Marine Insurance - Supreme Court Ruling On 'Fraudulent Devices'

In Versloot Dredging BV and another v HDI Gerling Industrie Versicherung AG and others (2016), the Supreme Court found that it would be disproportionately harsh to the insured if a lie found to be irrelevant to the recoverability of the claim meant that the insured could not recover under the policy.

Facts

On the night of 28 January 2010, water flooded the engine room of the "DC MERWESTONE" and this resulted in irreparable damage to the engine. During the insurers' solicitors' investigation, a representative of the vessel's managers developed a theory that the bilge alarm had sounded at about noon on 28 January, but the crew had been unable to investigate or deal with the leak because of the rolling of the ship in heavy weather. In an email sent to the solicitors, he set out this theory but also pretended that he had been told about the alarm activation by the crew. In reality, he had not been told this by the crew and had no reason to believe that the crew would support it.

The reason for the lie was that he was frustrated by the insurers' delay in recognising the claim. The cause of the flooding was not yet known, and he believed that it would help the claim if the casualty could be blamed on the crew instead of attention being concentrated on the defective condition of the ship and on the possible responsibility of the owners. He had been advised that the wording of the Inchmaree clause in the Institute Time Clauses might afford a defence under the policy if the owners were found to have any responsibility for what happened.

At first instance, Popplewell J held that the loss was proximately caused by a peril of the seas and that the relevant part of the Inchmaree clause had no application to this peril. It followed that the owners had a valid claim for about € 3 million whether or not the crew had failed to act on the alarm activation. The lie told by the representative of the vessel's managers was irrelevant to the merits of the claim. Nevertheless, Popplewell J held that the claim was lost as a result of the lie and his decision was upheld by the Court of Appeal.

The Fraudulent Claim rule

If an insured makes a fraudulent claim, the insurer is not liable to pay the claim. That is the position at common law and under the Insurance Act 2015. It was common ground between the parties and confirmed to be indisputable by the Supreme Court that the rule operates to bar the whole of the policyholder's claim in situations where: 1) the claim is...