minimal expense and resultant poor maintenance. Although there is active corrosion and some wastage of the structure in the topside ballast tanks this is relatively minor, the fitting of anodes should arrest the corrosion and the wastage noted can be rectified at no great cost. The vessel last drydocked in July 1991 and is next due in January 1994 for which there is a Class requirement for Ultrasonic thickness gaugings to the hull plating below the water line to be taken at that time. Although there is some corrosion on the outer hull the condition of the bottom side tanks and double bottoms are such that any wastage that may be recorded should be well within acceptable limits as the structure throughout is good. There are no apparent major deficiencies and it should be possible to maintain the vessel for a few more years with some modest investment for drydocking and remedial works on the main engine.”
“..found to be in sound condition with exception of slight corrosion spots at places, but general impression is that all internals are sound and strong.”
“That the word “maliciously” is quite capable of covering wanton damage is clear from its use and the meaning accorded to it under theMalicious Damage Act 1861 . Section 58 provides that where malice is an ingredient of an offence under that Act it is immaterial whether the offence was committed “from malice conceived against the owner of the property in respect of which it shall be committed or otherwise”
“A. I’m of the view, it is still a possibility that some curling of the edges of the petals would take place as a result of the initial stress state which is present in the plate as it is loaded up to the point, at the point of failure. We’re not talking about initial stress state due to still water bending moments in the vessel; we are talking about the very complex stress field which is present in the plate when the external loading is applied to that plate. It is bilaterally stiffened structure, there are welds, there are stiffener welds, there are, there is the welds on the frame 49 bulkhead; all those sites will serve to provide certain stress concentrations, as well as around the initial loading point from which failure initiation will take place and at that point of failure, the stress state of the plate changes as well as the loading being applied to it, and that could cause in a way that that failure is initiated and released. It is my view that it could potentially cause some curling of the edges of the petal to take place to the extent and to the degree of that. I think I stated that it is rather indeterminate and it is very difficult to predict, absolutely. Q. My question, Mr Misselbrook, was: is it your opinion that it is a likely explanation of the outward petalling we see on the North Star, yes or no? A. I cannot discount it as a possibility. Q. So you are saying that it is a probability, are you? A. No. Q. The only theory that was put to Dr Haxton to explain outward petalling was a theory based on reflected blast wave. Is this your theory? A. No. Q. No? But you are not suggesting that it is a possibility that cannot be discounted until the pressure time histories on those parts of the plate can be identified and correlated with the initial expansion of the shock wave into the compartment and the subsequent deflection of the various components. Q. Let me ask you this: is it your opinion that reflected blast waves is a likely explanation of the outward petalling we see on the North Star? A. Again, I would say it is a possibility. I cannot go any further than that until it has been further investigated. Q. And where in your reports do we see any discussion of this point? A. There is no discussion in any of my reports on this point? Q. Why not? A. It has not accounted for it as a possibility.”
“If the initial inwards-facing petals had turned through an angle of 180ºC or more, I fail to see how the subsequent development of a high velocity flow from the inside of the engine room could cause the petals to bend back outwards since this would require an initial movement against the proposed reversed gas flow. On the contrary, the flow-induced force acting on the inward facing side of the petals would tend to increase their curvature and press them against the inner face of the shell plating.”
“When bending of a flap of metal occurs in response to a load applied to the surface, the bend occurs preferentially at the fixed end of the flap where the resulting bending moment is greatest. This is a matter of common experience. The limited extent of the pronounced curvature of the petals therefore reflects the extent of the ductile tears which had been created during the initial period of intense explosive loading. By comparison, by the time that the explosion gases had vented into the engine room and the proposed reversed flow occurs, the brittle fractures would have formed causing much larger flaps to be exposed to the proposed flow-induced loading. If reversed bending were to occur under such conditions, outwards bending should not occur at the petals, but at the fixed end of the flap where the highest bending moment would be experienced. This would not cause reversal of the petals and would not be consistent with the pattern of deformation observed in the NORTH STAR shell plating.”
"It is fair to say, as I mentioned in my first witness statement, liquidity was tight in the first part of 1994, owing to the loss of the 'North Rock' income and the delay in putting 'Taxiarchis' into a trading condition. We were by no means insolvent ie. we did not owe more money than our assets were worth. It is fair to say that meeting our financial commitments involved a degree of juggling during the first half of 1994, but we were never in a situation where we were concerned as to whether it would be possible for us to meet them. This was, for us, just normal business in circumstances that were rather difficult for one reason and another."
“From the proceeds of the sale of the vessel payments to Salvors on account and to third parties were made leaving no cash to the owners. In light of the above we request your intervention and assistance to collect the above amounts.”
“Q: So you paid your War Risk premium on the 5 July and I suggest to you that that was no coincidence. You paid it then because you knew what was going to happen that night? A: Because I was, before in June, I was concerned about the outstanding premiums and, since we have this money available, we sent it, and the first thing the brokers say in the contract of War Risk is that it is payable at inception.”
“Your client, Mr Petrakakos, has asked me to write a letter explaining what the Serious Fraud Office is and to describe the assistance he has given in the investigation of the affairs of John Billington and his various companies and Martyn Ryder and Tony Locke and their various companies. I am aware that it is Mr Petrakakos’ intention to disclose this letter to Greek Judicial Authorities and I am happy for him to do so. I am the nominated Case controller with responsibility for the investigation into the affairs of Billington, Ryder and Locke the trial of whom on charges of fraudulent trading under theCompanies Act 1985 is due to commence on4 May 1993 . I have explained to Mr Petrakakos that I am unable to reveal specific details of our investigation to him however I can confirm for the purposes of this letter that Mr Petrakakos is regarded by this office as a victim of a fraud perpetrated by Mr Billington. Mr Petrakakos it is hoped, will give evidence on behalf of the Crown during the course of the trial.”
“I conclude that where an owner genuinely and reasonably believes that his vessel ought to be insured for a particular value which is in excess of the market value, he does not have to disclose the true market value, for, given his reasonable perception, the disparity is not capable of suggesting moral hazard. As a matter of logic, it is nothing to the point that the insurer is thereby deprived of the opportunity of investigating why there is a disparity. It is only where the disparity cannot be justified on reasonable commercial grounds that it ought to be disclosed. If insurers wish to secure the right to investigate for themselves the justification for any significant disparity, they have the simple remedy of requiring the assured to provide an independent market valuation and to explain any disparity in the insured value.”
“allegations of criminality or misconduct going to moral hazard which had been made by the authorities or third persons against the proposer and are known to him to be groundless; As to case (1), if an allegation of criminal conduct has been made against an assured but is as yet unresolved at the time of placing the risk and the evidence is that the allegation would have influenced the judgment of a prudent insurer, the fact that the allegation is unfounded cannot divest the circumstance of the allegation of the attribute of materiality. For example, if the proposer had told the insurer of the allegation and also that it was unfounded, the insurer might well have preferred not to trust the word of the assured or might have preferred to conduct his own investigation before agreeing to underwrite the risk.”
“I add however that, in this situation, the issues of both materiality and inducement would in all likelihood fall to be judged on the basis that, if there had been disclosure, it would have embraced all aspects of the insured’s knowledge, including his own statement of his innocence and such independent evidence as he had to support that by the time of placing. This might itself throw a different light on the answer to one or both of the issues of materiality and inducement. That would of course be a matter of fact and evidence.”
“There is no doubt that in combination facts which, taken in isolation might not be material, can become material.”
“In the field of moral hazard, a failure by the assured to disclose an existing allegation against him of dishonesty or relevant criminal conduct or a criminal charge would normally be non-disclosure of a material fact.”
“Q. Now presumably, you would also accept that, if an insured had recently been charged in criminal proceedings with fraud and had, in fact, committed that fraud, then that too would be a material matter for underwriters to know? A. Not on the War policy; it would be on the Hull risk policy. Q. Surely it would be relevant on any policy in relation to which you may have dealings with that insured? A. I don’t think so because the War policy is outside the control to 99% of the assured. So to me, it is irrelevant. His bank require it and I am happy to give it and the assured is not at risk of scuttling that boat to any reasonable amount.”
