Versloot Dredging v HDI Gerling Industrie Versicherung - The D C Merwestone
Versloot Dredging BV & Anor v HDI Gerling Industrie Versicherung AG & Ors – the D C Merwestone
 EWCA Civ 1349: Clarke and Vos LLJ and Sir Timothy Lloyd: 16 October 2014
MARINE INSURANCE: WHETHER OTHERWISE VALID CLAIM BY OWNERS FORFEIT DUE TO OWNERS' FRAUDULENT DEVICE: WHETHER DEFENCE OF FRAUDULENT DEVICE: CONTRARY TO ARTICLE 1 OF THE FIRST PROTOCOL TO THE EUROPEAN CONVENTION ON HUMAN RIGHTS EFFECTED IN ENGLISH LAW BY THE HUMAN RIGHTS ACT 1998
Chirag Karia QC and Tom Bird, instructed by Holman Fenwick Willan, for the appellant shipowners
Colin Edelman QC and Ben Gardner, instructed by Ince & Co, for the respondent insurers
In this judgment, the Court of Appeal upheld the decision at first instance and - in the context of insurance claims - applied the full rigour of the fraudulent devices doctrine as expressed (obiter) in the case of The “Aegeon”. It declined to introduce any element of proportionality in its application. The Court also held that the forfeiture of the claim as a consequence of the application of the doctrine was not contrary to Article 1 of the European Convention on Human Rights as enacted into English law.
This case note is based on an article that appeared in a ‘Briefing’ published by the London solicitors Waltons & Morse, authored by Kish Sharma, a barrister at the firm, and Christopher Chatfield, a partner in the firm
The appellant Owners of the “D C Merwestone” (the “Vessel”) had insured the Vessel under a time policy (the “Policy”) for 12 months at 1 April 2009. On 28 January 2010 the Vessel was off the coast of Poland, shortly after commencing a laden voyage from Klaipeda, Lithuania, to Bilbao, Spain, when she suffered an ingress of water, which flooded the engine room and incapacitated the Vessel. The Vessel's main engine was damaged beyond repair, and the Owners claimed €3,241,310.60 under the policy for the resultant loss.
The cause of the ingress of water was not substantially in dispute: when the Vessel arrived at Klaipeda, the weather was exceptionally cold (between minus 10°C and minus 35°C) and the crew used the Vessel's emergency fire pump and lines to blast away ice chipped off from the hatch covers. Seawater remained in the emergency fire pump, and when the water froze and expanded, the expansion caused a crack in the casing of the emergency fire pump and distorted the bar restraining the lid on the filter at the inlet side of the pump. The lid no longer formed a seal with the filter, and as the ice melted, seawater leaked in through the crack and the filter.
A lack of watertight integrity of the bulkheads within the Vessel allowed the water from the emergency fire pump to seep through more than half the length of the Vessel and into the engine room. Further, the pumping system in the engine room was defective and the pumps were unable to cope with the rate of ingress of water (which they would have done had they not been defective).
On 21 April 2010, Chris Kornet, a director of Rederij Chr. Kornet & Zonen B.V., managers hired by the Owners of the Vessel (the “Managers”), sent a letter to the Underwriters' solicitors stating (falsely) that the bilge alarm had gone off at about noon on 28 January 2010; that the alarm had been ignored because it was attributed to the rolling of the vessel in heavy weather and that he had been told both these things by the Master or crew. Chris Kornet repeated in substance the same false statements in a letter dated 27 July 2010 to the first Defendant as lead underwriter. The aim of the statement was to slant the evidence towards showing crew negligence and away from the possibility that it was proximately caused by the excluded perils of Owners’/Managers’ want of due diligence or from unseaworthiness of the Vessel to which the assured were privy.
In response to the Owners' claim, the Defendant underwriters denied that the loss was caused by an insured peril; argued that the loss was caused by the unseaworthiness of the Vessel to which the assured was privy and, finally, contended that the claim was forfeit because the presentation of the claim was supported by fraudulent statements.
The judge at first instance, Popplewell J., found that the loss had been caused by an insured peril but, “with manifest reluctance”, he had also held that the insurers had a good defence to an otherwise perfectly good claim on the grounds that the assured had used a fraudulent device in support of it.[]
In so finding, Popplewell J was applying the “tentative view” of Mance LJ. in Agapitos v Agnew (The “Aegeon”) (fn.1), that the rule as to fraudulent claims - “where the insured claims, knowing that he has suffered no loss, or only a lesser loss than that which he claims (or is reckless as to whether this is the case)” - should apply to the situation where the “the insured believes that that he has suffered the loss claimed, but seeks to embellish the facts surrounding the claim, by some lie”, which Mance LJ. termed the use of a “fraudulent device” . As with the making of a fraudulent claim, use of a fraudulent device would render an entire claim forfeit, even a portion of it that would otherwise have been good.
Popplewell J made no secret of his regret at the result: “To be deprived of a valid claim of Euros 3.2 million as a result of such reckless untruth, is in my view disproportionate”. Whilst considering himself bound to apply the doctrine of fraudulent devices, he in fact appeared to be strongly advocating a more flexible test of materiality whereby the Court would look at whether it was just and proportionate to deprive the assured of all of his substantive rights in respect of the claim, taking into account all the circumstances of the case, in particular the closeness of the connection between the fraudulent device and the valid claim. The Judge’s comments would appear to have been very much for the benefit of the Court of Appeal, to which an appeal had been allowed.
