Brillante Virtuoso – an extraordinary attempt at maritime insurance fraud

Suez Fortune Investments Ltd and Piraeus Bank AE v Talbot Underwriting Ltd and others [07.10.19]

Date published

07/10/2019

Authors

Chris Zavos

Partner

London

Suzy Oakley

Legal Director

London

Jacob Hooper

Senior Associate

London

Anna Haigh

Legal Director

London

Services

Sectors

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Between 2008 and 2011, nearly 200 vessels were taken by Somali pirates around the Gulf of Aden. The hull market has been exposed to many such claims and the vast majority have been resolved successfully and efficiently (albeit not without some tragic loss of life and considerable distress for the crews). Very few vessels were substantially damaged.

The alleged Somali pirate attack on the Brillante Virtuoso – some 10-12 miles off Aden on the night of 5-6 July 2011 was no such thing.

The original account from owners was that in an attack by Somali pirates, the vessel had been hit by RPGs and caught fire. Later investigations established that an “improvised explosive incendiary device” (IEID) had been detonated in the purifier room, within the vessel’s engine room. There is no reported Somali pirate case involving the detonation of an IEID.

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. There is no reported case of a Yemeni navy/coastguard pirate attack on a commercial vessel.

The legal dispute which followed owners’ and their mortgagee bank’s claim against war risks underwriters started in 2012 and has occupied more than 20 weeks of court time since then.

On 7 October 2019, the Admiralty Judge and Judge in Charge of the Commercial Court, Mr Justice Teare, handed down his judgment following a trial which lasted some 52 days. This judgment establishes that underwriters’ initial scepticism about the claim and their later allegation of fraud against owners were entirely vindicated.

The judge, in a careful and considered judgment, found that the vessel’s beneficial owner, Mr Marios Iliopoulos, 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 US$77 million. An earlier judgment of the Commercial Court had found the vessel to be a CTL on figures, with owners entitled to an additional US$8 million in expenses (some which is still subject to appeal).

The story

On 5 July 2011, Brillante Virtuoso was drifting 10-12 miles off Aden carrying a cargo of 140,000mt fuel oil (and not bitumen as owners had agreed to mis-describe it in order to evade customs duty). Earlier that day, underwriters were told the vessel was to call OPL Aden to embark a team of three unarmed security guards to join the transit through the Gulf of Aden/Indian Ocean. Underwriters agreed the call OPL Aden on that basis.

Shortly before midnight, a small boat approached the vessel containing seven armed and masked men. They had no ladder, no grappling hook and no independent means of getting on board the Brillante Virtuoso. The armed men told the crew they were the “security” and the master, who was not expecting them until the next morning, gave the order to let them onboard (without checking their identification for himself or leaving his cabin at any point).

Once on board, the armed men secured the crew in the accommodation (but not the master or chief engineer). The armed men demanded that the vessel proceed to Somalia. The master sailed for an hour and a half in the wrong direction, before the main engine stopped. Apparently, it broke down and would not restart. An IEID was then detonated in the purifier room, resulting in an oil fire. The crew (except the chief engineer) abandoned ship and were picked up by a US warship in the vicinity. The armed men left by the small boat in which they arrived, although no one saw them go.

An Aden-based salvor, Poseidon, attended the casualty early on the morning of 6 July. The photographic record shows that the oil fire had gone out by mid-morning on 6 July and all that remained was non-oil embers which would shortly go out. Yet by mid-afternoon on 6 July, there was a major engine room oil fire, which subsided again. By the afternoon of 7 July, the accommodation and wheelhouse had been destroyed by fire.

The vessel was later towed to Khor Fakkan where the cargo was offloaded by STS transfer.

DSC02642_cropped.jpg
Resurgence of the fire mid-afternoon on 6 July

The fraud case

In May 2015, underwriters formally alleged that the vessel had been destroyed with the privity and connivance of the owner, and in particular the beneficial owner, Mr Iliopoulos - that is, wilful misconduct within the meaning of Section 55(2)(a) Marine Insurance Act 1906.

The proceedings moved to disclosure. In breach of numerous court orders, owners failed to disclose a significant archive of documents held by the vessel’s managing company Worldwide Greek Tankers (WWGT). WWGT was also a company of Mr Iliopoulos. The archive was, on his own admission, a “crucial repository” of information. Increasingly elaborate stories were put forward by the owner and Mr Iliopoulos in an attempt to justify their failure to comply with the court’s disclosure orders.

