How good claims can be invalidated
Richard Hugg, Ince & Co, explains how good claims can be invalidated by passing false information to your insurer.
In a 2014 judgment of considerable significance (Versloot Dredging BV v. HDI Gerling and others (DC Merwestone), the English Court of Appeal has for the first time authoritatively established a “bright line rule” that an assured who tells a lie or uses false evidence to support his otherwise valid claim will forfeit the claim.
The decision serves as a strong warning to all assureds, whether commercial or private, not to act dishonestly when making claims under insurance policies.
It has been long established that an assured who fraudulently exaggerates his claim under an insurance policy forfeits any lesser claim he could otherwise have properly made. This rule, known as the “fraudulent claims” rule, has now been authoritatively extended by the Court of Appeal to apply to lies or dishonest conduct (“fraudulent devices”) in relation to otherwise entirely valid claims (and where there is no element of exaggeration). Although this judgment is in relation to commercial shipping, it is equally relevant to yacht and superyacht policies that are subject to English law.
The Background Facts
In January 2010, the DC Merwestone called at Klaipeda to load a cargo of steel. On sailing, the vessel’s bow thruster room flooded. The bow thruster room should have been watertight and a bilge alarm located there should have alerted the crew to the flooding. But the space was not watertight, the bilge alarm did not sound and the flooding extended into the engine room. The engine was destroyed in the flooding and the assured claimed the cost of replacing it.
It later transpired that the general manager’s statement was untrue and the master had never told him that the forward bilge alarm had sounded at noon.
In presenting the claim, the assured’s general manager stated that he had been told by the master that the forward bilge alarm had sounded at noon – long before the flooding was actually noticed – but that it had not been investigated, as the vessel had been rolling heavily. It later transpired that the general manager’s statement was untrue and the master had never told him that the forward bilge alarm had sounded at noon. Underwriters therefore argued that the general manager’s statement was a “fraudulent device”, and that the claim was forfeit. This argument was made on the basis of an earlier, but non-binding, Court of Appeal authority (The Aegeon). In that case, it was suggested that an assured will forfeit his claim if he tells a lie or puts forward false evidence in relation to the claim intending to improve his prospects of payment or settlement and if the dishonesty, viewed objectively, is capable of improving the assured’s prospects.
At the lower court hearing, the judge reluctantly applied The Aegeon and dismissed the assured’s insurance claim. The assured appealed.
The Court of Appeal Decision
“Once it is accepted that deterrence is a legitimate aim, the fact that forfeiture is a harsh, in some circumstances very harsh, sanction does not mean that it is disproportionate”
Before the Court of Appeal, the assured argued that the fraudulent device doctrine breached the provision in the European Convention on Human Rights that protects against interference with a person’s possessions. The assured argued that forfeiture of an insurance claim is an “interference” with a “possession”.
In considering this issue, the court stated that it had to decide whether the interference was justifiable on the basis that it “pursue[s] a legitimate aim by means that are reasonably proportionate to the aim sought to be realised” and strikes “a fair balance […] between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights”.
It held that the fraudulent device rule has a legitimate aim, namely to deter fraud. It also found that it provides a proportionate means of securing that aim because the fraudulent device doctrine only applies to fraudulent devices that: (i) directly relate to the claim; (ii) are intended by the assured to promote his success; and (iii) are, objectively assessed, capable of doing so. One of the judges commented that “once it is accepted that deterrence is a legitimate aim, the fact that forfeiture is a harsh, in some circumstances very harsh, sanction does not mean that it is disproportionate”. It was also noted that “the rule is only applicable in cases of fraud, from which no insured should have any difficulty in abstaining”.
The Court of Appeal therefore upheld the lower court’s judgment, finding that the fraudulent device doctrine, as suggested in The Aegeon, should be applied as a legal rule.
As can be seen from this case, even what may seem to be a relatively insignificant untruth told to support an otherwise valid claim is capable of leading to the loss of the entire claim.
In this decision, the court placed much emphasis on deterring fraudulent claims and the case underscores the importance for assureds of presenting their claims honestly. As can be seen from this case, even what may seem to be a relatively insignificant untruth told to support an otherwise valid claim is capable of leading to the loss of the entire claim.
The assured has sought and obtained permission to appeal to the Supreme Court. Ince & Co will report on the decision in due course.
Originally published by Ince & Co
Solicitor, Ince & Co
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