Versloot Dredging BV and another v HDI Gerling Industrie Versicherung AG and others (The 'DC Merwestone')  EWCA Civ 1349
This is an appeal from a judgment of Poppelwell J. The claimants were owners of the DC Merwestone, a vessel, insured under a Hull and Machinery time policy by the defendant underwriters. The cause of loss was crew negligence consisting of a failure to close the sea suction valve and drain a pump with the ultimate result that after the ice in the pump thawed, the engine room flooded causing damage to the engine itself. Insurers denied liability. At first instance, Poppelwell J determined that the policy responded to the loss but that the claim was forfeited by reason of a fraudulent means or device. The general manager of the vessel owners had made a false statement in relation to the circumstances of the loss. The judge applied the test (obiter) in Agapitos v Agnew (The Aegeon)  2 Lloyd’s Rep 42 as set out by Mance LJ. This test was that there would be a fraudulent claim where: a fraudulent device was directly related to the claim; the device was intended to promote the insured’s prospects of success; and the device would have tended to yield a not insignificant improvement in the assured’s prospects of success prior to any final determination of the parties’ rights. When this test was applied to the facts Poppelwell J found that there had been a fraudulent claim involving the use of fraudulent means and devices. The insured appealed.
The owners appealed on the basis that: the judge had erred in determining that: (1) the general manager’s statement was a fraudulent device; (2) the test in The Aegeon should not be followed; and, (3) the denial of recovery of a legitimate claim (even if the claim was supported by a fraudulent device) resulted in a deprivation of possessions under article 1 of the First Protocol to the European Convention of Human Rights (implemented under the Human Rights Act 1998).
Christopher Clarke LJ gave judgment for the Court of Appeal. The appeal was dismissed.
- The court at first instance had been right to conclude that the general manager’s statement was a fraudulent device; it served as a false representation.
- The law on fraudulent claims had been applied correctly. There was a long line of authority which established a special common law rule that any lesser claim (for a true amount) was forfeited where a fraudulently exaggerated claim was made. The rule rested on the duty of good faith applied to contracts of insurance. The duty applied also to fraudulent means and devices as these were sub-species of fraudulent claims. Further, the fraudulent assured should not be allowed to think that if the fraud did not work nothing would be lost. There was also sufficient public policy justification for protecting insurers from fraud. It did not matter that the consequences could be harsh for the insured.
- The rule did not contravene the Human Rights Act 1998. Although the sum payable under a policy was a possession within the Act, the rule pursued a legitimate aim by means proportionate to the aim sought.
This decision provides authoritative support for the existing approach to fraudulent devices and will be welcomed by underwriters.
For further information:
Versloot Dredging BV and another v HDI Gerling Industrie Versicherung AG and others (The 'DC Merwestone')  EWCA Civ 1349
Parker and Parker v. National Farmers Union Mutual Insurance Society Ltd  EWHC 2156
The first claimant (C1) was the owner of a house, which was insured in her name by The National Farmers Union Mutual Insurance Society Limited (NFU), the insurers, under a policy dated 6 July 2009. On 22 July 2009 the second claimant (C2), who was by then living with C1, was added as an assured. The house was damaged by fire on 6 December 2009, and a claim was made by C1. The insurers denied liability on a number of grounds: there was non-disclosure of a fraudulent claim by C2 in 2002 in respect of a stolen watch; there was non-disclosure of a fraudulent claim by both C1 and C2 in 2007 in respect of two stolen watches; C2 had deliberately set the fire in 2009; false documents relating to the lease of the property had been submitted in support of the claim; and there was breach of a policy condition which required documents. NFU counterclaimed for repayment of the sums paid for the earlier claims, for the cost of investigating the fraud and for a declaration that any sums payable to C1 could be recovered by way of subrogation from C2. Teare J held as follows.
- NFU did not have a non-disclosure defence against C1. (a) The 2002 claim by C2 had been fraudulent. (b) The 2007 claim by C2 had been fraudulent, but C1 had not been involved in the fraud. (c) The policy was composite and not joint. C1 and C2 had different interests in the property. C1 was the owner, and if C2 had any interest at all it was either some form of equitable interest or possibly in the rent payable under a lease to C1 and C2. Given that the rights of C1 and C2 were different, the policy could not be avoided against C1.
- The fire had been deliberately set by C2. However, C1 was not involved in the fraud and the fact that the policy was composite meant that she was not prevented from recovering.
- False documents were not submitted in respect of the fire, so on the facts there was no argument that C2 had submitted false documents as agent for C1 so that C1’s claim would be lost.
- The insurers could rely upon the defence of breach of condition. (a) The general condition “To qualify for benefit you …. must keep to the terms and conditions of the policy” rendered the claims conditions a condition precedent to liability, and that applied to the obligation on C1 “to provide all the written details and documents that [the insurers] ask for”. (b) C1 was in breach of that condition, by refusing the insurers’ request to provide bank statements to evidence the availability of funds to rebuild the property. (c) The condition was not void under the Unfair Terms in Consumer Contracts Regulations 1999. The term did not cause a significant imbalance in the parties’ rights under the contract to the detriment of C1: the insurers were entitled to ask for documents which were in C1’s possession as long as they acted reasonably; under ICOBS 8.1 the insurers could not reject a claim unreasonably; and the general condition was expressed in plain, intelligible language.
