Relatively few cases reach trial in relation to fraud by the insured. The fraud has usually been detected at or before proceedings and the insured’s claim fails entirely, under the principle that ‘fraud unravels all’. However, on 16 and 17 March the Supreme Court (Justices Mance, Clarke, Sumption, Hughes & Toulson) heard such a case in Versloot Dredging v HDI Gerling It turns on whether ‘fraud unravels all’ should apply equally to the use of fraudulent devices as it does to fabricated claims. This blog post summarises the issues and judgment is awaited in due course.
The term ‘fraudulent means or device’ describes a fraud in which an insured gives a false statement to embellish or improve the circumstances surrounding an otherwise genuine claim. This issue was explored more than a decade ago by the Court of Appeal in Agapitos v Agnew  EWCA Civ 247, by a bench that included the-then Lord Justice Mance. Then, he said that the fraudulent device must be “directly related to and intended to promote the claim”.
Versloot owned a dredger insured under a marine policy with HDI Gerling (and others). Around 27 January 2010 the vessel began taking on water in the engine room, but the crew could not locate the source. Unsuccessful attempts were made to pump out the water. A few days later, she was towed to shore where the water was pumped out. The leak had damaged the engine beyond repair. The claim for replacing it was around €3.2 million.
The judge at first instance concluded that claim would have succeeded but for misstatement by the general manager of the vessel. That amounted to a fraudulent device and thus the whole claim was forfeited.
The general manager was alleged to have claimed (i) that the bilge alarm had sounded at about noon on 28 January 2010 (ii) that it had been ignored because it was commonly understood to have been caused by the rolling of the vessel in rough weather and (iii) that he had been told both factors by the ship’s Master or crew. His statement, whilst not directly related to the amount of the loss, was false. He had in fact not spoken to the Master of the vessel at the time of he gave the statement and his account of why the alarm was not investigated was, he later admitted, speculation.
In October 2014 the Court of Appeal reaffirmed that the use of a fraudulent device will cause the loss of the entire claim and referred expressly to the Law Commission’s approach on the point. The Court also dismissed the additional argument that the total forfeiture of the claim infringed the insured’s property rights* under the European Convention on Human Rights. Furthermore, the Court of Appeal applied the test in Agapitos v Agnew, ie that in order for the claim to be forfeited, the fraudulent device must be directly related to the claim and must have been intended to enhance the prospects of the its success. [* The ECHR stipulates, at article 1 of protocol 1, that “Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law…”]
In the Supreme Court, the appellant’s case was that the fraud was unconnected to the level of losses, which were legitimately claimed. The supporting statement, whilst false, had no impact of the validity of the claim or its value and thus forfeiture of the entire claim was disproportionate to the gravity of the fraud. They suggested that if an insured honestly believed in, and otherwise had, a good claim, it should stand and that a sound claim should be differentiated from one built on untruths and fraud. They proposed that a just and proportionate test should be applied on a case-by-case basis to achieve legitimate aims.
The insurers, however, argued that fraud – even at the low end of the scale – is nevertheless fraud and reported about 2,000 fraudulent claims are detected each week. Fraud at whatever level is intended to improve the insured’s prospect of success. They reminded that SC that the Law Commission accepted that a fraudulent device should cause the loss of the entire claim. They argued it would be impossible to set a ‘fraud threshold’. For example, would the greater fraud be a company with a huge annual turnover and a fraudulent claim of £10 million or a householder submitting a fraudulent claim for few hundred pounds and who had only £500 savings in the bank?
The question for the SC is whether an otherwise legitimate claim should be forfeited because of a misstatement that has no bearing on the underlying validity of the claim, but which operates to enhances its presentation and prospects (albeit falsely or recklessly)?
It was difficult to gauge how the Justices might rule on this. Lord Sumption noted that there is around 200 years of English law behind us on the point and that the appellant asks whether we must now consider if we want to change that?
It seems that all that can be added at this stage is the observation that it is not easy to see how any change in the strict forfeiture rule, if it were to be made, would chime with current wider social and legal concerns about the incidence and effects of fraudulent claims, especially in the personal injuries area.
About the Author
Jef Mitchell is a consultant at BLM and former Chief Claims Officer at the Ministry of Defence where he regularly briefed Ministers on claims issues and risk management. He now helps to lead the firm’s Policy and Government Affairs work with Alistair Kinley preparing submissions and supporting evidence for consultations and reform proposals, in addition to liaising with government departments and regulators on key issues and consultations affecting the firm and its clients. Jef is also an accredited mediator.