Court Of Appeal Strongly Supports The Fraudulent Devices Rule

At first instance, Popplewell J found that the insured had a valid claim but that the entire claim was forfeited because the insured had used fraudulent devices (having recklessly misrepresented to insurers that an alarm had been heard by the Master of the ship). In reaching his decision, the judge had expressed some doubts about the materiality test for fraudulent devices, but had said that he felt bound to follow the (what he termed obiter) comments by Mance LJ in Agapitos v Agnew (The Aegeon) (No 1) [2002] EWCA Civ 247 (see further below). The owners appealed and the Court of Appeal has now held as follows:

1) The judge had been entitled to find that the insured had used fraudulent devices. The insurers could reasonably expect that answers to their questions would be based on actual inquiry rather than hypothesis. Nor did it matter that the misrepresentation was likely to be immediately falsified when the insurers spoke to the crew.

2) The correct test for fraudulent devices was that set out by Mance LJ: are the fraudulent devices (a) directly related to the claim and intended to promote it; and (b) if believed, will they yield a not insignificant (or immaterial or insubstantial) improvement in the insured's prospects (although Clarke LJ preferred the formulation that they are intended to produce "a significant" improvement in the insured's prospects)? The decision in "The Aegeon" should be followed as a matter of ratio by the Court of Appeal.

3) The Court of Appeal held that there were "several powerful reasons" for this conclusion: "The Aegeon" is authoritative, if not binding; a fraudulent device is a sub-species of a fraudulent claim, founded upon the underlying duty of utmost good faith; and there is a public policy justification for the rule, in order to protect insurers from fraud. As Clarke LJ observed: "The effect of the rule is that if you lie to your insurer in respect of anything significant in the presentation of the claim you will not recover anything from him. Once it is accepted, as it has long been, that an assured who fraudulently exaggerates his claim forfeits the whole of it - so that a fraudulent claimant can lose almost all of his otherwise valid claim (say 95%) - there seems to me no satisfactory reason in principle why the user of a fraudulent device should not lose 100%".

4) The Court of Appeal also referred to the Law Commissions' recent review of this issue. It was noted that the final Insurance Bill presented...