- ICOBS 8.1.1R, which prevents an insurer from unreasonably rejecting a clam, did not take effect as an implied term in the policy, although they were legally binding. In the present case the breach of condition was connected to the loss, and reliance on the condition was not unreasonable in that C1 had been informed of the consequences of no-compliance.
- Had it been necessary to decide the point, the insurers would have had a subrogation claim against C2. C2 faced liability for damaging C1’s property, and the insurers would have been entitled to exercise subrogation rights against C2.
- The insurers’ counterclaim would be upheld. (a) The insurers were entitled to repayment of the sums paid in respect of the earlier fraudulent claims, with compound interest. (b) The insurers were entitled to damages representing the costs of investigating the fraudulent claim, with simple interest.
- If the insurers were liable, the diminution in the value of the house after the fire was some £425,000. As that was less than the agreed costs of reconstruction, that was the sum that would have been payable.
For further information: Parker and Parker v National Farmers Union Mutual Insurance Society Ltd  EWHC 2156
Ma Kim Ying v. Manulife (International) Ltd  HKCFI 941
Mr Wong Shiu Tong applied for a life policy on 12 July 2004, and a policy was issued backdated to 1 July 2004 with Mr Wong as policyholder and his wife as sole beneficiary.
The policy contained an incontestability clause which stated: “The Owner’s or the life insured’s failure to disclose any fact or their misrepresentation of any fact within their knowledge that is material to the insurance (and it is not disclosed by the other party) will not, in the absence of fraud, render this policy voidable by the company after it has been in force during the life insured’s lifetime for 2 years from its date of issue or date of reinstatement …”.
Mr Wong died on 14 May 2007 from a condition which he had not disclosed to the insurers. The Court held that the non-disclosure had been fraudulent, that the facts withheld were material, that the underwriter had been induced to write the policy when it would otherwise have not been written and that the incontestability clause did not provide a defence. In addition, the assured was in breach of a warranty stating that the answers had been given to the best of his knowledge and belief.
Liberty Insurance (Pte) v Argo Systems FZE  EWCA Civ 1572
The assured entered into a contract for its floating casino to be towed from the US Gulf to India. The towage contract (Towcon), which was in standard form, stated that the tugowner would not be liable for any loss or damage sustained by the tow. By a voyage policy, dated 11 March 2003, on the terms of the Institute Voyage Clauses 2003, the defendant insurers agreed to insure the assured against total loss caused by perils of the seas. The policy, which was governed by English law, contained a warranty stating “no release, waivers or ‘hold harmless’ given to Tug”. The sum insured was US $1,225,000 and the premium was US$160,000. The vessel sank on the twelfth day of the voyage.
The insurers obtained a copy of the Towcon after the casualty, and on 18 July 2003 the insurers’ US attorneys sent a letter stating that the insurers “hereby den[y] coverage, for claims by the assured arising from the sinking”. A variety of defences were pleaded, including: failure to prove an insured peril; breach of a weather warranty; and misrepresentation of six matters. There was no mention of release, waivers or the hold harmless warranty. The letter concluded with the statement that the insurers “reserve the right to alter [their] position in light of discovery of previously undisclosed information which would materially alter the facts and circumstances presently known ... the foregoing is without prejudice to all the remaining terms and conditions of the policy, along with any other defences which may be discovered after, further investigation.”
The assured commenced proceedings against the insurers and the brokers in Alabama. The insurers did not rely upon breach of the warranty, and they were removed from the proceedings. The assured’s claim against the brokers subsequently failed. The assured commenced proceedings against the insurers in England, and four preliminary issues were raised before the court. These were answered as follows:
- There was breach of warranty, the warranty applied to standard “hold harmless” terms and not just to non-standard terms.
- The insurers were estopped from relying upon breach of warranty by reason of their failure to plead the breach for seven years, in particular by not alerting the assured to that possible defence when the claim against the brokers was brought and also by the terms of the reservation of rights in the letter of July 2003 which referred only to unknown matters.
- The insurers had waived the right to avoid the policy for misrepresentation, in that they had only ever purported to deny coverage and not to avoid, and they had also failed to return the premium to the assured.
- The insurers’ argument that they were entitled to damages for misrepresentation under section 2(1) of the Misrepresentation Act 1967 even though they had lost the right to avoid was not “bad in law”, although further argument on the point was necessary.
The insurers appealed based on the question as to whether they had lost the right to rely upon breach of warranty. The Court of Appeal reversed the trial judge and held that there had not been any waiver by estoppel:
- In the case of breach of warranty, the risk terminated automatically so there was no possibility of waiver by affirmation. The only form of waiver was waiver by estoppel, which required an unequivocal representation and reliance.
- There had not been any unequivocal representation that the hold harmless warranty would not be relied upon. The words “The foregoing is without prejudice to all the remaining terms and conditions of the policy” clearly indicated that the insurers were reserving the right to rely upon any remaining terms and conditions in the future, so that there was no representation let alone an unequivocal one. Further, the failure by the insurers to advert to the warranty for some seven years did not amount to a representation. The general rule was that silence did not give rise to a representation let alone an unequivocal representation.
For further information: Liberty Insurance PTE Ltd & Anor v Argo Systems FZE  EWCA Civ 1572 (15 December 2011)