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Web alert: Court of Appeal Authoritatively Confirms Fraudulent Devices Rule

News & Insights 23 April 2015

In this recent judgement of great significance to insurers in all classes of business, the Court of Appeal upheld that an assured who employs a ‘fraudulent device’ forfeits its claim, despite the fact that the claim would otherwise have been valid and recoverable.

In this recent judgment [1] of great significance to insurers in all classes of business, the Court of Appeal upheld that an assured who employs a ‘fraudulent device’ forfeits its claim, despite the fact that the claim would otherwise have been valid and recoverable.
After a severe flooding incident in the engine room of the DC Merwestone, the owners sought to recover damages from their Hull and Machinery insurers. The policy incorporated the Institute Time Clauses – Hulls 1/10/83 and the Institute Additional Perils Clause – Hulls. A dispute arose in respect of the cause of the damage to the main engine and why the water ingress could not be controlled. 
First instance judgement
Popplewell J found that the casualty was proximately caused by a peril of the sea, namely, the fortuitous entry of seawater due to crew negligence, but that the owners were not privy to any unseaworthiness and there was no lack of due diligence on the part of the owners. The insurance policy thus responded to the loss. However, Popplewell J held that the claim was forfeited by reason of a fraudulent means or device in the making of the claim. The judge found that the claim letters sent by the ship’s managers contained an untruth told recklessly in support of the claim, to which it was directly related, in the hope of a prompt settlement. This satisfied the relatively low threshold materiality test set out by Mance LJ in The Aegeon (2002) which the judge applied.  
The test
The rule only applies to fraudulent devices which (i) directly relate to the claim; (ii) are intended by the assured to promote his prospect of success; and (iii) are, objectively assessed, capable of improving the assured’s prospects of payment or settlement prior to final determination of the parties’ rights.
The owners appealed, raising arguments that; (1) the fraudulent devices rule as tentatively articulated in The Aegeon was wrong as a matter of law and (2) in any event the rule should be struck down on the basis that it violates an assured’s rights under Article 1 of the First Protocol to the European Convention on Human Rights.
Court of Appeal Judgement
The Court of Appeal unanimously dismissed the assured’s appeal.  

  1. Clarke LJ held that the judge had correctly applied the law on fraudulent claims.
    (a)   The test used in The Aegeon decision was “authoritative”; it had been applied, followed and cited without disapproval in numerous cases. A long line of authority has further established a special common law rule resting on the duty of utmost good faith.
    (b)  The duty applied to fraudulent means and devices. Clarke LJ explained a fraudulent device was a sub-species of a fraudulent claim, the fraudulent assured must not be allowed to think that if the fraud was unsuccessful nothing would be lost and at the stage when the fraudulent device was used it would probably not be possible to tell whether the claim would be accepted.
    (c)   There was no proportionality requirement. A claimant who fraudulently overstated his claim recovers none of it whatever the size or proportion of the overstatement. 
  2. Clarke LJ found the rule did not contravene the Human Rights Act 1998. It was common ground that an amount payable under an insurance policy was a ‘possession’ for the purposes of the Act, however, the rule satisfied the requirement that it pursued a legitimate aim by means that are reasonably proportionate to the aim sought to be realised. 

Based on the applicability of the test both Popplewell J and Clarke LJ found that the fraudulent devices rule was satisfied and that therefore there was a fraudulent claim involving the use of fraudulent means and devices. The assured's claim was thus forfeited.
Leave to appeal to the Supreme Court has been granted. However, this judgement comes as a strong reminder to all assureds and insurers of their obligation to act in the utmost good faith.
The Standard Club will be publishing a full consideration of this case in our Standard bulletin, a link to which shall be posted in due course.
[1] Versloot Dredging BV v HDI-Gerling & others, The DC Merwestone [2014] EWCA Civ 1349

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