“Q. What I do not quite understand from your evidence is why you exclude, which I think you do, the prospect that he will use a means of causing water to enter the hull of the vessel which has exactly the same effect, namely the sinking of the ship, but which is a means which, because of the division of Risk between the Hull and Machinery policy and a War Risks policy, technically falls under the War Risks policy, not under the Hull and Machinery policy. I just do not follow that? A. I follow your argument, my Lord. All I can say is that statistically, over my experience since 1953, it has always been the favoured choice because it is easier for the dishonest owner or scuttler to choose the Hull Risk. It is only a new fashion over the last few years that we have had these few War cases. Before, my Lord, we never had a War scuttling. There has never, up until now, been a successful War scuttling. Maybe the shipowners were not bright enough, I don’t know. It has always been a possibility, my Lord. All I can say is 99.5% of all decent scuttlings have been Hull Risk; they haven’t been War Risk, but why, you will have to ask the dishonest shipowner? I don’t know, my Lord. Q. I think what you are saying – and correct me if I am wrong, I get this from your statement in your report – is that the opportunity is presented by a War Risk policy because of the way in which the Risk is defined. The insured Risk as defined on the War Risks policy, being compared to the way it is defined for the purposes of a Hull and Machinery policy, is more circumscribed? A. Yes. Q. So the area of potential loss-causing activity is itself more circumscribed. Do you put it higher than that? A. No, my Lord, but it may become a fashion now for a scuttling to be one by War Risk. I don’t put it higher than that, my Lord.”
“Q. So even though, as we have seen, there are various ways a dishonest assured could manufacture a total loss, could manufacture a partial loss, could manufacture exaggerated claims under his War policy, the fact that he is dishonest is of no interest to you whatsoever? A. It is of no interest to me, but it is of interest to the primary policy; this is an exclusion policy. It is of interest to the leaders of the primary assurance and I would wish to satisfy myself that the primary assurance has gone into those points. I am not interested. Q. So is what you are saying this: that provided the Hull and Machinery underwriters have been fully informed of the assured’s dishonesty? A. I would have assumed they had; I would not have asked. I can’t go around each time I write a War Risk and say, “Look, old boy, did you ask any pertinent questions?”
“Q. So the reason why, for example, in this case, you say that the fact that there were criminal proceedings afoot in Greece in which allegations of dishonesty had been made against the Petrakakos brothers, the reason you say that would not concern you as a War Risk underwriter is that because no facts relating to dishonesty of the assured, however clearly established, would matter? A. Ah, well, I think I would go further. Considering there had been no proof, I don’t think that it is material either way, but it is certainly not material to the War underwriters. The only marginal question is: is it material to the All Risks underwriter? I doubt it is. The Greeks are very litigious. Q. Going back to my question: your evidence is that none of this would be material to a War Risk underwriter? A. None of it would be material to the War Risk underwriter. Q. That opinion does not depend on what is or is not said in the Serious Fraud Office letter; it is simply your general view? A. No, I think that is irrelevant.”
“Q. So you do not think that an underwriter who cannot prove the scuttling ought to take a nondisclosure defence? A. I don’t like it. It is the most unattractive part of underwriting. It is very unattractive. Q. Why do you not like it? A. Because we don’t ask the questions. Q. No.? A. And we are in trade. Q. Yes? A. Trade, not a profession. I don’t like it. In trade, you tend not to ask; you are greedy for the money and to then say, ‘Ah, but I can get you because you did not disclose this’, to me has always been very unattractive, and I don’t want to come to that.”
