UK: (Re)insurance Weekly Update 26- 2016

Last Updated: 27 July 2016
Article by Nigel Brook

A summary of recent developments in insurance, reinsurance and litigation law.

This week's caselaw

Versloot v HDI Gerling: Supreme Court rules that the use of fraudulent devices does not amount to a fraudulent claim and so the claim is not forfeit

The Insurance Act 2015 will clarify the remedy available to insurers for a fraudulent claim. However, the Act does not define what a fraudulent claim is. Three categories are possible: (1) the entire claim is fabricated; (2) there is a genuine claim but it has been dishonestly exaggerated; and (3) there is a genuine claim but the insured supplies false information to support it (either because he doubts the strength of the claim, or he wants to speed up payment). The last category, known as fraudulent devices, was the subject of this case.

The earlier decisions in this case were reported in Weekly Updates 23/13 and 39/14. At first instance, the judge found that the insured had a valid claim but that the entire claim was forfeit because the insured had used fraudulent devices (having recklessly misrepresented to insurers that an alarm had been heard by the Master of the ship). The Court of Appeal rejected the appeal from that decision, approving the judgment of Mance LJ in Agapitos v Agnew "The Aegeon" [2003] that a fraudulent device is a sub-species of a fraudulent claim. The Court of Appeal found that there was a public policy justification for the rule, namely to protect insurers from fraud.

The Supreme Court, by a majority of 4:1 (Lord Mance dissenting) has now allowed the appeal from that decision, finding that the use of a fraudulent device does not amount to a fraudulent claim and so the claim is not forfeit.

Lord Sumption said that "the position is different where the insured is trying to obtain no more than the law regards as his entitlement and the lie is irrelevant to the existence or amount of that entitlement.... I do not accept that a policy of deterrence justifies the application of the fraudulent claim rule in this situation". It was held that the lie used in a fraudulent devices claim is always immaterial to the claim, which is payable as soon as the loss arises. Lord Sumption added that the fraudulent devices rule therefore only protects the insurer "from the obligation to pay, or to pay earlier, an indemnity for which he has been liable in law ever since the loss was suffered". The Supreme Court also rejected the argument that the fraudulent claims rule is merely a manifestation of the duty of utmost good faith.

A distinction may be made, though, where a lie is told regarding a genuine claim for reasons other than claims presentation (eg to avoid liability to pay a higher premium).The decision did also confirm that where a claim is fraudulently exaggerated, the entire claim is forfeit, not just the dishonest element.

COMMENT:  The Supreme Court's finding that an insured can submit false or forged documentation and information in support of its valid claim with apparent impunity is likely to come as a surprise to the insurance industry, especially since the position is not confined to consumer insurance policies, but is clearly intended to apply equally to large, complex commercial claims (the case itself involved a €3m claim under a marine policy).   

The Supreme Court did suggest that the insured who uses fraudulent devices may face some adverse consequences, for example:

  1. prosecution for a criminal offence, although as Lord Hughes admitted "the risk of prosecution is relatively slight, even after some well publicised recent trials, especially if he stood to gain nothing to which he was not entitled, and it may not operate as a significant sanction in many cases"; or
  2. liability in damages to insurers (Lord Hughes accepted that the prospects of establishing such liability were "comparatively remote", and it is hard to see what damages the insurer is likely to be able to claim); or
  3. adverse impact on his credibility in any trial regarding the claim (assuming the case goes to trial); or
  4. the requirement to disclose his lie to future insurers, thus resulting in a likely higher premium or even the inability to insure). Although a lie to a prior insurer is a material fact which should be disclosed (see eg Aviva v Fielding (Weekly Update 38/10), it is to be queried how readily this information will be shared amongst insurers in practice.

Accordingly, the chance that some sanction may be available for insurers where a fraudulent device has been used would appear to be slight. Lord Toulson's response was that "I am sceptical about the idea that knowledge of this judgment will incentivise people with valid insurance claims to lie in support of their claims. Those who are honest will not do so because it would not be in their nature, while some who are dishonest may do so if they think that they will get away with it, despite the risk of it having a boomerang effect on whether the court believes anything that they say".

