UK: Court of Appeal considers application of the doctrine of “fraudulent devices

    In Versloot Dredging BV v HDI Gerling Industrie Versicherung AG (The DC Merwestone) ([2014] EWCA Civ 1349) the appellant shipowners appealed a decision made on the basis of the fraudulent devices principle discussed obiter in the case of Agapitos v Agnew (The Aegeon) (No.1) ([2002] EWCA Civ 247) that they could not recover losses from the respondent hull and machinery underwriters. The Court of Appeal chose to apply The Aegeon and dismissed the appeal.

    At first instance Mr Justice Popplewell found that the shipowners’ claim resulting from flooding of the engine room had been supported by a letter containing a deliberate misrepresentation to induce acceptance of the claim (a fraudulent device), and following the extension of the common law rule that an insured who makes a fraudulent claim forfeits any lesser claim which he could properly have made, it was held that the entire claim was forfeit even though, in the circumstances, such a sanction was disproportionately harsh. (See our previous blog on the High Court decision.

    It was argued by the appellants (amongst other things) that (1) the special common law rule of ‘law of forfeiture’ on a fraudulent insurance claim should not be extended to fraudulent means or devices, and (2) such application was a disproportionately harsh sanction which produced a manifest injustice in violation of Article 1 of the First Protocol of the Human Rights Act 1998.

    The Court of Appeal held, following The Aegeon, that as a fraudulent device is a sub-species of a fraudulent claim, the application of the common law rule to both fraudulent claims and fraudulent devices employed in support of those claims provided “a coherent whole”. There was also a public policy justification for the dual application in that insurers are entitled to protection from either type of fraud, and the scope of the rule should not be limited for fear that unscrupulous insurers might assert a fraudulent device without proper basis for doing so.

    Upon consideration of the Human Rights Act 1998, it was further held that forfeiture of the entire claim (even if that claim was otherwise valid) was a just and proportionate response and did not infringe the shipowners’ Article 1 rights. The aim of the fraudulent device doctrine was to “deter fraud in the making of claims and to frustrate any expectation that, if the fraud fails, the fraudster [would] not lose out.” It also protected insurers from the risks inherent in the imbalance between the information available to the insured and to the insurers. Since deterrence was a legitimate aim, the fact that forfeiture was a harsh sanction did not mean that it was disproportionate.

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