In Versloot Dredging BV v HDI Gerling Industrie Versicherung AG (the DC Merwestone)  EWCA Civ 1349, the English Court of Appeal considered the special common law rule of forfeiture of the claim where a fraudulent device had been relied upon for the purposes of making the claim. The Court held that underwriters had been justified in resisting a marine insurance claim made by ship owners in its entirety on the basis of a recklessly made representation in connection with that claim. In Hong Kong, the decision is likely to have precedent value in cases where insurance claims are made on the basis of a fraudulent device.
The Appellants (the “Owners”) were the owners of the “DC Merwestone” (the “Vessel”). The Respondents (the “Underwriters”) were the hull and machinery underwriters of the Vessel under a policy which provided coverage for loss caused by “perils of the sea” and under “Inchmaree clauses” (clauses extending cover to include damage or loss due to latent causes, such as bursting of boilers, unseen defects in machinery, negligence of crew etc). The Inchmaree clauses were qualified to the extent that coverage was not available for losses resulting from want of due diligence by the Owners (the “Inchmaree Provisos”).
Prior to embarking on a voyage, the Vessel’s fire hose had not been properly emptied. Seawater in the hose froze, cracking the pump casing and distorting the filter lid. The ice subsequently melted and seawater leaked causing flooding and irreparable damage to the engine.
The Owners claimed under the Policy. The Owners’ case was that a proximate cause of the loss was the fortuitous ingress of seawater into the engine room which was a covered “peril of the seas”. Alternatively, there was cover under the Inchmaree clauses on the basis that the proximate cause of loss was crew and/or contractors’ negligence, neither of which resulted from the Owners’ lack of due diligence.
However, the claim was rejected by the Underwriters on the basis that (i) the loss had not been caused by a peril of the sea and did not fall within the Inchmaree clauses as a result of the Inchmaree Provisos; (ii) the loss was caused by the Vessel’s unseaworthiness to which the Owners were privy; and (iii) the Owners had effectively forfeited their claim due to the fact that its presentation was supported by a fraudulent statement.
The Owners initiated proceedings challenging the Underwriter’s rejection of the claim. The court at first instance upheld the forfeiture of the claim and the Owners appealed.
One of the key issues on appeal was whether the common law rule of forfeiture for fraudulent claims also applies to fraudulent means or devices. The rule provides that an insured who has made a fraudulent claim forfeits in its entirety any lesser claim which he could properly have made. This was extended, albeit by obiter dicta, to fraudulent devices by the decision in The Aegeon . Unlike a fraudulent claim, a fraudulent device is a lie “used if the insured believes that he has suffered the loss claimed, but seeks to improve or embellish the facts surrounding the claim“. There is no requirement that the insurer should have been deceived by the lie, or that the lie should have played any part in his consideration of whether to pay the claim. A mere attempt to deceive is sufficient to attract the penalty of forfeiture of an otherwise valid claim.
In this case, it had been accepted by the Court that the loss could technically have been covered under the Policy as it was caused by a fortuitous accident which normally constituted a peril of the sea. However, the manager had no grounds to believe that the account he had given to support the Owner’s claim was true. It was an untruth told recklessly to promote the claim in the hope of achieving a prompt settlement.
The Court of Appeal upheld the forfeiture and confirmed that the common law rule of forfeiture for fraudulent claims does also apply to fraudulent devices. This was so even though the judge at first instance had noted that, on the scale of culpability, the manager’s conduct was at the low end of the scale. This was an untruth recklessly told, not a carefully planned deceit. Yet as a result, the Owners had been deprived of a substantial claim.
However, for the Court of Appeal, there were “several powerful reasons” for this decision:
- A fraudulent device was a sub-species of a fraudulent claim. The application of the rule to fraudulent devices was consistent with the basis of its application to fraudulent claims and the rule’s rationale (i.e. the fact that insurance contracts are underpinned by a continuing duty of good faith).
- There was a public policy justification for the rule as applied to both claims and devices: the “draconian consequence only applies to those who are dishonest” and the “importance of honesty in the claiming process is manifest“.
- Earlier authority provided some support for the application of the special common law rule to fraudulent devices.
- The Aegeon had been cited without disapproval in a number of subsequent cases and academic authorities.
The common law rule of forfeiture for fraudulent claims also applies in Hong Kong and it is likely that a Hong Kong court, faced with similar facts, will follow the decision in Versloot Dredging BV. The case should therefore serve as a warning to assureds when seeking to make a claim under an insurance policy. The decision confirms that fraudulent devices or means will essentially be regarded as a sub-species of fraudulent claim and the special rule of forfeiture may therefore apply. This is so despite the fact that the assured’s degree of culpability which might attach to fraudulent conduct may be low.
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