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” [2003] (see further below). The owners appealed and the Court of Appeal has now held as follows:

  1. 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.
  2. 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.
  3. 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%”.
  4. 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.
  5. 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).
  6. 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.