In this case the Court of Appeal considered whether the rule that a fraudulent claim deprives the insured from any recovery also applies to fraudulent devices.

The Facts

In January 2010 a vessel owned by the Claimant suffered ingress of water causing irreparable damage to its engine. The Claimant brought a claim under its insurance policy in order to recover losses of approximately EUR 3.2 million.

During the trial the Claimant was able to show that its claim was good and honest. However, during conversations with the underwriters the Claimant’s General Manager falsely represented that the crew had reported that they had heard an alarm (which would have alerted the crew to the flooding) on the day of the casualty but failed to investigate because its sounding had been attributed to rolling of the vessel. In fact, the crew had never heard or reported any such alarm and this representation to underwriters was held to be a reckless untruth, in that the General Manager had no reasonable basis for making it, having consciously decided not to ask the crew whether it was correct.

The Decision at First Instance

The Judge at first instance decided that the Claimant would not be able to recover any losses under the policy, following the approach to fraudulent devices suggested by Lord Justice Mance (as he then was) in Agapitos v Agnew [2003] QB 556, to the effect that an insured who embellishes his claim with a lie will lose that claim (even if it would otherwise be recoverable in full) if the lie directly relates to the claim and satisfies subjective and objective tests as to intention and materiality, respectively.

This approach was considered appropriate in the context of the well-known line of authority that an insured who fraudulently exaggerates an insurance claim thereby invalidates any lesser claim which he could otherwise properly pursue (provided the exaggerated element is not, taken in isolation, de minimis). However, Popplewell J. expressed his concern as to the harshness of application of the fraudulent devices rule in this case, and granted permission to appeal on various grounds.

The Appeal

The Court of Appeal unanimously dismissed the appeal and upheld the first instance decision. In reaching its conclusion it was necessary to consider two central issues:

  1.   If the rule in relation to fraudulent claims also applied to fraudulent devices, namely the making of statements which are known by the insured to be untrue or which are made recklessly, not caring whether they are true or false, in support of a claim honestly believed by him to be good as to liability and amount; and
  2.   If the rule applied, whether application of the rule was proportionate in the present case in light of Article 1 of the First Protocol to the European Convention on Human Rights.

The Court of Appeal held that the rule relating to recoverability of losses under a fraudulent claim was long established and whilst the decision in Agapitos v Agnew was not strictly binding in this case, it was authoritative. Additionally, a fraudulent device was viewed as a sub-species of a fraudulent claim and application of the rule to both fraudulent claims and fraudulent devices would provide a coherent whole. Further, the Court held that the decision was in line with public policy as the rule would only apply to those who were dishonest and would ensure that honesty in the claims process was upheld.

The Court of Appeal went on to consider whether application of the rule was overall a proportionate means of deterring fraud in relation to insurance claims. The Court held that it was and accepted that deterrence of fraud in insurance claims was in itself a legitimate aim and that application of the rule would not affect the ‘careless or forgetful’ insured. Furthermore, the practical implications of any kind of ‘just and proportionate’ test were considered undesirable as it could make potential outcomes difficult to predict and increase litigation.

Commentary

The decision has significant market implications in the context of both marine and non-marine insurance, clearly confirming that an insured who uses a fraudulent device will forfeit an otherwise valid claim.