“Q. What I wanted to ask you about was this: you did express, when you were giving evidence, in the course of cross-examination and in answer to questions I put to you, a view in relation to reliance on defences of non-disclosure which is a view which, speaking for myself, I have never previously heard expressed by any Lloyd’s underwriter in this Court? A. I think that is to the regret of Lloyd’s, my Lord. Q. Is this a view which you have long held? A. Yes, my Lord and you make money – I attracted – I had by far the largest – I had over half the world’s War income. Over half the world’s Total Loss income; over half the world’s kidnap and ransom, War income. I am in trade. The trouble with Lloyd’s is it thinks it is a profession. It is not, it is trade. Q. During this period, this very, very successful period which you had, particularly specialising in War Risks cover and Total Loss cover, did you, in fact, ever take non-disclosure points? A. I never took a non-disclosure point. Q. The whole time you worked as an underwriter? A. The whole time, because it was known I had a very fast quick queue and, as I think I said, I did not ask many questions and, if I did not ask questions, it was my fault.”
“Q. So what I suggest, Mr Hall, is that, in the context of a war risks policy, so far as total loss claims are concerned, the reality is that any moral hazard concern on the part of the underwriter can only really be directed at the risk that the owner might bomb his own ship in order to make a fraudulent claim under clause 1.5? A. I would agree with that; either total loss or partial loss.”
“Unless otherwise agreed, where a marine policy is effected on behalf of the assured by a broker, the broker is directly responsible to the insurer for the premium, and the insurer is directly responsible to the assured for the amount which may be payable in respect of losses, or in respect of returnable premium.”
“A prudent underwriter certainly would wish to know that there was such a large differential between the sale price of US$1.4 million and the insured value of US$4 million , and this is something that should have been disclosed. I accept there is nothing unusual in there being a differential, but I would expect this to be in the region of 10-15%, possibly somewhat more, but certainly not a multiple as here. Such a differential raises a clear concern as to moral hazard. In blunt terms, the insured would or might have a financial interest in losing the vessel.”
“Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.”
“(a) the detonation of an explosive (b) any weapon of war and caused by any person acting maliciously or from a political motive.”
“I believe that in this case the arrest and the underlying allegations ought to have been disclosed for two reasons. Firstly, I understand that in the Panama proceedings, there were allegations of fraudulent behaviour, in particular an allegation that an insurance policy had been dishonestly assigned. I have to say that if I had learned of such an allegation of dishonesty, particularly relating to an insurance policy, I would have refused the risk without a second thought. I would not have wanted to do business with this client for the very reasons relating to moral hazard discussed above. I am confident that any prudent underwriter would do the same. Secondly, it would be relevant to the financial position of the beneficial owners of that vessel, who I believe were the same as the Owners of the “NORTH STAR”
“My conclusion is that late payment or failure to pay premium under a previous policy is not in itself material to the risk being insured under a H&M policy, and therefore not disclosable as such. It may be relevant to whether or not the new insurer will be paid promptly and without any hassle, but that does not make it a material fact for the purposes of MIAA, s18. It is MIA, s.53(1), together with policy terms such as the premium warranty, rather than s.18, that provide the insurer with protection in the event his insured proves to be a serial premium payment defaulter. I am reinforced in this conclusion by the evidence as to how unusual it would be to disclose past premium payment record, and the absence of any inquiry in relation thereto in the Argonaut Questionnaire (notwithstanding the presence of other inquiries regarding previous insurance). Given the apparent prevalence of late premium payment in the marine market, I do not think the rarity of such disclosure and the absence of such inquiry can simply be attributed to reliance on the brokers to vet bad payers out.”
