The importance of being honest – the fraudulent device rule in insurance claims
It is clear that an insured who makes a fraudulent claim – being one which is either entirely false or has been intentionally exaggerated – will forfeit its right to that claim (including any genuine part thereof in respect of an exaggerated claim). The recent Court of Appeal decision in Versloot Dredging BV v HDI Gerling confirmed that, under English law, an insured who employs a fraudulent device to advance an otherwise good claim will also forfeit its right to the entire claim.
The facts of Versloot
In January 2010 the engine room of the vessel the "DC Merwestone" flooded, causing extensive damage to the ship's engine. The Insured brought a claim for the loss and at first instance Popplewell J rejected each of Insurers' coverage arguments, essentially finding that the claim was good. The Judge found, however, that cover under the policy had been forfeited by the Insured because its general manager, Mr Kornet, had made a false representation during the claims process.
Mr Kornet had sent a letter to Insurers in April 2010 in which he stated that the Bowthruster bilge alarm had sounded on the day of the flooding but had been mistakenly ignored by the ship's crew. At trial it became clear that the alarm had not in fact sounded. Popplewell J found that Mr Kornet genuinely believed his account to have been a "realistic explanation of events" but had been reckless as to the truth of his representations and had made no attempt to check with the crew that his representations were correct.
The Insured appealed the decision on the basis that to extend the forfeiture doctrine, which applies to fraudulent claims, to fraudulent "devices" employed in support of a valid claim was disproportionate. The Court of Appeal upheld Popplewell J's first instance decision. The Court was influenced by the fact that parties to an insurance contract have a "special relationship" which is governed by the duty of utmost good faith, and the fact that insurers are particularly vulnerable to fraud.
Prior to the decision in Versloot the extension of the forfeiture doctrine to fraudulent devices had been a matter of some uncertainty, having been approved obiter by Lord Mance in Agapitos v Agnew. Following the Court of Appeal's decision it is now clear that, under English law, an Insured who employs a fraudulent device will forfeit its claim.
The Court acknowledged that Mr Kornet had become
"increasingly frustrated that the Underwriters were not paying his claim, particularly because the Owners needed money to secure the release of the Vessel from the repairs."
Unfortunately for policyholders this is frequently the case, with insurers often taking months or even years to investigate a claim, leaving the policyholder often unable to rebuild their business. The position is made all the more frustrating for policyholders who feel they have little leverage against insurers under English law, which does not recognise a claim for damages as a result of late payment of a valid claim.
The decision in Versloot demonstrates, however, that such frustrations will not be an excuse for policyholders who must adopt an honest approach to the claims process and comply with their duty of utmost good faith.
An appeal has been lodged with the Supreme Court.
For more information please contact Harriet Stokes, Solicitor at Michelmores LLP on +44(0)20 7659 4626 or firstname.lastname@example.org