The Court of Appeal judgment in Versloot Dredging v HDI Gerling [2014] EWCA Civ 1349 that has recently been handed down is good news for insurers, as the court has dismissed the appeal of an insured whose claim was held forfeit after it was proved he made a fraudulent statement to bring what otherwise would have been a legitimate claim.

Although set in a marine context it has a wider application to property claims and also raises an interesting contrast to the casualty market.

Claim background

The claimants were the owners of a dredging vessel insured under a marine policy with the defendants. On or around 27 January the vessel began taking on water in the engine room but the crew could not locate the source of the ingress. Attempts made to pump the water overboard were unsuccessful. By 30 January 2010 the engine room of the vessel had become submerged and had ceased to work. The vessel was towed to shore where the water was pumped out.  The main engine was damaged beyond repair and a new engine and gearbox were fitted. The claimants brought a claim for losses in the sum of €3,241,310.60.

The cause

The judge at first instance concluded that the cause of the casualty was unseaworthiness as a result of crew negligence, along with a lack of watertight integrity of the bulkheads and the defective state of the vessel's engine room pumping system which was unable to cope with the rate of ingress of water.

All of the above causes were insured perils meaning, but for any misstatement, the claim would have succeeded.

The fraudulent device

The general manager of the vessel was alleged to have falsely claimed (1) that the bilge alarm had gone off at about noon on 28 January 2010 (2) that it had been ignored because it was commonly understood to have been caused by the rolling of the vessel in rough weather and (3) that he had been told both of these things by the Master of the vessel and its crew.

The general manager's statement, whilst not directly related to the amount of the loss, was false. He had in fact not spoken to the Master of the vessel at the time of giving the statement and his account of why the alarm was not investigated was, he later admitted, speculation. The courts held that as a result, the whole claim was forfeit.

The appeal

The Claimants appealed the decision on the basis that the fraud was unconnected to the level of losses which were legitimately claimed. The statement by the crew member, whilst false, had no impact of the validity of the claim or the value.

The Court of Appeal applied the test in Agapitos v Agnew [2003] QB 556 . That test says that in order for the claim to be forfeit, the fraudulent device must be directly related to the claim and must have been intended to enhance the prospects of the claim's success.

The Claimants argued that forfeiture of the entire claim was disproportionate to the gravity of the fraud, however the Court of Appeal was reluctant to deviate from a common law doctrine which has been in application, particularly in the insurance field, for over 150 years.

The Court of Appeal held that if a case by case basis for determining what portion of a claim were to be forfeit due to fraud were introduced, it would cause confusion and lead to inconsistency in application. Also, the Law Commission had looked at the issue as part of their insurance law reform proposals and it appeared they had no appetite to bring about any change. It was considered that a change in  approach "might be seen to encourage policyholders to commit minor frauds in the expectation that such conduct would not affect the legitimate element of the claim".

The Court of Appeal held that deterrence of fraud is a legitimate aim and whilst forfeiture appears to be disproportionate in some circumstances, it is not disproportionate to the aim of discouraging and reducing insurance fraud. This doctrine arises as Lord Mance put it, "from a perception of appropriate policy and jurisprudence on the part of our 19th century predecessors, which time has done nothing to alter".

The Court of Appeal considered that the test under Agapitos v Agnew had been met and dismissed the appeal.

Fraudulent claims and the future

So the accepted position on fraudulent devices in property claims has been upheld.  Insurance contracts, of course, carry the duty of utmost good faith. If an insured breaches their duty of utmost good faith to the insurer and inflates their claim, knowing that is not worth the stated value, the insurer can avoid liability for the whole claim.

This is in contrast to how fraudulent claims are dealt with in personal injury claims where the injured party owes no duty of utmost good faith to the insurer because its relationship is with the defendant. In all but the rarest of cases, a claimant in a personal injury claim does not lose the right to the 'good' part of the claim as a result of any dishonesty. This has arguably led to a win-win scenario for the dishonest claimant and an industry wide problem with exaggerated claims.

Section 49 of the Criminal Justice and Courts Bill seeks to address this by introducing the concept of 'fundamental dishonesty' in personal injury claims so that where dishonesty is discovered the whole of the claim will be forfeit rather than just the fraudulent part.  There is some discussion still about the appropriate wording of this section of the Bill, in particular whether the word "fundamental" confuses the issue.  However, if the Bill becomes law and enacts an effective provision along the same principle this should bring personal injury claims more in line with property damage claims and will hopefully, discourage claimants from exaggerating their losses and give insurers the opportunity to avoid liability on fraudulent claims.