UK: English Law’s Response To An Insured’s Fraudulent Representations - Part 1

Over the course of two articles, we consider English law's response to fraudulent representations made by an insured in the course of insurers' investigations (the subject of this article) and in statements made in litigation proceedings which induce settlement (the subject of the next article).

Fraud can come in many guises: from deliberately deceiving underwriters on the nature of the risk to be insured, to exaggerating the circumstances or extent of any loss. Insurers often have to rely upon information provided by insureds when assessing claims which could, unbeknown to insurers, include misrepresentations by the insured intended to obtain a higher settlement amount or achieve payment more quickly. In this article we consider English law's draconian approach to fraudulent statements and how insurers could better identify potentially untrue statements.

1. Introduction

It is well understood that the insured owes a duty of utmost good faith, including in respect of any claims presentation and co-operation. That duty includes not making fraudulent claims or using fraudulent devices. The duty applies throughout the parties' relationship.

2. Fraudulent Devices

A fraudulent claim is one in which an insured knowingly seeks a benefit to which it is not entitled. Fraudulent devices were historically distinguishable from fraudulent claims and have been defined by the English Court of Appeal[1] as "[t]he making of statements which are known by the insured to be untrue or which are made recklessly, not caring whether they are true or false, in support of a claim honestly believed by him to be good both as to liability and amount". Most commercial policies will include an express term providing that in the event of a fraudulent claim the insured forfeits all benefits under the policy. Absent an express term, the English common law imposes such a requirement pursuant to the duty of good faith.

Where fraud is established, the claim fails in its entirety (including that portion which is genuine and indemnifiable) and the policy may be terminated, even in circumstances where an insured could have successfully maintained the claim without the use of fraud. This principle seeks to ensure that an insured will not gain from the use of fraud and will lose everything if fraud is employed. The principle is draconian by design to deter the deception of insurers who have no or little knowledge of the incident giving rise to the claim.

3. Versloot Dredging: The High Court

In the English High Court case of Versloot Dredging[2] the judge held at first instance that the fraudulent claims rule applies as much to: (i) fraudulent maintenance of an initially honest claim; and (ii) a claim which the insured knows from the outset to be exaggerated. No distinction is to be drawn between fraudulent claims and devices. The case concerned a claim under a hull policy covering a vessel whose engine room flooded. The insured sued for an indemnity which insurers declined to pay. Insurers defended on three grounds: (i) the loss was caused by an uninsured peril; (ii) the loss was caused by the unseaworthiness of the vessel with the knowledge and privity of the Insured; and (iii) the claim was supported by a fraudulent statement.

During the course of the claims process, insurers questioned the insured's management about the rate of ingress of water into the engine room. Insurers could not understand from the facts how such a large volume of water could have entered the engine room without being discovered by the crew until it was too late to prevent the resulting loss. On two occasions, insurers requested the insured's management to confirm why such ingress had apparently either gone unnoticed for so long or how it had occurred as quickly as it did. The insured's General Manager sought to blame crew negligence for the loss (which was an insured peril) and gave two separate statements to insurers. The relevant one for the purpose of the Judge's findings confirmed that "[a]fter further investigation...the first engine room alarm went off at noon...not investigated... [assumed rolling has set off the alarm]. Time of leakage is around 13.00hrs on 28 January." At trial, the insured did not maintain that the alarm had sounded at noon and there was no evidence it had sounded at any time on the date of loss before about 9pm.

The Judge held that the explanation provided was a matter of pure speculation rather than based on anything the crew had told the General Manager. On a scale of culpability, the Judge found that this was "at the low end" and that it was a reckless untruth, believed by the General Manager to be a plausible explanation, not a carefully planned deceit. It was said on one occasion (in a statement to insurers) and not pursued at trial. The General Manager had made no attempt to investigate or speak with the crew before answering the insurers' query. The response was given as it was assumed that it would lead to a speedy resolution of the claim and prompt payment of settlement monies, much needed to secure the release of the vessel from the shipyard. 