Following two days of cross-examination of Mr Iliopoulos in the High Court in London, owners’ claim was struck out in May 2016. Flaux J (as he then was) emphatically rejected the stories put forward by Mr Iliopoulos as “cock and bull” (in argument) and later in his judgment as “dishonest nonsense”, “a fabrication, a charade” (see https://www.bailii.org/ew/cases/EWHC/Comm/2016/1085.html).

The bank’s claim continued - as co-assured under the war risks policy in its own right and as assignee of owners’ claim. The bank vigorously denied the allegation of fraud.

In February 2017, the bank accepted underwriters’ assertion that the armed men were not Somali pirates but renegade members of the Yemeni coastguard or navy. A key issue between the parties was whether these renegade members were acting on their own account or on the instructions of Mr Iliopoulos to stage a piracy attack in order to commit insurance fraud.

If the armed men were confederates of the owner, the bank maintained this still amounted to an insured peril under the war risks policy, principally: “piracy” or “persons acting maliciously”. The bank maintained that an attack on the vessel by the owner was an attack on their proprietary interest in the vessel as mortgagee.

The bank also relied on the composite nature of the war risks policy to say that the bank was not tainted by their co-assured’s (i.e. owners’) fraud. Underwriters made no allegation of fraud against the bank.

Underwriters also advanced a number of other defences to the claim, which will be addressed in a later bulletin.

The decision

The judge concluded that Mr Iliopoulos was the “instigator of the conspiracy” to destroy the vessel in order to commit insurance fraud. He was not “left in any doubt as to [that] conclusion”.

The master, chief engineer and Mr Vergos, the owner of Poseidon, were party to the conspiracy. The original fire caused by the IEID had all but gone out and was deliberately re-ignited with the help of Mr Vergos whilst the vessel was in the control of Poseidon. The judge also found that the master and chief engineer, as well as the owners’ surveyor, gave untrue evidence at trial.

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’.”

The following are but a few of the factors relied upon by the judge:

  1. There was no known case of Yemeni piracy, before or after the attack, and there was nothing about the situation in Yemen in July 2011 which was conducive to the commission of this type of unique crime.
  2. The improbability that the armed men would know that the vessel was drifting and awaiting a security team.
  3. The master’s “extraordinary” decision to remain in his cabin without seeking to check the identity of the armed men for himself before letting them on board.
  4. The main engine did not break down, but the chief engineer deliberately stopped it, as shown by the telegraph buzzers recorded on the VDR audio.
  5. The master failed to activate the SSAS alert until after the attack, despite being only a few metres away from the alarm on the bridge throughout the material time.
  6. The implausibility that the armed men would bring on board a partially complete IEID (complete in everything but the accelerant required to detonate it), and would then abandon their plan and rapidly set fire to the vessel instead.
  7. The fact that Poseidon were able to mobilise “with a promptness of which leading international professional salvors would be proud”, if they were genuinely responding to the casualty without prior knowledge.
  8. The fire re-ignited in the purifier room whilst Poseidon were there, and the only way this could have happened was by human intervention – there was clear evidence that a tap had been broken off from a diesel oil service tank and later reconstructed to conceal its prior removal. Mr Vergos of Poseidon failed to mention the resurgence of the fire in his salvage arbitration statement.
  9. The VDR recorded the armed men and the master as they played out their charade, including, remarkably, a question by one of the armed men whether the master was “ok”, after the master’s hands had been tied in front of him.
  10. Mr Iliopoulos sought to make the crew change their evidence as to how the armed men were permitted on board the vessel. (Another witness in the case had to leave Greece and gave evidence whilst in police protection in England - https://www.bailii.org/ew/cases/EWHC/Comm/2018/2929.html).

No insured peril

The judge found that a group of armed men acting on the instructions of the owner and who were permitted to board the vessel by the master in order to set fire to it were not pirates.

The armed men did not intend to steal or ransom the vessel or steal from the crew, but were motivated to assist the owner to commit a fraud upon underwriters. Armed men pretending to be pirates are not pirates in the popular or business sense. Mr Iliopoulos’ insurance fraud was not an act of piracy against the bank’s proprietary interest.

Following the Supreme Court decision in the B Atlantic [2018], “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.

Comment

This decision represents a complete and emphatic victory for underwriters, in demonstrating owners and Mr Iliopoulos destroyed their own vessel in a spectacular and novel way. A further bulletin will follow expanding on the important legal issues in the case – but this represents a significant victory in the ongoing fight against fraud.

Kennedys act for war risks underwriters and the Kennedys team comprises Chris Zavos, Jo Ward, Anna Haigh, Suzy Oakley and Jacob Hooper.

Read more items in London Market Brief - October 2019

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