Versloot Dredging BV v HDI Gerling Industrie Versicherung AG; The DC Merwestone
| Jurisdiction | England & Wales |
| Judge | Lord Toulson,Lord Mance,Lord Clarke,Lord Sumption,Lord Hughes |
| Judgment Date | 20 July 2016 |
| Neutral Citation | [2016] UKSC 45 |
| Date | 20 July 2016 |
| Court | Supreme Court |
[2016] UKSC 45
Lord Mance
Lord Clarke
Lord Sumption
Lord Hughes
Lord Toulson
Appellants
Richard Lord QC Tom Bird Victoria Wakefield
(Instructed by Holman Fenwick Willan LLP)
Respondents
Colin Edelman QC Ben Gardner
(Instructed by Ince & Co)
Heard on 16 and 17 March 2016
( with whom Lord Clarke, Lord Hughes and Lord Toulson agree)
At common law, if an insured makes a fraudulent claim on his insurer, the latter is not liable to pay the claim. In relation to contracts concluded after 12 August 2016, the rule has been restated and its other consequences defined in section 12 of the Insurance Act 2015. The question at issue on this appeal is what constitutes a fraudulent claim. This is a controversial question at common law, which the Act of 2015 does not resolve. Three possible situations may be relevant. First, the whole claim may have been fabricated. In principle the rule would apply in this situation but would add nothing to the insurer's rights. He would not in any event be liable to pay the claim. Secondly, there may be a genuine claim, the amount of which has been dishonestly exaggerated. This is the paradigm case for the application of the rule. The insurer is not liable, even for that part of the claim which was justified. Third, the entire claim may be justified, but the information given in support of it may have been dishonestly embellished, either because the insured was unaware of the strength of his case or else with a view to obtaining payment faster and with less hassle. The present appeal is concerned with embellishments of this kind. They are generally called "fraudulent devices". The expression is borrowed from a standard clause avoiding contracts of fire insurance which was widely used in the 19th and early 20th centuries. But it is archaic and hardly describes the problem. I shall use the expression collateral lies, by which I mean a lie which turns out when the facts are found to have no relevance to the insured's right to recover. The question is whether the insurer is entitled to repudiate a claim supported by a false statement, if the statement was irrelevant, in the sense that the claim would have been equally recoverable whether it was true or false.
On the night of 28/29 January 2010, shortly after leaving Klaipeda in Lithuania with a cargo of scrap iron, the "DC MERWESTONE" was incapacitated by an ingress of water which flooded the engine room. The ingress of water was the combined result of (i) the negligence of the crew in failing to close the sea inlet valve of the emergency fire pump and drain down the system, after they had used the hoses to clear ice chips from the hatch covers; (ii) damage to the emergency fire system pump casing and filter after the vessel had sailed from Klaipeda, as a result of the freezing and expansion of the seawater inside them; (iii) the negligence of contractors employed on an earlier occasion, who failed to seal the engine room bulkheads after passing cables through them, with the result that they were not watertight; and (iv) defects in the engine room pumping system, which was unable to cope with the rate of ingress. The main engine was damaged beyond repair.
The insurers instructed solicitors, Ince & Co, to investigate. Ince asked the owners for their explanation of the casualty. Mr Chris Kornet, the relevant individual in the vessel's managers, developed a theory that the bilge alarm had sounded at about noon on 28 January, but the crew had been unable to investigate or deal with the leak because of the rolling of the ship in heavy weather. The judge found that this was a speculation on Mr Kornet's part which he genuinely regarded as plausible. But in proffering it to Ince & Co in an e-mail of 21 April 2010, he pretended that he had been told about the alarm activation by members of the crew. The judge found that this was a reckless untruth. Mr Kornet had not been told this by the crew and had no reason to believe that the crew would support it. And, although the master did later support the story, he had not done so by 21 April. Mr Kornet's reason for acting in this way was that he was frustrated by the insurers' delay in recognising the claim and making a payment on account. At a time when the cause of the flooding was not clear, he believed that it would fortify the claim and accelerate payment if the casualty could be blamed on the crew's failure to respond to the activation of the bilge alarm. This was because otherwise attention would be concentrated on the defective condition of the ship and on the possible responsibility of the owners for that state of affairs. He had been advised that the wording of the Inchmaree clause in the Institute Time Clauses might afford a defence under the policy if the owners were found to have any responsibility for what happened.
