The case

Prior to embarking on a voyage from Lithuania to Spain, the fire hose of the M/v “DC MERWESTONE” had not been properly emptied.

Given the extremely low temperatures, the seawater in the hose froze and expanded, cracking the pump casing and distorting the filter lid, which meant it no longer formed a seal on the hose.

While the vessel remained in the port, no water entered through this open space, because the ice created a barrier. However, after the vessel left the port, once temperatures were back to normal, the seawater melted and leaked from the crack and the lid, flooding the engine room and damaging the main engine.

The Owners claimed under their H&M policy for resultant loss. The policy included Institute Time Clauses – Hulls 1.10.83 (ITC), which covered damage to the vessel caused by “perils of the seas” and “negligence of Masters Officers Crew or Pilots”, and the Institute Additional Perils Clauses (IAPC).

The Owners’ principal argument was that the proximate cause  of  the  loss  was  the ingress  of seawater into the bowthruster room, i.e. a peril of the seas. Moreover, the Owners argued that the cover was available under ITC and IAPC clauses on the grounds that the loss was caused by crew negligence (which did not result from want of due diligence by the Assured).

The claim was rejected by the Underwriters on the basis that i) the loss was not caused by a peril of the seas, but rather by crew negligence through the crew’s failure to drain the emergency fire pump and ii) the crew negligence was not covered given the relevant want of due diligence by the Assured in failing to make available appropriate cold weather procedures, failing to inspect and maintain the duct keel and failing to have a proper system for the maintenance of the bilge pumps. Furthermore, the Underwriters argued that the claim was forfeit as it was supported by a fraudulent device.

More specifically, the Underwriters submitted that a crewmember deliberately or recklessly had given a false narrative of the casualty in order to improve the prospects of the Owners’ claim.

The Commercial Court’s decision

The Court  held  that  the  loss  had  been actually caused by a peril of the sea and therefore the Owners had a valid claim. In fact, the Court stated that the seawater ingress i) could be considered a fortuity since it arose from an unexpected incident and ii) could be considered “of the sea” because the accident was specific to the maritime nature of the adventure.

Concerning the Underwriters’ arguments relating to the want of due diligence by the Assured, the Court found that there had not been a causative want of due diligence.

Therefore, the Owners’ claim could theoretically have been recovered in full. However, in light of the employment of a fraudulent device in support of the claim, the Court rejected the claim, applying the so-­‐called “fraudulent claims rule”.

Such rule provides that an insured who has made a fraudulent claim forfeits in its entirely any lesser claim which he could properly have made. The rule has now been extended, by the previous decision in “The Aegeon”, to cases in which the assured has deployed some fraudulent means or devices to  advance what  is otherwise  a wholly valid claim. In particular, in “The Aegeon”, it was held that “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”. Therefore, a mere attempt to deceive is sufficient to attract the penalty of forfeiture of the valid claim.

In light of the above, as the law currently stands, the Court had no choice but to reject the claim in full. However, the Court considered that the forfeiture of the claim was disproportionately harsh in the circumstances.

The Court of Appeal’s decision

The key issue of the 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 dismissed the Owners’ appeal, finding that the rule against fraudulent claims applies equally to fraudulent means or devices, as a fraudulent device must be deemed a sub-­‐species of a fraudulent claim.

It appears evident that the foundation of this rule is the obligation of utmost good faith between insured and insurer.

In this respect, the Court of Appeal considered that, since deterrence of fraud is a legitimate aim for the protection of society, the rule is absolute even if forfeiture appears disproportionate.

In particular, the Court of Appeal stated that deterrence is itself a legitimate aim and, therefore, the fact that forfeiture is a very harsh sanction does not mean that it is disproportionate to that aim.

It goes without saying that this case is a victory for the underwriting community and emphasises the care that must be taken by assureds to present a completely accurate picture when making a claim under an insurance policy.

The judgment indeed authoritatively establishes that an assured who uses a fraudulent device to promote an otherwise valid claim forfeits its claim.