In Versloot Dredging BV v HDI Gerling Industrie Versicherung AG (the DC Merwestone) [2014] EWCA Civ 1349, the 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.

Both the Commercial Court and the Court of Appeal 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 by the assured made in connection with that claim.

As well as providing useful guidance on what may constitute a fraudulent device, the decision of the Court of Appeal is particularly significant in that it represents the first time that a court has applied Mance LJ's (as he then was) obiter dicta in Agapitos v Agnew (The Aegeon) (No. 1) [2002] EWCA Civ 247 as ratio.

Additionally, the Court of Appeal examined for the first time, the application of Article 1 of the First Protocol to the European Convention of Human Rights ("A1P1") to a common law doctrine in the field of commercial law.


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 12-month policy incepting on 1 April 2009 (the "Policy"). The Policy terms provided coverage for loss caused by "perils of the sea" and under Inchmaree clauses which 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 from Lithuania to Spain, the Vessel's fire hose had not been properly emptied. Seawater in the hose froze, cracking the pump casing and distorting the filter lid which meant it no longer formed a seal on the hose. The ice subsequently melted and seawater leaked causing flooding in the engine room and irreparable damage to the engine.

The Owners claimed under the Policy. The claim was rejected by the Underwriters on the basis that (i) loss had not been caused by a peril of the seas 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 (to the extent that there were blockages when the Vessel embarked) so that no liability attached pursuant to section 39(5) Marine Insurance Act 1906 ("MIA"); and (iii) the Owners had effectively forfeited their claim due to the fact that its presentation was supported by a fraudulent statement.

In relation to (iii), the Underwriters alleged that a manager had deliberately or recklessly given a false narrative of the casualty. It was alleged by the Underwriter that the manager made this false representation because he had been advised of the Inchmaree Provisos and understood the need to distance the Owners from any fault in relation to the casualty.

The Owners initiated proceedings challenging the Underwriters' rejection of the claim. 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". In the alternative, 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. Finally the Owners denied that they had relied on fraudulent devices in support of their claim.

Judgment at first instance

Mr Justice Popplewell found for the Underwriters holding that the Owners could not recover their losses. Though the loss could technically have been covered under the Policy, the employment of a fraudulent device in support of the claim had resulted in the claim's forfeiture.

The ingress of seawater caused by crew negligence was a fortuitous accident which normally constituted a peril of the sea, as was an accidental incursion of seawater into part of a vessel in a manner where seawater was not expected to enter. That fortuitous accident was a proximate cause of loss meaning theoretically, coverage was available under the Policy.

Section 39(5) MIA provides that where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness. The "privity of the assured" in this context means the assured's personal knowledge and consent: the assured must know the facts constituting unseaworthiness and realise that those facts render the ship unseaworthy. Knowledge for these purposes also includes suspicion that the vessel might be unseaworthy combined with a conscious decision not to inquire for fear of confirming that suspicion. In this context, knowledge of the managers was treated as knowledge of the Owners.

On the evidence, neither the Owners nor the crew had been aware of the blockages which had caused the casualty. In any event, the Underwriters had failed to show that had the systems been working properly, the ingress of seawater would have been controlled and casualty averted.

It is a special rule at common law that an insured who has made a fraudulent claim forfeits in its entirety any lesser claim which he could properly have made. This rule applies even where there is no express clause in the policy. The fraudulent claims rule has now been extended, albeit via obiter dicta, by the decision in The Aegeon to cases in which the assured has deployed some fraudulent means or device to advance what is otherwise a wholly valid claim. Per Mance LJ in The Aegeon: "a fraudulent device is used if the insured believes he has suffered the loss claimed, but seeks to improve or embellish the facts surrounding the claim, by some lie". The threshold for materiality of the fraudulent part of the claim is not high: 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 or when to pay the claim. A mere attempt to deceive is sufficient to attract the penalty of forfeiture of the valid claim.

In the present case, the manager had no grounds to believe that the account he had given in support of the Owners' claim was true. It was an untruth told recklessly to promote the claim in the hope of achieving a prompt settlement. The Underwriters' defence succeeded and the Owners' claim, which had otherwise been valid, was forfeited.

Obiter, Popplewell J expressed regret at being forced to come to this conclusion. He noted that on the scale of culpability which might attach to fraudulent conduct, the manager's conduct was at the low end. This was an untruth recklessly told not a carefully planned deceit. As a result, the Owners had been deprived of a substantial valid claim. This, the judge suggested, was a disproportionately harsh sanction. Popplewell J's own view was that the law should require a sufficiently close connection between the fraudulent device and the valid claim to make it just and proportionate that the valid claim should be forfeited.

Decision of the Court of Appeal

The Owners' appeal was unanimously dismissed, with the leading judgment being given by Lord Justice Christopher Clarke.

