Fraudulent devices rule effectively abolished in UK shipping case

In brief - Insurers should consider effect of the Versloot decision on marine insurance in Australia

The Supreme Court of the United Kingdom has refined the scope of the fraudulent claims rule in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2016] UKSC 45 by determining that the rule does not apply to collateral lies told by the insured to embellish their claim but which are otherwise immaterial to the insured's right of recovery under the policy.

We have previously reported on the first instance decision of Popplewell J in the Commercial Court in our November 2013 article Court rejects insurance claim of ship owners because of "fraudulent device" used in making claim, and the Court of Appeal decision which confirmed the fraudulent device rule adopted at first instance in our November 2014 article Fraudulent devices rule confirmed in shipping case by England's Court of Appeal. The majority of the Supreme Court has now overturned the decision of the Court of Appeal and effectively abolished the fraudulent devices rule.

Director lies about bilge alarm sounding to reassure insurers about vessel's seaworthiness and functioning alarms

The insured claimants were the owners of the cargo vessel "DC MERWESTONE" which was incapacitated by a flood in her engine room which damaged the main engine beyond repair.

The owners of the vessel made a claim for €3,241,310.60 under a marine insurance policy which extended to loss attributable to crew negligence (unless the owners were personally guilty of want of due diligence) and unseaworthiness (unless the owners were personally privy to it). The cause of the damage was found to be a combination of crew negligence, contractor's negligence and unseaworthy pumps. However, the owners were not personally guilty of want of due diligence nor were they privy to the unseaworthiness. Accordingly, the loss was covered under the policy (at [59]), with the proximate cause being the perils of the sea (namely the fortuitous entry of sea water during the voyage).

The insured was asked by insurers to explain the ingress of water into the engine room and the pump's failure to control it. Importantly, one of the owners' directors asserted that the bilge alarm had sounded nine hours before water was seen under the floor plates of the engine room and that no action had been taken by the crew because it was attributed to the vessel rolling in heavy seas. This was a lie which was intended to reassure the insurers...