The trial Judge applied the non-binding decision of Mance LJ in The Aegeon[1] when considering the effect of the General Manager's statement and held that the statement: (i) was directly related to the claim; (ii) was intended to promote the insured's prospects of success; and (iii) if believed, would have yielded a not insignificant improvement of those prospects, and in that event found that the statement was a fraudulent device which the insured intended to rely upon to promote its claim.

The trial judge: (i) dismissed insurers' first two defences; (ii) held that crew negligence was the cause of loss (an insured peril); and (iii) held that a fraudulent statement was made to support the claim. The claim was accordingly dismissed which otherwise, but for the fraudulent statement, would have succeeded.

4. Versloot Dredging: Court of Appeal

The Court of Appeal would not interfere with the High Court Judge's findings of fact, but considered whether the non-binding decision in The Aegeon should be applied in respect of fraudulent devices/statements used in support of claims. The Court held that it should apply that decision and confirmed the following test in respect of ascertaining whether a device is fraudulent:

1) The device must be directly related to the claim, as opposed to some dispute with a third party [Objective test];

2) The device must have been intended by the Insured to promote its prospects of success [Subjective test]; and

3) It must not be irrelevant, such that, if believed, it would tend to yield a significant improvement in the insured's prospects of success prior to any final determination of the parties' rights [Objective test].

The Court confirmed that a fraudulent device will result in the forfeiture of the claim and no return of premium. The Court further noted that the obiter decision in The Aegeon had been also been applied in New Zealand[2] and India[3], as well as England.

5. Law Reform

The UK Law Commissions' July 2014 Report, which has been implemented within England's Insurance Act 2015 (not yet in force), observes in respect of fraudulent devices, "[t]he Aegeon has led to a sudden surge in insurers' lawyers pleading fraudulent means and devices as a way of deterring the insured's claim", but the Commission has not militated against the common law principles in respect of fraudulent devices. Much in the Report supports the application of the rule to devices as well as claims. Section 12 of the Insurance Act 2015, confirms that if the insured makes a fraudulent claim, insurers: (i) are not liable to pay the claim; (ii) may recover from the insured any  sums paid in respect of the claim; (iii) may treat the policy as having been terminated with effect from the time of the fraudulent act (but not affecting the rights and obligations of the parties prior to the fraudulent act); and (iv) if the policy is terminated, are not obliged to return any of the premium paid. However, there is no definition of "fraudulent claim" in the Act and the Law Commission had taken the view in its Report that that is a matter for the Courts to determine. That said, the notes to the initial draft Bill indicated that one of the acts which would make a claim fraudulent would be the used of fraudulent means or devices to support a genuine claim.

6. Observations

Insurers should be alert to statements from those within the insured's organisation who have no direct knowledge of the circumstances or facts giving rise to the incident and subsequent loss. Where necessary, confirmation from the insured should be sought that appropriate investigations have been undertaken and that the relevant personnel with the requisite knowledge have been interviewed. Loss adjusters and brokers should be aware of the insured's duties and the draconian legal effect of untrue statements. Insurers may wish to carefully consider any factual statements made which are accompanied with pressure to make prompt payment and, where necessary, inform the insured tactfully of its duties when responding to insurers' queries.  

Footnotes

[1] Versloot Dredging BV v. HDI Gerling Industrie Versicherung AG & Ors [2014] EWCA Civ 1349

[2] Versloot Dredging BV v. HDI Gerling Industrie Versicherung AG & Ors [2013] EWHC 1666 (Comm)

[3] Agapitos v. Agnew [2003] QB 556

[4] Stemson v. Amp General Insurance (NZ) Ltd – as considered by the Privy Council, see [2006] 2 Lloyd's Rep IR 252

[5] Beacon Insurance Co., Ltd. v. Maharaj Bookstore Ltd. – as considered by the Privy Council, see [2014] UKPC 21

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.