  1. Existence of a fraudulent device

The judge had been entitled to find that the Owners had been at least reckless as to whether the explanation for the events which had been given had been supported by the crew's recollection. The extensive investigations undertaken by the judge showed that the Owners had not wanted the absence of confirmation from the crew to get in the way of an explanation which involved no fault on the part of the Owners or managers. This was an untruth told recklessly in support of the claim to which it directly related and in hope of prompt settlement.

  1. Wrong representation

The Owners contended that the representation relied upon (that the crew had reported an alarm going off following the flooding) did not satisfy the "limited objective element" of the materiality test tentatively laid down in The Aegeon (i.e. would the representation have tended to yield a not insignificant improvement in the assured's prospects). The Court of Appeal disagreed maintaining that the representation that the crew had reported the alarm episode was directly related to the claim and was intended to promote it. The fact that the narrative was purportedly given by the crew would improve the prospects of the Owners' claim on the basis that a factual account supported by the crew's supposed recollection would be more significant than one based purely on hypothesis.

  1. Application of the special common law rule of forfeiture to  fraudulent devices 

The key issue in relation to this ground of appeal was identified as whether the special common law rule of forfeiture for fraudulent claims applies to fraudulent means or devices.

The Court of Appeal relied primarily on Mance LJ's obiter dicta in The Aegeon which, suggest that the special common law rule should apply to fraudulent means or devices as it does to fraudulent claims. It was noted that the decision in The Aegeon was obiter because in that case, the court held that the rule did not apply after the commencement of litigation in the light of the decision in The Sea Star [2003] 1 AC 469 (the alleged lie being made in the claimant's statement of case, so the rules of the Court governed the consequence).

There were "several powerful reasons" for applying Mance LJ's dicta:

  • The Aegeon, whilst not binding is authoritative;
  • A fraudulent device is a sub-species of a fraudulent claim. The application of the rule to fraudulent devices is 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).
  • The "draconian consequence only applies to those who are dishonest" and the "importance of honesty in the claiming process is manifest". There is a public policy justification for the rule as applied to both claims and devices.
  • The Law Commission had explicitly proceeded on the basis that a fraudulent device was part of the fraudulent claims doctrine and that The Aegeon was good law.
  • Earlier authority provides some support for the application of the special common law rule to fraudulent devices.
  • The Aegeon has been cited without disapproval in a number of subsequent cases and academic authorities.
  1. Was forfeiture the proportionate response?

The Owners contended that the response must be just and proportionate for the rule to apply because the application of the special rule to fraudulent devices is an extension or by virtue of the provisions of A1P1. The Court of Appeal acknowledged that there was "no or limited consideration in the authorities" on the issue of proportionality. As for the application of A1P1 in such cases, no previous authority has addressed this point.

In relation to "Protection of property", A1P1 provides that "[e]very natural or legal person is entitled to the peaceful enjoyment of his possessions". An amount payable under an insurance contract is a "possession" for these purposes thus forfeiture of the claim is an interference which engages A1P1. In determining whether there had been a breach, the Court considered whether the interference could be justified on the basis that it "pursue[s] a legitimate aim by means that are reasonably proportionate to the aim"; and strikes a "fair balance…between the demands of general interests and the…protection of the individual's fundamental rights".

The Owners submitted that in this case, the application of the special rule to fraudulent devices was clearly disproportionate. It ignored the gravity of the device and as Popplewell J noted made no distinction between "a reckless untruth…told on one occasion" and a "carefully planned deceit or conspiracy". The Underwriters on the other hand submitted that the rule in The Aegeon contains its own restrictions which guarantee proportionality by ensuring only relevant lies, told to deceive and objectively capable of doing so, will lead to forfeiture because: (a) the device must be directly related to the claim; (b) it must have been intended by the assured to promote his prospect of success; and (c) it must not be irrelevant (in that prior to the determination of the parties' rights, if believed, it would have tended to yield a not insignificant improvement in the assured's prospects).

The Court of Appeal narrowed the critical question to be whether the use of a fraudulent device which fulfils those restrictions and results in forfeiture of a claim is a proportionate means of securing the objective of deterring fraud. The conclusion reached was that once it is accepted that "deterrence is itself a legitimate aim, the fact that forfeiture is a…very harsh…sanction does not mean that it is disproportionate to that aim. The rule is only applicable in the case of fraud from which no insured should have any difficulty in abstaining…..[I]f some form of 'just and proportionate' test is adopted, its application would be problematic and its outcome difficult to predict". It would be possible to leave the outcome on what is just and proportionate in each case to the court's discretion; however, "that is likely to reduce the deterrent effect of the rule since to introduce degrees of fraud runs the risk that people come to think they can lie to their insurer about the circumstances of their claim without risk of sanction, provided that the lie is not one that the law takes seriously".


This case serves as a warning to assureds when seeking to make a claim under an insurance policy. The Court of Appeal's 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. Since deterrence of fraud is a legitimate aim for the protection of society, the rule is absolute even if forfeiture appears, on the face of it, disproportionate.

The Court of Appeal's findings are broadly consistent with the approach of the Law Commission, whose proposals are reflected in the Insurance Bill currently before Parliament.