Insurance & Reinsurance - 'Perils Of The Seas' And Fraudulent Devices

The recent decision of Mr Justice Popplewell in Versloot Dredging BV v. HDI Gerling and others (The DC Merwestone) [2013] EWHC 1666 (Comm)) in the Commercial Court is of considerable significance to marine insurers and non-marine insurers alike, since it involves a detailed examination and hostile critique of the development and application of the concept of "fraudulent devices" in the context of an insurance claim.

The case involved the defence by hull and machinery underwriters of a claim for the cost of replacing a vessel's engine following a flooding incident in the Baltic in January 2010. The policy was on the Institute Time Clauses – Hulls 1.10.83, with the Additional Perils Clause. Underwriters ran three defences, namely (1) that the damage to the engine was not caused by an insured peril; (2) that the damage to the engine was attributable to the unseaworthiness of the vessel on sailing, with the privity of the assured; and (3) that, in any event, even if the claim was recoverable in principle, the assured had forfeited its claim by reason of the employment of fraudulent devices in the presentation of the claim.

Overview of the Casualty

The circumstances of the casualty were stark. The vessel called at Klaipeda, Lithuania to load a cargo of scrap metal in January 2010. Whilst she was there, the crew used the vessel's emergency fire pump and, having done so, negligently failed to purge the pump of water and close the sea valve. In consequence, water remained in the pump. Due to the extremely low ambient temperature (minus 35°C), the water in the pump froze, and expanded as it did so, thus causing the pump casing to crack and the strainer lid in the pump housing to become distorted. The crack and the distortion created a direct opening between the sea water outside the vessel and the interior of the vessel's bowthruster space, a supposedly watertight compartment at the forward end of the ship. Whilst the vessel remained at the loadport, there was no ingress of water into the bowthruster space because the ice created a watertight barrier. However, when the vessel sailed from the loadport en route to Bilbao, she passed through warmer waters, and the ice melted, with the inevitable consequence that there was an ingress of water into the bowthruster space.

The ingress into the bowthruster room should not have been a problem because that space was supposed to be a watertight space fitted with a bilge alarm which, all being well, should have alerted the crew to any water ingress. Unfortunately, however, the bulkhead between the bowthruster space and the duct keel (a tunnel running the length of the vessel) was not watertight. The water was therefore able to enter the duct keel. The duct keel itself should have been watertight at the aft end of the vessel but, again, it was not, with the consequence that the water was able to enter the engine room. It was admitted that the vessel was unseaworthy with regard to the lack of watertight integrity at both ends of the duct keel. Due to the positioning of the alarms, the crew was not alerted to the ingress of water into the engine room until it had reached a level of about one metre or more above the floor plates in that space.

At that point in time, the crew sought to deploy the vessel's pumps, which had a theoretical pumping capacity of the order of 300 tonnes per hour, and as such, should have been capable of stemming the ingress (determined to...