The law now draws a sharp distinction between a fraudulent claim (which leads to complete forfeiture) and a fraudulent device (for which there is no remedy at all). But is the distinction between the two always clear? The basis for the distinction is that the insured's right to an indemnity arises as soon as the loss is suffered, and there is a "correct" amount payable which can be objectively assessed and does not depend on how the insured puts its claim. If the insured lies, but the lie is not relevant to the existence or the amount of a right to an indemnity, then the insured has not dishonestly sought to recover more than it is entitled to. But an assessment of the existence and the amount of the right to indemnity may in practice depend to a great extent on the evidence produced by the insured, and an insured who lies may end up with his claim being paid without having genuinely produced that evidence.

Cape Distribution v Cape International: Whether subrogated claim relating to mesothelioma could be brought where party not a co-insured throughout period of exposure/allocation of defence costs

The judge's earlier decision on certain preliminary issues in this case was reported in Weekly update 18/16. The defendant parent company had (on the facts of the case) been found liable to the employees of its wholly-owned subsidiary ("the subsidiary") who had been exposed to asbestos as a result of working for the subsidiary. The subsidiary's employers' liability insurer sought to recover from the parent company.

In 1964, the subsidiary had sold all its assets to the parent, in return for an indemnity from the parent company. Some months later, an endorsement was added to the subsidiary's employers' liability policy which, it was held, precluded the subrogated claim for asbestos-related illnesses because the parent company had been added as an insured.

In this case, one of the issues was whether the insurer could bring a subrogated claim for mesothelioma where there had been exposure to asbestos both before and after the parent company had become an insured under the policy (the so-called "straddlers" issue). The insurer's argument was based on the principle that for mesothelioma claims, each defendant is liable for the whole of the damage (not just a proportion) where there has been any material exposure (as a result of the Compensation Act 2006), and so it could bring a subrogated claim (for the full amount) in respect of exposure before the parent company became a co-insured. The parent company countered that the subrogation claim was barred because it had been a co-insured for at least some of the relevant period. Picken J agreed with the parent company.

Nor could the subsidiary limit its claim to liabilities incurred before 1964 alone: that "would constitute an unfair selection of the period to which a loss is to attach". The judge cited an extract from Zurich v IEG (see Weekly Update 18/15) in which it was said (in a different context) that "it is contrary to principle for insurance to operate on a basis which allows an insured to select the period and policy to which a loss attaches. This is elementary. If insureds could select against insurers in this way, the risks undertaken by insurers would be entirely unpredictable". It was said to be impermissible for the subsidiary to frame its case so that the policy responded in full to the liabilities of one co-insured but not the other (especially where claims straddled the period before and after co-insurance).

Nor was apportionment permissible. The insurer had sought to rely on Zurich v IEG, but the judge distinguished that case on the basis that here the insurer had agreed to cover the parent company for the same period when the subsidiary was covered under the policy. The judge also rejected an argument that Lord Mance in Zurich had impliedly accepted a set-off argument in circumstances where the insured is solvent.

The above issues did not arise in relation to claims brought by employees for divisible diseases (such as diffuse pleural thickening), where a tortfeasor is only liable to the extent of its contribution to the total exposure. The parties agreed that no subrogation claim could be pursued in relation to the period where the parent company was a co-insured (but a subrogated claim could be brought when it was not a co-insured).

An issue also arose as to whether the insurer could recover any of its defence costs for the "straddler" claims from the parent company. Reliance was placed by the parent company on a textbook extract and prior caselaw which supported the submission that a policy should cover all costs incurred in the defence of a claim even if that might overlap with matters which are not covered under the policy. The judge agreed with those arguments and noted that the policy here required the insurer to pay "all costs and expenses" (as had also been the case in John Wyeth v Cigna [2001], where the Court of Appeal held that the insurers were liable for the full amount of the defence costs even some of those costs also related to claims which were uninsured). It made no difference that the issue here was not whether the subsidiary could recover its defence costs, and nor could it be said that there had been no co-insurance as regards defence costs. It made no difference which disease was in issue. The judge also noted that IEG had received its defence costs in full in the Zurich case (even though a proportionate recovery of damages was allowed in that case).