“Q. And you proceed on the basis that it is reasonable to suppose that there might be some substance in those charges if they had led to criminal charges being brought? A. That’s correct, yes. Q. Unless you can be satisfied that there is no substance to the charges, you may not or you might not insure the applicant? A. No, the fact that there are serious allegations would be enough for me considering a new potential assured. The fact that the allegations were and still are in existence and ongoing, that would have been the end of the story as far as I am concerned. I am not interested in whether these allegations are true or not, insofar as the fact that there are allegations of fraud is the all-important issue as far as I am concerned. Q. Let us take it step by step, Mr Tobin. The relevance of the allegations, you have just agreed, is that they raise a concern that there may be some substance in the charges, because if somebody is the subject of criminal proceedings, then you work on the basis that there may be some substance to that: that is your working assumption? A. Yes, part of it, yes. Q. So if you can in fact be satisfied that there is no substance to those allegations, then in those circumstances which maybe unusual, there is no difficulty, but you would need to be satisfied? A. I would not have entered into a discussion any further with the broker had he advised me that there were allegations of fraud. I wouldn’t have been interested in going any further to discuss the rights, wrongs or where with all as far as those particular allegations are concerned. Q. So your position is that you would have an entirely closed mind? A. Absolutely, yes. Q. It does not matter what information is provided to you? A. I know my management at that particular time would not have been happy had I entered into a contract knowing that there were serous fraud issues with that issue and nor indeed would I have been happy to enter into a contract with somebody who had ongoing serous fraud allegations.”
“Q. What I suggest to you, Mr Tobin, is two things: I suggest first of all that if a broker had asked, you would have extended the courtesy of a discussion and I suggest secondly that the exceptional circumstances of this letter being as it is, a representation from the premier prosecuting authority in England and Wales, being provided after what must have been a thorough investigation makes this a quite exceptional case and whatever the ordinary position of your company, in the light of this letter you would have been prepared to grant this insurance? A. No. This as I say, this is one issue of a number of issues which were ongoing with the assured and all the broker would have said is one issue seems to have been addressed and there are also X many issues still ongoing unresolved. So this really would not be a discussion, a major discussion point. The fact is that at that particular time there were ongoing allegations still applying in Panama and Greece and that would have been enough, as far as my discussions are concerned.”
“MR GOLDSTONE: Very well, Mr Potter. The position is when you made your statement you were unaware of the Serious Fraud Office letter? A. That is correct. Q. So for the last three years you have been proceeding on a certain basis. That basis is that the Petrakakos brothers have been charged with fraud and you are unable to form any view as to whether there was substance behind those allegations, and on that basis you would not have granted the insurance? A. That is correct, my Lord. Q. I suggest to you that that view has become entrenched in your mind, is that right? A. That view is a view that I have held for quite some time, my Lord. I don’t wish to deal with anyone that has either been allegedly, has allegedly committed fraud, or has been proven to have committed fraud. So far as I’m concerned, that is not an area that I would wish to discuss with a broker. If that information was given to me I would not carry on with the conversation. Q. The point I am putting to you, Mr Potter, is that for the last three years you have been proceeding on a certain basis, and that it is now very difficult for you to approach the Serious Fraud Office letter with an open mind, is that right? A. No, I don’t agree, my Lord. I can only repeat that so far as I’m concerned, fraud is fraud whether it’s proven or not, and the number of instances of fraud being advised to an underwriter, I would imagine, would be very, very few. If they were advised I can see absolutely no reason to even consider the risk.”
“Q. So the fact that the Serious Fraud Office say that the Petrakakos brothers are innocent and the fact that Mr Billington is convicted of the fraud, you say would have made no difference? A. That is correct, my Lord. Q. I suggest to you, Mr Potter, that that is not true, and that the true position is that you would have appreciated immediately, had you been told those facts that this was an exceptional case. And I suggest to you that in those circumstances you would not have turned around to Hoggs and refused the cover because it would have made you appear quite unreasonable? A. It would have made no difference to me, my Lord, I would still not have written the risk.”
“I could make no assessment of the strength of the fraud allegations in Greece or their likelihood of success. The number of different proceedings would itself have struck me as significant and led me to the conclusion that there must be something wrong somewhere to have generated so many claims. The allegations of fraud, although they had nothing to do with either shipping or insurance, would still have been of significance to me as undermining the character and trustworthiness of the people I was being asked to insure. I would have considered the letter from the Serious Fraud Office, but do not believe that this would have affected my decision. The letter does not say which of the Petrakakos brothers it is concerned with and it is only commenting on the proceedings which the Serious Fraud Office is intending to bring against John Billington in England. Although it appears to be intended that the letter will be shown to the Greek judicial authorities, it does not seem to me to comment upon the allegations against the Petrakakos brothers in Greece. The premiums for war risk cover are, as I have said, miniscule. At a rate of 0.5%, for example, a total loss would take thousands of risks to recoup, from a financial point of view, and I would simply not have taken a chance with these owners having heard of the fraud allegations and, as stated in paragraph 23 of my First Statement, I would simply not have taken the chance. Realistically, I would not have considered these allegations in isolation. I would also have had in mind the allegations in Panama. Any single fraud is a serious matter but in this case there was also the fact of the combination of the allegations in Greece and Panama. I would have doubted whether this could have been coincidence.”
“If the broke to me had been of the above nature, I would not have written the risk. I could not judge the truth or otherwise of the allegations of fraud but they were made in the context of the owners’ shipping business and concerned their dealings with insurance. The allegations were therefore being made in respect of the very things that I would be concerned with. I would not take the risk of dealing with untrustworthy people. The fact of a dispute with a business partner and the arrest of the North Rock, with the possibility of further arrests of the ship, would also have been a great concern to me. These were not arrests of a similar nature to the usual arrests for a cargo claim where the ship is quickly released after a P&I club provides security. Because of the age of the Kent fleet, I would have assumed that these owners were the type of owners who were operating on very tight margins and who would need the ships to be earning nearly all the time to enable the whole operation to hang together and continue. A dispute with the business partner which, it appears, would prevent one or more of the ships from earning an income for a considerable period of time would have a major impact on the owners’ ability to run and maintain the ships and to continue with their business. If the owners’ source of income is dramatically reduced, not only would they be unable to properly maintain and run their ships, they might well be tempted to resort to an insurance scam and scuttle a ship in order to save their business venture.”
“If – it has always been viewed by – certainly by me and my company certainly at that time, that if an insured had not paid a premium and had a policy cancelled that that is a very, very serious issue and it is certainly a client that we would not wish to get involved with.” 251. He also said: “Q..and what you would be looking for, I suggest, is an explanation that reassures you that it is not likely to be a problem in the future? A. If we are talking about a policy that has been cancelled due to non-payment of premium and the broker advised me that the policy had been cancelled for non-payment of premium, I would not have wished to get involved with that particular client. If a policy is cancelled by underwriters that has to be a very, very serious matter. Underwriters don’t cancel policies very, very easily.”
“Q. What I would like to ask you is this: even though the potential bad debt involved would not have been significant, if there was nevertheless a potential bad debt issue, would you or would you not have considered it worth while getting involved? A. No, absolutely not. I wouldn’t have felt that it would be worthwhile exposing my company to a bad debt situation, and the amount is almost irrelevant really. It is just the problems that you go through as far as bad debt is concerned and it is just not worth it. It is not worth exposing your company to a bad debt issue.”
“I do see a significant difference between underwriters cancelling a previous cover and a history of delayed payment of premium by owners. If an underwriter has actually cancelled cover it signifies to me that that underwriter has lost complete confidence in either the willingness or the ability of the insured to pay. War underwriters provide cover for large exposures at miniscule premiums at the basic rate. I would not want to be concerned with a risk where I have to chase the broker for payment, where the brokers might come back to me repeatedly and ask for an extension of time for the insured to pay the premium only to find that six months or more into the risk that I have not received the premium and the policy is cancelled by the owners or, possibly, that the brokers ask for the broker’s cancellation clause to be operated. All that time I would have been on risk for no premium. If a recently expiring policy had been cancelled by underwriters for non-payment of premium, I would not have written the risk. If, by contrast, the owners’ premium payment history showed them to be slow payers, I would have inserted a premium payment warranty which would have required the premium to be paid by a certain date, shortly after the attachment date, failing which the policy would be cancelled from inception.”
“Even if we did not know any of the other financial background, I expect we would have refused to cover the risk because again this circumstance indicates severe financial difficulties of the Owners.”