In fact, the lie was irrelevant to the merits of the claim. The judge, Popplewell J, held that the loss was proximately caused by a peril of the seas, namely the fortuitous entry of seawater through the sea inlet valve during the voyage, and that the relevant part of the Inchmaree clause had no application to this peril. He rejected a contention that the owners had sent the vessel to sea with defective engine room pumps in breach of the warranty implied by section 39(5) of the Marine Insurance Act 1906, because the managers had not known of the problem at the relevant time. It followed that the owners had a valid claim for some €3.241m whether or not the crew had failed to act on a bilge alarm activation at about noon on 28 January. However, he held that that claim was lost as a result of the collateral lie about it: [2013] 2 All ER (Comm) 465.
He reached that conclusion with regret because he regarded it as unjust to the parties before him. At para 225 of his judgment, he observed:
"In a scale of culpability which may attach to fraudulent conduct relating to the making of claims, this was at the low end. It was a reckless untruth, not a carefully planned deceit. It was told on one occasion, not persisted in at the trial. It was told in support of a theory about the events surrounding the casualty which Chris Kornet genuinely believed to be a plausible explanation. The reckless untruth was put forward against the background of having made the crew available for interview by the Underwriters' solicitor, who had had the opportunity to make his own inquiries of the crew on the topic. To be deprived of a valid claim of some €3.2m as a result of such reckless untruth is, in my view, a disproportionately harsh sanction."
There is a substantial body of case-law on the effect of express clauses avoiding the policy or forfeiting the claim if it is affected by fraud. These cases turn on the language of the contract, although it is fair to say that most of them show a strong propensity on the part of the courts to give them an interpretation wide enough to cover any dishonesty in relation to the claim whether or not it was decisive of the merits. Such clauses appear to have been in common use from the end of the 18th century.
The common law rule relating to fraudulent claims appears to originate rather later, in the middle of the 19th century. In Britton v Royal Insurance Co (1866) 4 F & F 905, which is generally regarded as the leading case, there was an express clause, but Willes J in his summing-up to the jury stated the law altogether generally at pp 908–909:
"A fire insurance, he said, is a contract of indemnity; that is, it is a contract to indemnify the assured against the consequences of a fire, provided it is not wilful. Of course, if the assured set fire to his house, he could not recover. That is clear. But it is not less clear that, even supposing it were not wilful, yet as it is a contract of indemnity only, that is, a contract to recoup the insured the value of the property destroyed by fire, if the claim is fraudulent, it is defeated altogether. That is, suppose the insured made a claim for twice the amount insured and lost, thus seeking to put the office off its guard, and in the result to recover more than he is entitled to, that would be a wilful fraud, and the consequence is that he could not recover anything. This is a defence quite different from that of wilful arson. It gives the go-bye to the origin of the fire, and it amounts to this—that the assured took advantage of the fire to make a fraudulent claim. The law upon such a case is in accordance with justice, and also with sound policy. The law is, that a person who has made such a fraudulent claim could not be permitted to recover at all. The contract of insurance is one of perfect good faith on both sides, and it is most important that such good faith should be maintained. It is the common practice to insert in fire- policies conditions that they shall be void in the event of a fraudulent claim; and there was such a condition in the present case. Such a condition is only in accordance with legal principle and sound policy."
This approach was not initially accepted in Scotland, where the Court of Session held that the genuine part of a fraudulently inflated claim was recoverable: Reid & Co Ltd v Employer's Accident & Livestock Insurance Co Ltd (1899) 1 F 1031. But in England the courts consistently applied Willes J's test to avoid the entirety of an exaggerated claim. That approach was endorsed by the House of Lords in Manifest Shipping Co Ltd v Uni-Polari Insurance Co Ltd (The "STAR SEA") [2003] 1 AC 469.
It was settled from an early stage of the history of English insurance law that the duty of utmost good faith applied not only in the making of the...
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