It is well known that English law takes a very strict approach towards fraudulent claims. An insured who makes a fraudulent claim will not recover anything under his policy of insurance even if he could have made a recovery, had he made an honest claim.
The rationale stems from the principle of good faith in insurance contracts, and is supported by public policy reasons. An insured should not be led into thinking that he loses nothing by submitting a fraudulent claim.1
With regard to fraudulent devices (i.e. where an insured uses a fraudulent device to promote an otherwise valid claim), the Court of Appeal judgment in “The AEGEON”2 held (although obiter) that the rule of fraudulent claims should extend to fraudulent devices provided that the fraudulent device:
Directly relates to the claim and intends to promote it
If believed, would objectively yield a not insignificant improvement to the insured’s prospects
Against this background, an action3 was brought by the owners of the “DC MERWESTONE” against underwriters who had refused coverage of a loss suffered by the owners of the vessel when water flooded the main engine room. The underwriters defended the claim, inter alia, on the basis that the insured had used a fraudulent device by recklessly misrepresenting that an alarm had been heard by the Master of the vessel. A member of the crew had sent a letter to the underwriters informing them that the bilge alarm had sounded on the day of the water ingress, but that it had been ignored by the crew. It later transpired that the alarm had not sounded, and that the member of the crew had no grounds to believe that the alarm had sounded. He believed that it would “assist the claim if he minimised any opportunity for attributing fault to the owners, rather than the crew, in relation to the cause of the casualty”.
At first instance, Popplewell J decided to follow the judgment of Mance LJ (as he then was) in “The AEGEON” and agreed with the underwriters. The Court of Appeal confirmed Popplewell J’s judgment and upheld Mance LJ’s test in “The AEGEON”. The Court of Appeal’s reasoning was that there were powerful public policy reasons, such as the importance of honesty in the claims process, and that insurance contracts are governed by the duty of good faith.
This judgment will no doubt be welcome by underwriters as it strongly supports both the test set out in the “The AEGEON”, and the public policy considerations behind the rule of fraudulent claims and fraudulent devices.
Although Popplewell J, at first instance, was reluctant to follow the fraudulent device test in “The AEGEON”, and expressed support for a test that would allow the Court to take proportionality into account, he ultimately decided to follow “The AEGEON” and support the fraudulent device principle. The fact that the new Insurance Act 2015 which received Royal Assent in February 2015, and will come into force as of 12 August 2016, does not consider the position in relation to fraudulent devices, highlights the importance of this Court of Appeal ruling.