Farewell to the “Fraudulent Devices” Doctrine!

The recent decision of the Supreme Court in Versloot Dredging BV v. HDI Gerling Industrie Versicherung (The DC Merwestone) [2016] UKSC 45 has hit the insurance market like a bombshell! For more than a decade, it has been assumed that if a fraudulent device (such as a “lie”) is used to promote an honest claim, as long as the device used is material in the sense that it is likely to provide an advantage to the assured in securing a settlement, the claim will be treated as a “fraudulent” one. The Supreme Court ruled with a majority (4:1) that this is not the case!

The facts are relatively straightforward. The assured’s vessel, The DC Merwestone, suffered a flooding incident in January 2010. The incident resulted in irreparable damage to her engine, located at the aft end, even though water ingress was through the bow thruster space at the forward end of the vessel. The assured claimed from its hull insurer for the cost of replacing the damaged engine. The coverage defences put forward by the underwriters were rejected by the first instance judge, Popplewell, J, but he held that the assured had forfeited its otherwise valid claim as he used fraudulent devices in advancing said claim. During the casualty investigation, the underwriters’ solicitors sought the assured’s explanation for the ingress, its spread from the bow thruster room to the engine room and the reason why the crew were unable to control it using the vessel’s pumps. The assured’s General Manager responded in a letter which contained a representation that the crew had reported that they had heard a bilge alarm (which would have alerted the crew to the flooding) at noon on the day of the casualty but had failed to investigate the alarm on the basis that its sounding had been attributed to the rolling of the vessel. The representation was untrue in that the crew had never heard or reported a noon alarm and had never given an explanation for not investigating. This representation was held to be a reckless untruth.

The majority of the Court – Lord Sumption, Lord Clarke, Lord Hughes and Lord Toulson – appreciating that this is essentially a policy question considered it to be “a step too far” and “disproportionately harsh” to deprive an assured of his claim by reason of his fraudulent conduct if at trial years later it turns out that the fraudulent device used at the claims stage had been unnecessary because the claim was in fact always recoverable. Their Lordships seem to be influenced by the fact that an assured utilising fraudulent devices to advance his claim still has a genuine belief in the accuracy of the claim whilst the same cannot be said for an assured who creates the loss in order to make a claim or who exaggerates the extent of his claim. It is worth noting that Lord Mance delivered a dissenting judgment arguing that “Abolishing the fraudulent devices rule means that claimants pursuing a bad, exaggerated or questionable claim can tell lies with virtual impunity.”

This decision means that an insurer will not be able to defend against a claim in a case where the assured uses fraudulent invoices to secure a quick settlement for his claim (see, for example, Sharon’ Bakery (Euorope) Ltd v. AXA Insurance UK plc [2011] EWHC 210 (Comm)) unless, of course, the policy contains an express clause indicating that the claim will be forfeited if promoted by making use of fraudulent devices. Such express terms are common in fire policies but perhaps, in the light of this decision, insurers should consider incorporating them into marine and energy policies as well. Institute Hull Clauses 2003 could lead the way. Clause 45.3 stipulates:

“It shall be a condition precedent to the liability of the Underwriters that the Assured shall not at any stage prior to the commencement of legal proceedings knowingly or recklessly
… mislead or attempt to mislead the Underwriters in the proper consideration of a claim or the settlement thereof by relying on any evidence which is false
… conceal any circumstance or matter from the Underwriters material to the proper consideration of a claim or a defence to such a claim.”

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Professor Barış Soyer

Professor Soyer was appointed a lecturer at the School of Law, Swansea University in 2001 and was promoted to readership in 2006 and professorship in 2009. He was appointed Director of the Institute of Shipping and Trade Law at the School of Law, Swansea in October 2010. He was previously a lecturer at the University of Exeter. His postgraduate education was in the University of Southampton from where he obtained his Ph.D degree in 2000. Whilst at Southampton he was also a part-time lecturer and tutor. His principal research interest is in the field of insurance, particularly marine insurance, but his interests extend broadly throughout maritime law and contract law. He is the author of Warranties in Marine Insurance published by Cavendish Publishing (2001), and an impressive list of articles published in elite Journals such as Lloyd’s Maritime and Commercial Law Quarterly, Berkley Journal of International Law, Journal of Contract Law and Journal of Business Law. His first book was the joint winner of the Cavendish Book Prize 2001 and was awarded the British Insurance Law Association Charitable Trust Book Prize in 2002, for the best contribution to insurance literature. A new edition of this book was published in 2006. In 2008, he edited a collection of essays published by Informa evaluating the Law Commissions' Reform Proposals in Insurance Law: Reforming Commercial and Marine Insurance Law. This book has been cited on numerous occasions in the Consultation Reports published by English and Scottish Law Commissions and also by the Irish Law Reform Commission and has been instrumental in shaping the nature of law reform. In recent years, he edited several books in partnership with Professor Tettenborn: Pollution at Sea: Law and Liability, published by Informa in 2012; Carriage of Goods by Sea, Land and Air, published by Informa in 2013 and Offshore Contracts and Liabilities, published by Informa Law from Routledge in 2014. His most recent monograph, Marine Insurance Fraud, was published in 2014 by Informa Law from Routledge. His teaching experience extends to the under- and postgraduate levels, including postgraduate teaching of Carriage of Goods by Sea, Transnational Commercial Law, Marine Insurance, Admiralty Law and Oil and Gas Law. He is one of the editors of the Journal of International Maritime Law and is also on the editorial board of Shipping and Trade Law and Baltic Maritime Law Quarterly. He currently teaches Admiralty Law, Oil and Gas Law and Marine Insurance on the LLM programme and also is the Head of the Department of Postgraduate Legal Studies at Swansea.

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