If an Insured relies on fraudulent means or devices in pursuing a claim, is the entire claim forfeited? The Court of Appeal of England and Wales considered this question in Versloot Dredging BV & Or v HDI Gerling Industrie Versicherung AG & Ors (2014).

At the trial at first instance, the Insured would have established that it had a good claim under its policy, but for the fact that it had, during the course of communications with underwriters, provided a narrative of events in respect of the claim that contained assertions that were not true.

The assertions did not mean that the claim would have been paid when it otherwise should not have been paid, or that more would have been paid than otherwise should have been paid, but the court at first instance nevertheless concluded that they amounted to a fraudulent device that prevented the Insured from recovering anything at all.

After surveying the relevant case law, the Court of Appeal agreed.

Background

The Insured ship owners (Versloot) claimed under their marine policy (the Policy) following water ingress and damage to their cargo ship.

At the court of first instance, it was held that the loss was caused by a peril of the sea, namely, the fortuitous entry of sea water brought about by the crew’s negligence.

The loss was therefore covered under the Policy, but for the question of whether Versloot had forfeited its claim because of untrue assertions made to underwriters during the course of the claim being investigated.

The fraudulent means/device

Underwriters claimed the forfeiture of the Policy had occurred because a director of the company that managed the vessel, Mr Kornet, had deliberately or recklessly claimed that: (i) the bilge alarm had gone off at about noon on the day of the incident, prior to the engine of the vessel being submerged later that evening; (ii) the alarm had been ignored because its sounding was attributed to the rolling of the vessel in heavy weather; and (iii) he had been told both these things by the Master and the crew.

In fact, according to the crew the bilge alarm had not gone off until 9.15pm and the ingress of water had gone unnoticed for a substantial period of time. The judge did not accept Mr Kornet’s evidence that he had spoken to the Master in April 2010 (three months after the incident) and that the Master had told him that the alarm had gone off around noon.

The judge found that Mr Kornet believed that it would assist the claim if he minimised any opportunity for attributing fault to the owners, rather than the crew, because of advice he had received in connection with the terms of the Policy. He was also increasingly frustrated that underwriters were not paying the claim.

The various untrue assertions made by Mr Kornet in his explanation of the loss amounted to a fraudulent device, preventing Versloot from recovering anything in respect of its claim.

The appeal

A long line of authority establishes the rule that, if an insured fraudulently inflates the value of a claim under a policy, it forfeits any lesser claim it could properly have made.

The rule applies even if there is no clause in the policy incorporating it because it is said to derive from the continuing duty of good faith applicable to insurance contracts. The rule is deliberately draconian because it functions as a deterrent to the deception of insurers who will ordinarily have no direct knowledge of the circumstances of a claim.

There is clear Court of Appeal authority in the form of Agapitos v Agnew [2003] QB556 (The Aegon) that the rule is applicable to fraudulent means or devices. Versloot sought to challenge this application of the rule in its appeal.

Versloot argued that the fraudulent claims doctrine involves a disproportionately harsh sanction which, in seeking to penalise and deter, usurped the function of the criminal law but with a lesser burden of proof and lesser safeguards. There was a critical distinction between a fraudulent claim and a fraudulent device: a fraudulent claim involved an insured seeking a benefit to which he was not entitled; a fraudulent device did not.

The Court of Appeal was not persuaded. The effect of the rule is that if an insured lied to its insurer in respect of anything significant in the presentation of the claim the insured will not be entitled to recover in respect of that claim. In the case of both a fraudulent claim and a fraudulent device, fraud is used to obtain something to which the insured is either not entitled or would not otherwise have received: in a fraudulent claim, the bogus part of the claim; and in a fraudulent device claim, “earlier payment than full investigation would otherwise permit”.

The Court of Appeal also noted that the rationale for the rule was that the fraudulent insured must not be allowed to think that if the fraud is successful he will gain; but, if it is unsuccessful, he will lose nothing.

Comment

The potential harshness of the rule that the entire claim is forfeit in the event of fraud is highlighted by this case where the insured would have recovered for its claim but for some reckless assertions within its narrative of events regarding the cause of the loss.

Insurers would say they need protection in the strongest terms because of their vulnerability in view of the asymmetric knowledge between insured and insurer about the events giving rise to a claim. Therefore any fraudulent attempt to bolster a claim or avoid/cut down avenues of enquiry in respect of it should be discouraged with draconian consequences.

A small or moderate sized insured company that has just been on the receiving end of a major loss and is then subject to a lengthy investigation by insurers with global reach and deep pockets, and who might create the impression that they are looking for any reason not to pay the claim, might be tempted to take a different view.

The clear message from the courts for any insured in this situation is that, however frustrating or long winded it finds an insurer’s claims investigation, honesty and patience is always the best policy.