Limitation arguments also arose as to the time limit for the subsidiary's claim under the sale agreement with the parent company. The judge held that time started to run not from the date of an employee's claim against the subsidiary, but instead from the date when the subsidiary's liability to the employee was established (whether by a judgment, arbitral award or agreement). The parent company could not assert a time bar defence in this case because it had consented to the subsidiary amending its claim form after it was issued in order to bring the claims to which the time-bar case related.

COMMENT: The view in this case that the insured could not select the policy period under which it wishes to claim echoes the position adopted in Teal (see Weekly Update 29/13) where it was held that a freedom to adjust the order of payment of claims (for the same period) "cannot in the present context readily be reconciled with the basic philosophy that insurance covers risks lying outside an insured's own deliberate control". In other words, however the insured may choose to act when deciding how to claim, the courts still have a discretion to deal with the position between the other (potentially indemnifying) parties in a way they feel is just and equitable.

Willers v Joyce: Supreme Court ruling on judicial precedent and the status of a Privy Council decision

The first instance decision in this case was reported in Weekly Update 18/15. The issue in the case was whether the tort of malicious prosecution extends to the prosecution of civil, as well as criminal, proceedings. . Reliance was placed by the defendant on the House of Lords decision in Gregory v Portsmouth City Council [2000]. However, the claimant sought to rely on the more recent decision of the Privy Council in Crawford Adjusters v Sagicor General Insurance (see Weekly Update 22/13), which held that there is a tort of malicious prosecution of civil proceedings. The judge held that the House of Lords decision was binding on her but that she could follow Crawford if she was persuaded that, for all practical purposes, it is a "foregone conclusion" that the Supreme Court would eventually follow Crawford if this case is appealed to that level (although she further held that she was not so persuaded here).

By a majority of 4:1, the Supreme Court has now allowed the appeal from that decision and found that the tort of malicious prosecution includes the prosecution of civil proceedings.

The Supreme Court then went on to clarify the position regarding the status of Privy Council decisions. It held that there is no doubt that a court will usually follow a Privy Council decision (unless there is a decision of a superior court to the contrary), but it is not bound by precedent to do so. The Supreme Court went on to rule that this is an absolute rule and it cannot be disapplied where a first instance judge or the Court of Appeal considers it a foregone conclusion that the Privy Council view will be accepted by the Court of Appeal or Supreme Court (as the case may be): "I have concluded that it is more satisfactory if...the rule is absolute – ie that that a judge should never follow a decision of the Privy Council, if it is inconsistent with the decision of a court which is otherwise binding on him or her" (as per Lord Neuberger).

However, the Supreme Court also held that it should be possible for the Privy Council itself to rule that the Supreme Court (or House of Lords) or Court of Appeal was wrong and so the Privy Council decision should be followed. Accordingly, where an appellant invites the Privy Council to depart from a decision of the Supreme Court/House of Lords or Court of Appeal, the registrar of the Privy Council will draw this to the attention of the President of the Privy Council: "The President can then take that fact into account when deciding on the constitution and size of the panel which is to hear the appeal, and, provided that the point at issue is one of English law, the members of that panel can, if they think it appropriate, not only decide that the earlier decision of the House of Lords or Supreme Court, or of the Court of Appeal, was wrong, but also can expressly direct that domestic courts should treat the decision of the Privy Council as representing the law of England and Wales".

In reaching this decision, the Supreme Court took into account the fact that the President of the Privy Council is also the President of the Supreme Court and that the panels of the Privy Council normally consist of Justices of the Supreme Court.

Da Costa v Sargaco: Whether judge had been entitled to hold insurance claim was fraudulent and to bar a party from hearing the evidence of another party

At first instance, the judge held that the claimants' insurance claim was fraudulent. She also ordered that each claimant be excluded from court whilst the other was giving evidence. The claimants appealed. The Court of Appeal has now held as follows:

  1. The judge had not erred in failing to have regard to the Court of Appeal case of Hussain v Hussain and Aviva (see Weekly Update 38/12). That case may be of interest but it does not establish what inferences a court may draw where fraud is alleged but there is no direct evidence connecting the parties alleged to be in a fraudulent conspiracy: "what inferences are appropriate depends entirely on the particular facts of the particular case".
  2. However, the judge did not make sufficient findings, or provide sufficient reasoning, to substantiate the fraud finding which she made. Although the judge's conclusion that the claimants had failed to establish their claim for damages was allowed to stand, that alone did not justify a finding of fraud. Even a finding that the accident had not occurred at all would not have necessarily led to a finding of fraud. Accordingly, the appeal was allowed.
  3. The Court of Appeal found that there is no absolute requirement that, in order for a party to have a fair trial (in accordance with Article 6 of the ECHR), he or she must have the opportunity to be present personally throughout the entire hearing. Although it may be the starting point that a party should be present, there can be situations where he or she can be excluded eg due to unruly behaviour.

In this case, though, there had been no justification for excluding the claimant. Nevertheless, that was not automatically fatal to the fairness of the trial. Here, the claimants were on the same side and represented by the same counsel and were telling essentially the same story: "the first claimant did lose the opportunity to learn from observing the second claimant giving evidence what to expect when it came to his turn, but then someone has to go first in any event and a claimant will not usually have the opportunity to observe before giving evidence". Accordingly, a fair trial had taken place.

Le Guevel-Mouly v AIG: Whether English court should order insurance claim to be heard in Scottish court, on the basis that it was the more appropriate forum

Where a Member State has jurisdiction under Regulation 1215/2012, that court cannot stay the action on the basis that another Member State court is the more appropriate forum (forum conveniens). However, it was recently confirmed in Cook v Virgin Media (see Weekly Update 46/15) that a forum conveniens argument can still be run in a domestic case (ie involving the different legal jurisdictions of the United Kingdom). The issue in this case was whether a stay should be ordered.

The case involved a claim from French nationals for an accident caused by a French driver whilst driving in Scotland and insured by an English insurer. The claimants had a direct right of action against the insurer under the Fourth Motor Insurance Directive, and there was no dispute that the claim was governed by French law. Under the Regulation, the claimants could choose to sue the insurer in either France or the UK, and they chose the UK. The insurer sought to argue that Scotland was the most appropriate forum because the accident and damage occurred there. The judge held that that was a factor of little weight, given that liability was not in issue. He noted that where English jurisdiction is founded on right, it is for the defendant to show that another forum is clearly more appropriate. The insurer had not done that here and so the action was not stayed.

L R Avionics v Federal Republic of Nigeria: State immunity and enforcing an award which has been converted into a judgment

The claimant obtained an arbitration award in its favour against the Federal Republic of Nigeria. It also subsequently obtained a judgment from the Nigerian Federal High Court ordering the Federal Republic to pay the sums awarded in the arbitration. When the Federal Republic did not comply with the Nigerian judgment, the claimant sought to enforce both the award and the judgment in England.

Section 9 of the State Immunity Act 1978 provides that "where a state has agreed in writing to submit a arbitration, the state is not immune as respects proceedings in the courts of the UK which relate to the arbitration".

The Supreme Court in NML Capital v Republic of Argentina (see Weekly Update 25/11) confirmed that proceedings to enforce an award under section 101 of the Arbitration Act 1996 are "proceedings which relate to the arbitration" and so do not attract immunity. Accordingly, the claimant was entitled to register the award for recognition and enforcement. However, enforcement of the Nigerian judgment was a different matter and was of importance because it is the judgment, and not the award, which carries interest. The judgment could not be recognised and enforced under section 101 because it is a judgment and not an award. However, the English court has a discretion to enforce the judgment under section 9 of the Administration of Justice Act 1920.

Males J held that the defendant was not immune and the judgment should be enforced under the 1920 Act. That was because just as an application to enforce an arbitration award is a proceeding which relates to the arbitration, so too is an application to enforce a judgment which is in effect an award which has been converted into a judgment (under a foreign statutory provision equivalent to section 66 of the Arbitration Act 1996). Accordingly, this is all part of the process of enforcement of an award, and so the reasoning in NML is equally applicable to enforcement of such a judgment.

However, on the facts, the claimant was unable to prove that the relevant property against which enforcement was sought was in use for commercial purposes.

(Re)insurance Weekly Update 26- 2016

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.

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Nigel Brook
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