However, in the event, the Court of Appeal disagreed with the Judge on his view of the harshness and unfairness of the principle and resoundingly applied it.
The Court of Appeal Judgment
The Owners’ appeal necessarily related to the “fraudulent device” issue only, since they had won on all the other issues below.
Owners’ attacks on the Judge’s factual findings
Before coming to the legal issues raised, the Court of Appeal reviewed and upheld the Judge’s factual findings as follows: (a) there had been a misrepresentation as to what the crew had reported; (b) the relevant director had acted with the requisite “recklessness” ; (c) the statement that the crew had reported the earlier bilge alarm was material (in the sense of being directly related to the claim and intended to promote it) and (d) the director honestly believed that the alarm had actually sounded, and he did not make this statement recklessly (as opposed to his statement that the crew had reported the alarm, which had been made recklessly) .
The appeal on the law
As to the law, the Court of Appeal characterized the appeal as raising two issues: (a) whether the rule about fraudulent claims applies to fraudulent devices; and (b) if so, a new issue (not raised in the court below), as to whether the rule about fraudulent devices could “stand” in the light of Article 1 of the First Protocol to the European Convention on Human Rights (“the ECHR”) effected in English law by the Human Rights Act 1998 (the “HRA”). This provision will here be referred to as “Article 1”.
Application of the “Aegeon”
With regard to the first legal issue, the Court recognised that the decision in the “Aegeon” was obiter and that none of the relevant authorities was binding on the Court of Appeal. Nevertheless, the Court held that there were “several [in fact six] powerful reasons” why that case should be applied by the Court of Appeal as a matter of binding ratio. These were that:
(1) The “Aegeon” was authoritative;
(2) The “fraudulent devices” doctrine shared the same basis (that is, the obligation of utmost good faith) as the rule as to fraudulent claims and the same rationale, that is, of deterring fraud on the insurer;
(3) It had the same public policy justification as the rule as to fraudulent claims;
(4) The Law Commissions of both Scotland and England in their recent reports considered the “fraudulent devices” doctrine and the “Aegeon” itself to be good law;
(5) Authority for the doctrine antecedent to the “Aegeon” could be found and
(6) The “Aegeon” had been cited “without disapproval” in a number of subsequent cases and n most leading textbooks.
The Court then went on specifically to consider the proportionality of the rule which had concerned the Judge so greatly. It noted that the question of proportionality had received no or only limited consideration in the authorities. However, the Court considered that it was precisely the draconian effect of the rule that gave the doctrine its deterrent effect and therefore its justification .
Did Article 1 strike down the doctrine of fraudulent claims?
The Court considered the second legal issue raised by the appeal, the effect of Article 1, which gives a person a right not to be deprived of its possessions. By section 6 of the HRA 1998, it is unlawful for a public authority, including a Court, to act in a way which is incompatible with an ECHR right. It was common ground between the parties that the Court should develop the common law so as to give effect to the ECHR; further the insurers accepted that the forfeiture of an insurance claim was an interference with the rights under Article 1.
The Court considered the relevant test set out in AXA General Insurance Ltd v HM Advocate (fn.2). It asked whether the rule “pursue[s] a legitimate aim by means which are legitimately proportionate to the aim sought to be realised”. There was no real dispute that the doctrine had a legitimate policy aim: deterring the making of fraudulent claims and frustrating any expectation that, if the fraud failed, the fraudster would not lose out. The Court concluded that the doctrine sought to secure this objective by proportionate means: it was only applicable in cases of fraud; and the relevant conduct would likely be a criminal offence; further, if the rule were not applied, this might encourage the commission of minor frauds in the expectation that they would not affect the legitimate element of the claim and the Court was keen to preserve the rule’s deterrent effect. Lastly, what was under consideration was not a legislative or administrative act, but the operation of a common law doctrine. This was an incident of a commercial relationship of a special character and this militated, for various reasons, against the application of the doctrine breaching Article 1.
The fraudulent device doctrine not left entirely intact?
The Court of Appeal did not, however, leave Mance LJ.’s formulation in the “Aegeon” wholly pristine. At para 165, Christopher Clarke LJ. took some issue with Mance LJ.’s statement that “the fraudulent device must have tended to yield a not insignificant improvement in the insured’s prospects of success prior to any final determination of the parties’ rights” . He expressed himself to be “not quite sure why the negative formulation was adopted, and [he] would prefer the requirement to demand a significant improvement in the insured’s prospects”. However, Christopher Clarke LJ. concluded that such a shift of language did not matter in this case, because the fraudulent device would have tended to produce a significant or even a substantial improvement in the insured’s prospects. However, Sir Timothy Lloyd, whilst agreeing with Christopher Clarke LJ. that the appeal should be dismissed on the facts and the law, made a point of stating that it was not necessary to decide this point in this case, and that he expressed no view on it. Vos LJ simply agreed with Christopher Clarke LJ.
In the event, the Court of Appeal declined to develop the law on forfeiture of an assured’s claim for use of a fraudulent device in the direction of proportionality, as seemed to be urged by Judge at first instance. The policy of dissuading fraud by assureds weighed paramount with the Court of Appeal judges. However, Christopher Clarke LJ.’s parting shot hints that the doctrine may become slightly attenuated in future, in that the Courts may require the device to yield a “significant or even a substantial” improvement in the insured’s prospects, rather than merely a “not insignificant” one.
Fn.1 Agapitos v Agnew  EWCA Civ 247
Fn.2  UKSC 46