100,000–150,000 whereas the assured valued the vessel at the outset of the contract as 1.8m. The insurer purported to avoid the contract for material misrepresentation but the assured argued that he had reasonable grounds to believe that the value was 1.8m. To support his claim the assured submitted documents such as a charterparty, invoices showing made to a shipyard for maintenance to render the ship seaworthy. The judge found that the assured had used fraudulent devices to support the claim since the signatures on some of the documents were forged and the invoices were fake.
It is worth mentioning that in the two recent occasions, while having found themselves bound by the extension of the rule to fraudulent means and devices, the judges expressed their regret for their decisions due to the harshness of the consequences reached in the cases in question. The first of these cases is Aviva Insurance Ltd v Brown80 wherein the assured insured his house against risks including subsidence and the costs incurred in rebuilding the house along with the cost of temporary accommodation if the house became uninhabitable due to subsidence. He made a claim under the policy for subsidence in 1989. A further claim was made in 1996. After some considerable delay, Aviva admitted the claim but the repair works were not carried out until 2008. Aviva paid the cost of repairs of £176,951.68. As part of the claim, Aviva also paid an amount in respect of alternative accommodation in the sum of £58,500. During negotiations regarding alternative accommodation the assured sent a letter to the loss adjusters appointed by the insurer with regard to a property No.38 which said ‘Please find enclosed details of a house that I consider will be suitable as alternative accommodation. I have spoken to the agents who have been in touch with the owner. Could you please obtain permission from the insurers that I can proceed to rent this house and that they will pay the deposit and rent.’ In the end this arrangement did not take place, the assured moved into another property for alternative accommodation. Eder J was persuaded that the assured acted fraudulently in putting forward No.38; in fact he owned the property and in his letter, he, in effect, represented that the owner was someone other than the assured himself. Eder J held that this was not ‘insubstantial’, ‘insignificant’ or ‘immaterial’.81 As a consequence, the assured’s entire claim was forfeited which entitled the insurer to recover its payment for alternative accommodation as well as the amount paid for the cost of repairs of the assured’s home as both were part of the same claim arising out of the subsidence at the assured’s home. Eder J recognised the harshness of this result but added that this was the inevitable result of the facts and the well-established policy of the law.82
More recently, in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG,83 the owners of DC Mervestone suffered an ingress of water which flooded the engine room, and incapacitated the vessel. The vessel’s main engine was damaged beyond repair. The claim by the owners under the policy is for the resultant loss in the sum of £3,241,310.60. The underwriters contended the claim was forfeit because the owners employed fraudulent devices in support of the claim when presenting it to underwriters in 2010 and 2011. It was alleged that K for the managers deliberately or recklessly gave a false narrative of the casualty in a letter to the underwriter’s solicitors. Arguably, he did that because he had been advised of the due diligence proviso and understood a need to distance the owners themselves from any fault in relation to the casualty, and was therefore keen to explain the quantity of water reaching the engine room by a narrative which involved the bilge alarms working but being ignored by the crew. Popplewell J found and the Court of Appeal approved84 that the false statement was directly related to the claim and intended to promote the claim. It met the limited objective element of the test of materiality that, if believed, it would have tended at that stage to yield a not insignificant improvement in the owner’s prospects of getting the claim paid.85 Popplewell J expressed his unwillingness to apply Mance LJ’s test in Agapitos v Agnew and proposed an alternative materiality test which is ‘the policy of the law should be to require at least a sufficiently close connection between the fraudulent device and the valid claim to make it just and proportionate that the valid claim should be forfeit’.86 Nevertheless, feeling obliged to do so, Popplewell J applied the materiality test as adopted in Agapitos v Agnew.87 The shipowner’s appeal was dismissed. At the Court of Appeal Christopher Clarke LJ found Agapitos v Agnew, although not binding, still ‘authoritative’.88
The controversy seems to derive from the fact that the claim is a genuine claim, when fraudulent means and devices are used to promote a claim, the assured does not claim any more than what he suffered. Applying the fraudulent claims rule to the use of fraudulent means and devices therefore may create very harsh consequences since the assured loses his entitlement for a genuine claim under the policy. This extension nevertheless may be found justifiable for the reason that in the case of the assured submitting a fake invoice to prove the claim, it is difficult for the insurer to be reassured as to the genuine amount of the loss. Then, it is possible to counter argue that upon discovery of fraudulent means and devices, a market rate for the subject matter insured might help ascertain the amount of the assured’s loss. As referred to above the fraudulent claims rule was justified by Lord Hoffmann in The Star Sea89 in the following words ‘The fraudulent insured must not be allowed to think: if the fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing.’ Lord Hoffmann’s concerns may well explain the logic behind the fraudulent claims rule but it does not equally apply to fraudulent means and devices because in the latter context, if he was permitted to recover despite the fraud, the assured would still recover the loss that he genuinely suffered, no more or no less than that as would have been observed in Aviva and Versloot above.
The law on fraudulent claims is currently subject to reform. The Law Commission found that the law was considered unclear and in need of consolidation.90 As referred elsewhere in this book, the Insurance Bill 2014 was introduced in parliament which included recommendation regarding fraudulent claims. The proposals are at present said to be likely to come into force in 2016. Section 11 of the Government Insurance Bill 2014 is in the following words:
Remedies for fraudulent claims
1 If the insured makes a fraudulent claim under a contract of insurance –
a) the insurer is not liable to pay the claim,
b) the insurer may recover from the insured any sums paid by the insurer to the insured in respect of the claim, and
c) in addition, the insurer may by notice to the insured treat the contract as having been terminated with effect from the time of the fraudulent act.
a) it may refuse all liability to the insured under the contract in respect of a relevant event occurring after the time of the fraudulent act, and
b) it need not return any of the premiums paid under the contract.
3 Treating a contract as having been terminated under this section does not affect the rights and obligations of the parties to the contract with respect to a relevant event occurring before the time of the fraudulent act.
4 In subsections (2)(a) and (3), ‘relevant event’ refers to whatever gives rise to the insurer’s liability under the contract (and includes, for example, the occurrence of a loss, the making of a claim, or the notification of a potential claim, depending on how the contract is written).
In their report the Law Commissions emphasised the need for certainty in remedy for fraudulent claims.91 Thus, the reform proposal contains only sections regarding remedies and clause 12 refers to the effect of a fraudulent claim where there is more than one assured.
It has been presented in this chapter that there are a number of anomalies regarding the fraudulent claims rule the most of which are:
1 A low threshold of the materiality test
2 Extension of the rule to fraudulent means and devices
The issues which have been settled by the case law are
1 Definition of fraud
2 The juridical basis of the rule which is not the duty of good faith as this view was rejected by the House of Lords in The Star Sea and at least twice more by the Court of Appeal in The Aegeon and AXA v Gottlieb
3 The assured’s motive in making a fraudulent claim is irrelevant, the judge has no discretion to adjust the claim but once fraud is proved to forfeit the whole claim
4 The fraudulent claims rule should be analysed contractually and if the assured’s fraudulent conduct goes to the root of the contract the insurer should be entitled to terminate the contract.