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
Similar Articles
Relevancy Powered by MondaqAI
Fenwick Elliott LLP
Clyde & Co
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Fenwick Elliott LLP
Clyde & Co
Related Articles
 
Related Video
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions