Court of Appeal strongly supports the fraudulent devices rule
The first instance decision in this case was reported in Weekly Update 23/13. Popplewell J found that the insured had a valid claim but that the entire claim was forfeited because the insured used fraudulent devices (having recklessly misrepresented to insurers that an alarm had been heard by the Master of the ship). In reaching his decision, the judge had expressed some doubts about the materiality test for fraudulent devices, but had said that he felt bound to follow the (what he termed obiter) comments by Mance LJ in Agapitos v Agnew “The Aegeon”  (see further below). The owners appealed and the Court of Appeal has now held as follows:
- The judge had been entitled to find that the insured had used fraudulent devices. The insurers could reasonably expect that answers to their questions would be based on actual inquiry rather than hypothesis. Nor did it matter that the misrepresentation was likely to be immediately falsified when the insurers spoke to the crew.
- The correct test for fraudulent devices was that set out by Mance LJ: Are the fraudulent devices (a) directly related to the claim and intended to promote it; and (b) if believed, will they yield a not insignificant (or immaterial or insubstantial) improvement in the insured’s prospects (although Clarke LJ preferred the formulation that they are intended to produce “a significant” improvement in the insured’s prospects). The decision in “The Aegeon” should be followed as a matter of ratio by the Court of Appeal.
- The Court of Appeal held that there were “several powerful reasons” for this conclusion: “The Aegeon” is authoritative, if not binding; a fraudulent device is a sub-species of a fraudulent claim, founded upon the underlying duty of utmost good faith; and there is a public policy justification for the rule, in order to protect insurers from fraud. As Clarke LJ observed: “The effect of the rule is that if you lie to your insurer in respect of anything significant in the presentation of the claim you will not recover anything from him. Once it is accepted, as it has long been, that an assured who fraudulently exaggerates his claim forfeits the whole of it - so that a fraudulent claimant can lose almost all of his otherwise valid claim (say 95%) - there seems to me no satisfactory reason in principle why the user of a fraudulent device should not lose 100%”.
- The Court of Appeal also referred to the Law Commissions’ recent review of this issue. It was noted that the final Insurance Bill presented to Parliament in July confirmed that “if the insured makes a fraudulent claim under a contract of insurance….the insurer is not liable to pay that sum”. Although there is no definition of a fraudulent claim in the bill, the notes to the initial draft bill indicated that a fraudulent device would amount to a fraudulent claim.
- However, the Court of Appeal noted that the Law Commissions did not appear to have considered the possible impact of Article 1 of the First Protocol to the European Convention on Human Rights (“A1P1”), which provides that “ every natural or legal person is entitled to the peaceful enjoyment of his possessions” (an argument which was raised for the first time during the appeal).
- The Court of Appeal went on to reject an argument that forfeiture must be proportionate (either because of an extension to the fraudulent devices rule or because of A1P1). The “bright line rule” that the use of a fraudulent device forfeits the claim is a proportionate means of securing the aim of deterring fraud in relation to insurance claims. It does not matter that forfeiture may be a harsh (or in some cases very harsh) sanction.
Accordingly the appeal was dismissed.
COMMENT: Insurers will be pleased to note the Court of Appeal’s very strong support for the fraudulent devices rule in this judgment. The rejection by the Court of Appeal of a stronger materiality test (after the Law Commissions also failed to recommend a change to this test) is reassuring. It should be borne in mind, though, that a fraudulent device must still be proven on the facts and the recent Privy Council case of Beacon Insurance v Maharaj Bookstore (see Weekly Update 27/14) demonstrates that that can sometimes be a challenge to achieve. (There, the Privy Council upheld the trial judge’s decision that false invoices submitted by the insured did not amount to fraudulent devices because of a lack of dishonest intent. That was a generous decision given that Mance LJ referred to the need only for “some lie” to support a claim of fraudulent devices).
One further general point worth noting from the Court of Appeal’s judgment is its willingness to refer to the notes accompanying the initial draft bill when interpreting the Insurance Bill currently going through Parliament (although there was no need to interpret the Bill in this judgment). As we have previously reported, there is much useful guidance contained in the notes, some of which is not reflected in the express wording of the Bill, and so this will help to achieve some clarity if and when the Bill is enacted.