Australia: Versloot Dredging BV v HDI-Gerling Industrie Versicherungs AG - The DC Merwestone - should an alternative materiality test be applied in cases involving the use of a fraudulent device?

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The defendants provided hull & machinery insurance on terms which included cover under ITC Hulls 1/10/83 for loss or damage caused by perils of the seas, and for loss or damage caused by crew negligence, provided that the loss or damage did not result from want of due diligence on the part of the assured, owners or managers.

In January 2010, the main engine of the assured's vessel was irreparably damaged by ingress of water into the engine room. Popplewell J found on the facts that the crew had left water in the emergency fire pump, which froze and expanded, causing the casing to crack and distort. Once melted, water leaked through the damaged casing via the bowthruster space (which should have been watertight) and duct keel (which also should have been watertight) into the engine room. The crew became aware of the water ingress at a relatively early stage and the engine room pumping system was switched on, but the pump was not working correctly.

Owners claimed the cost of replacing the engine (in excess of €3 million). Underwriters defended the claim on three bases:

  1. the loss was not caused by peril of the seas, but instead by crew negligence in relation to the emergency fire pump. There was no cover for the crew negligence because of want of due diligence on the part of the Owners/Managers;
  2. the loss was caused by unseaworthiness of the vessel to which Owners were privy under s39(5) of the Marine Insurance Act 1906 (MIA); and
  3. Owners had made fraudulent statements in support of their claim so that, even if the claim was covered, it had been forfeited.

Peril of the seas

Popplewell J found that the loss was proximately caused by a peril of the seas. In order to recover, there had to be a fortuity, and the fortuity had to be of the seas. Here, the fortuity was the ingress of water into the engine room which resulted from the negligence of the crew. Underwriters' argument that the proximate cause was the crew negligence, rather than the water ingress, was rejected.

Alternatively, if the loss was proximately caused by crew negligence, there was no want of due diligence on the part of Owners or Managers.


The defence of unseaworthiness with privity under s39(5) MIA also failed, with the judge finding that Owners were not aware of the defective condition of the engine room pumping system.

Fraudulent devices

At an early stage, the vessel's general manager, K, reported to Underwriters that the master had advised that a bilge alarm had been triggered several hours before the casualty, but that this was not investigated by the crew because the vessel was rolling in heavy weather. It was later admitted that this was untrue.

The judge found that K's statement was made in order to support Owners' allegation of crew negligence, and to distance Owners from any allegation of want of due diligence. Whilst it was made under a genuine belief that it was a reasonable explanation of events, K had been reckless as to whether he had in fact been told by the master that the bilge alarm had sounded.

It is settled law that an assured who makes a fraudulent claim forfeits any lesser claim that could properly have been made. This rule was extended by the Court of Appeal (obiter) in The Aegeon ([2002] 2 Lloyd's Rep 22) to cases in which the assured supports a valid claim using fraudulent devices – i.e. where the assured believes he has suffered the loss claimed, but embellishes the facts surrounding the claim by means of a lie. The lie must be "material", in that it directly relates to the claim and, if believed, would objectively yield a "not insignificant" improvement in the assured's prospects of winning at trial or achieving a better settlement. "Not insignificant" means not insubstantial, not immaterial or not de minimis – a low threshold.

Although not strictly binding, Popplewell J applied the test for materiality in The Aegeon. Finding that K's statement was material, and intended to improve the chances of achieving a prompt settlement from the Underwriters, he reluctantly dismissed Owners' claim, commenting that:

  • there is a difference between a fraudulent claim and the use of fraudulent devices in support of a valid claim, where the assured is looking to persuade insurers to pay the claim more quickly, or to make an increased offer of settlement, rather than to recover more than his contractual entitlement. The culpability of an assured who supports a valid claim with fraudulent devices might be "at the lower end of the scale."
  • the test is capable of producing disproportionately harsh consequences. In particular, there is no requirement for the particular underwriter to be deceived by the fraudulent device. Further, it is not possible for an assured to correct or retract a false statement once made.
  • In this case, the fraudulent device was a reckless untruth rather than a carefully planned lie. It was told on one occasion and was not maintained at trial. Further, at the time it was given, K genuinely believed that his explanation was plausible.
  • Popplewell J would be "strongly attracted" to a test for materiality which allowed the court to consider whether it was just and proportionate, in all of the circumstances, to deprive the assured of the entirety of his claim. He suggested that "the policy of the law should be to require at least a sufficiently close connection between the fraudulent device and the valid claim to make it just and proportionate that the valid claim should be forfeit."


This case is a useful summary of the law on establishing loss by peril of the seas and demonstrates the evidentiary difficulties insurers face in proving unseaworthiness with the privity of the assured, under section 39(5) MIA.

Permission to appeal has been granted on the dismissal of the claim for use of fraudulent devices, with the appeal to be heard in Spring 2014. It will be interesting to see whether the Court of Appeal is prepared to consider the judge's alternative materiality test.

The Law Commission's consultation on Insurers' Remedies for Fraudulent Claims (part of their work on Insurance Contract Law) closed in 2012. The introduction of the notion of proportionality into remedies available for the use of fraudulent devices was not specifically discussed, although a minority of respondents favoured proportionality in cases of "minor exaggerations." At the time of writing, the Law Commission is due to submit a final report and draft bill in early 2014.


1Protection of the Sea (Civil Liability for Bunker Oil Pollution Damage) Act 2008 (Cth), Navigation Act 1912 (Cth), Protection of the Sea (Powers of Intervention) Act 1981 (Cth),Transport Operations (Marine Pollution) Act 1995 (Qld),Transport Operations (Marine Safety) Act 1995 (Qld), Great Barrier Reef Marine Park Act 1975 (Cth)

2Protection of the Sea (Civil Liability for Bunker Oil Pollution Damage) Act 2008 (Cth), Transport Operations (Marine Pollution) Act 1995 (Qld). Transport Operations (Marine Pollution) Regulation 2008 (Qld).

3see for example Government of the Republic of Spain v SS Arantzazu Mendi [1939] AC 256

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