This is an appeal from a judgment of Poppelwell J. The claimants were owners of the DC Merwestone, a vessel, insured under a Hull and Machinery time policy by the defendant underwriters. The cause of loss was crew negligence consisting of a failure to close the sea suction valve and drain a pump with the ultimate result that after the ice in the pump thawed, the engine room flooded causing damage to the engine itself. Insurers denied liability. At first instance, Poppelwell J determined that the policy responded to the loss but that the claim was forfeited by reason of a fraudulent means or device. The general manager of the vessel owners had made a false statement in relation to the circumstances of the loss. The judge applied the test (obiter) inAgapitos v Agnew (The Aegeon) [2002] 2 Lloyd’s Rep 42 as set out by Mance LJ. This test was that there would be a fraudulent claim where: a fraudulent device was directly related to the claim; the device was intended to promote the insured’s prospects of success; and the device would have tended to yield a not insignificant improvement in the assured’s prospects of success prior to any final determination of the parties’ rights. When this test was applied to the facts Poppelwell J found that there had been a fraudulent claim involving the use of fraudulent means and devices. The insured appealed.

The owners appealed on the basis that: the judge had erred in determining that: (1) the general manager’s statement was a fraudulent device; (2) the test in The Aegeon should not be followed; and, (3) the denial of recovery of a legitimate claim (even if the claim was supported by a fraudulent device) resulted in a deprivation of possessions under article 1 of the First Protocol to the European Convention of Human Rights (implemented under the Human Rights Act 1998).

Christopher Clarke LJ gave judgment for the Court of Appeal. The appeal was dismissed.

  1. The court at first instance had been right to conclude that the general manager’s statement was a fraudulent device; it served as a false representation.
  2. The law on fraudulent claims had been applied correctly. There was a long line of authority which established a special common law rule that any lesser claim (for a true amount) was forfeited where a fraudulently exaggerated claim was made. The rule rested on the duty of good faith applied to contracts of insurance. The duty applied also to fraudulent means and devices as these were sub-species of fraudulent claims. Further, the fraudulent assured should not be allowed to think that if the fraud did not work nothing would be lost. There was also sufficient public policy justification for protecting insurers from fraud. It did not matter that the consequences could be harsh for the insured.
  3. The rule did not contravene the Human Rights Act 1998. Although the sum payable under a policy was a possession within the Act, the rule pursued a legitimate aim by means proportionate to the aim sought.

This decision provides authoritative support for the existing approach to fraudulent devices and will be welcomed by underwriters.

For further information: Versloot Dredging BV and another v HDI Gerling Industrie Versicherung AG and others (The 'DC Merwestone') [2014] EWCA Civ 1349