Court of Appeal upholds forfeiture of whole insurance claim for use of a fraudulent device
Versloot Dredging BV v HDI-Gerling & others, The DC Merwestone [2014] EWCA Civ 1349
In a judgment handed down on 16th October 2014, the Court of Appeal affirmed the fraudulent devices doctrine, laying down the principle that the consequence of the use of a fraudulent device by an insured in connection with the presentation of a valid, unexaggerated insurance claim is to render the entire claim forfeit.
Background
The dispute between the appellant shipowners and the respondent underwriters of a hull and machinery policy arose from the partial flooding of the “DC Merwestone”, following which the underwriters refused to make payment. They argued that the claim was forfeit as a result of fraudulent statements about the flood made in a letter from a representative of the shipowners.
At first instance Popplewell J held (with some reluctance) that the otherwise valid claim was forfeit as a result of the false narrative of the casualty contained in the letter.
The appeal
The shipowners appealed, arguing that extension of the forfeiture rule from fraudulent claims to fraudulent devices followed by Popplewell J was:
- based on erroneous obiter dicta of Mance LJ in Agapitos v Agnew (The Aegeon) (No 1) [2003] QB 556; and
- an unjust and disproportionate interference with the property rights they enjoyed under Article 1 of the First Protocol of the European Convention on Human Rights.
The decision of the Court of Appeal
The Court unanimously dismissed the appeal. Christopher Clarke LJ (with whom Vos LJ and Sir Timothy Lloyd agreed) agreed that Mance LJ’s observations were not binding. However, after considering The Aegeon, he held that the following were compelling reasons for applying the fraudulent devices doctrine:
- Although not binding, The Aegeon was authoritative, had been cited without disapproval in later cases and had some support from antecedent authority and the Law Commission’s recent proposals.
- The foundation for the fraudulent claims rule was that the insured owes a duty of utmost good faith to the insurer in presenting a claim. The rationale behind the forfeiture rule for fraudulent claims applied equally to fraudulent devices, which was in a way a sub-species of a fraudulent claim. The forfeiture rule had to be consistently applied to both fraudulent claims and fraudulent devices, rendering the rule a coherent whole.
- There was also a public policy justification for the rule being applied consistently to fraudulent claims and devices: insurers were entitled to protection from both types of fraud. In the absence of forfeiture as a sanction, fraud would be a one way bet for insureds whereby they would lose nothing if their fraud was detected but would stand to make gains from deceiving their insurer.
Christopher Clarke LJ went on to hold that the aim of the fraudulent devices doctrine, namely the deterrence of fraud, was legitimate and that the draconian sanction was not disproportionate to achieving this aim. As the rule was only applicable in case of fraud, it did not affect all insureds indiscriminately: the careless or forgetful insured did not forfeit their claim and neither did the insured who had told some irrelevant lie or whose lie is not told in order to induce payment.
Colin Edelman QC appeared for the successful respondents; instructed by Ince & Co.
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