Australia: Court rejects ship owners' insurance claim because of "fraudulent device" used in making claim

Last Updated: 15 December 2013
Article by Andrew Tulloch

In brief - Insured falsely alleges that bilge alarm had gone off but was ignored

The decision of Mr Justice Popplewell in the Commercial Court in England in Versloot Dredging BV & Anor v HDI Gerling Industrie Versicherung AG & Ors (2013) EWHC 1666 (Comm.), handed down on 14 June 2013, provides a solitary lesson regarding the dangers of supporting a claim with a "reckless untruth", as the insured was deprived of an otherwise valid claim of some €3.2 million as a result.

Failure of crew to clear water from emergency fire pump and close sea valve

Whilst loading a cargo of scrap metal in Lithuania in January 2010, the crew negligently failed to clear water from the emergency fire pump of the vessel DC Merwestone and failed to close the sea valve. Due to the extremely low temperatures, the water in the pump froze and expanded, causing it to crack and create a direct opening between the sea water outside the vessel and the interior of the vessel's bowthruster of space.

Although the ice created a watertight barrier at the loadport, when the vessel sailed into warmer waters the ice melted and there was an ingress of water into the vessel. The vessel lacked watertight integrity and a bilge alarm did not alert the crew until water had reached about one metre above the floor plates in the duct keel. Attempts to pump the water were unsuccessful. Ultimately the engine was completely submerged and required replacement.

Ship owners argue that cause of loss was "perils of the seas"

Underwriters denied liability for the claim on the basis that the proximate cause of the ingress and damage to the engine was crew negligence in failing to drain the emergency fire pump and to close the sea valve.

On the other hand, the insured argued that the proximate cause of the loss was "perils of the seas" and crew negligence, without any causative lack of due diligence on the part of the owners. The insured also contended that there was repairer negligence in failing to ensure watertight integrity at both ends of the duct keel.

Court's analysis of the law of proximate cause

Mr Justice Popplewell found that the casualty was proximately caused by the perils of the seas, namely the fortuitous entry of sea water during the voyage, even though caused by crew negligence at the loading port.

His judgment includes a careful analysis of the law of proximate cause, noting that: "...where there is a fortuitous ingress of sea water, it is often the ingress itself, rather than that which renders if fortuitous, which is to be regarded as the proximate cause of the loss..."

He noted:

I am concerned with a casualty in which the chain of causation was:
  1. an external fortuitous event (crew negligence)
  2. unseaworthiness (but not debility)
  3. the effect of the sea on the vessel (which was not the ordinary action of wind and waves: the wind and waves were not extraordinary but their action on the vessel was)
  4. ingress of sea water
  5. damage to the subject matter insured. The casualty was a fortuity because the crew negligence was fortuitous. The fortuitous ingress of sea water was a peril of the seas, which was a proximate cause of the loss and damage.

He found that the owners had a valid claim for €3,241,310.60 under the policy, unless it is forfeited by a fraudulent device having been employed in pursuit of the claim.

Ship owners attempt to distance themselves from any blame for the casualty

The underwriters maintained that in a letter to the underwriters' solicitors Ince & Co dated 21 April 2010, a further letter to the lead underwriter dated 27 July 2010 and then a Preliminary Report dated 27 January 2011 sent to the underwriters, the insured falsely claimed that the bilge alarm had gone off at about noon on 28 January 2010, but had been ignored because it was attributed to the rolling of the vessel in heavy weather.

The underwriters allege that the insured did this in an attempt to distance the owners from any fault in relation to the casualty and to overcome the Inchmaree proviso, under which there was cover for loss or damage caused by negligence of the Masters, officers, crew or pilots, provided the loss had not resulted from want of due diligence by the assured, owners or managers.

What is a "fraudulent device" in the context of an insurance claim?

Mr Justice Popplewell noted that there is a longstanding rule of law to the effect that an insured who had made a fraudulent claim forfeits any lesser claim which he could properly have made. He noted that the origin of the fraudulent claims rule was linked to the continuing duty of good faith in insurance contracts and also derived from an implied term of the contract.

His judgment examined the decision in Agapitos v Agnew (2003) QB 556, in which Lord Justice Mance said: "a fraudulent device is used if the insured believes that he has suffered the loss claimed, but seeks to improve or embellish the facts surrounding the claim, by some lie".

Mr Justice Popplewell approved of the comments of Lord Herschell in Derry v Peek (1889) 14 AC 337 at 374, who said:

I think the authorities established the following propositions:
First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false.

Fraudulent means or devices intended to yield "not insignificant" improvement in insured's prospects

Mr Justice Popplewell then considered the question of whether the fraudulent part of the claim must be substantial.

He found that the test is that:

Fraudulent means or devices are sufficient to vitiate a valid claim if:
  1. They are directly related to the claim and intended to promote the claim; and
  2. The fraudulent means or devices would, if believed, tend, objectively and prior to any final determination at trial of the parties' rights, to yield a not insignificant improvement in the insured's prospects, whether they be prospects of obtaining a settlement, or a better settlement, or of winning at trial. In this context "not insignificant" has the same connotation as "not insubstantial", "not immaterial", "not de minimis", which is the test for the fraudulent claims rule, of which the rule as to fraudulent means and devices is to be treated as a subspecies.

Underwriters' defence of fraudulent device successful and owners' rights to claim forfeited

Although he indicated that he was strongly attracted to a "materiality" test, permitting a Court to look at whether it was just and proportionate to deprive an insured of his substantive rights, taking into account all the circumstances of the case (such as is provided under Australian law in section 56 of the Insurance Contracts Act 1984 (which does not apply to marine insurance), he nevertheless considered that on the facts before him, the underwriters' defence of fraudulent device succeeded and the ship owners' rights to claim were forfeited.

The trial judge said that he reached that conclusion with regret: "In a scale of culpability which may attach to fraudulent conduct relating to the making of claims, this was at the low end. It was a reckless untruth, not a carefully planned deceit."

He commented that he considered to be denied recovery for its claim to be "a disproportionately harsh sanction".

Leave to appeal granted

It is understood that leave to appeal has been granted. In view of the trial judge's findings regarding the scale of culpability and his concern regarding the sanction imposed by reason of the fraudulent device, there must be a reasonable prospect that an appeal court will seek to find a way around the outcome which was obtained.

The case is a useful one in its examination not only of issues regarding perils of the sea and proximate cause, but significantly for its commentary regarding the defence regarding the rule relating to fraudulent devices.

Andrew Tulloch
Insurance and reinsurance
Colin Biggers & Paisley

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Andrew Tulloch
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