A European ship-owner has forfeited an otherwise-valid claim of more than $4.8 million after the UK Court of Appeal upheld a decision to deny liability because of a ‘reckless untruth’ told during the claims process.

The case, decided late last year, provides a salutary lesson regarding the dangers of supporting a claim with a reckless untruth.

While loading a cargo of scrap metal in Lithuania in January 2010, the crew negligently failed to clear water from the emergency fire pump of the vessel DC Merwestone and failed to close the sea valve. Due to the extremely low temperature, the water in the pump froze and expanded, causing it to crack and creating an opening. When the ice melted after the vessel sailed into warmer waters, water entered the vessel, submerging and destroying the engine.

In presenting the claim to insurers, the insured recklessly told the underwriters an untruth, stating that the bilge alarm had gone off but was ignored. The underwriters allege that the insured did this in an attempt to distance the owners from any fault in relation to the casualty.

Set precedents

While it is clear from a long line of authority that if an insured makes a fraudulently inflated claim under the policy, he forfeits any lesser claim which he could properly have made, the issue in Versloot Dredging was whether the same rule about fraudulent claims applies to fraudulent means or devices.

The Court referred to the 2003 case of Agapitos v Agnew, in which the Lord Justice Mance define a fraudulent device as a device used “if the insured believes that he has suffered the loss claimed, but seeks to improve or embellish the facts surrounding the claim by some lie”.

Mance found that a fraudulent device forfeited a claim, provided that the device was:

  • directly related to the claim;
  • intended by the insured to promote prospects of success; and
  • would have tended to yield a not insignificant improvement in the insured’s prospects of success.

Waves in Australia

While the decision is clearly of importance to the law of marine insurance in Australia, the effect of section 56 of the Insurance Contracts Act 1984 in relation to non-marine insurance should also be noted.

Section 56(2) provides that “if only a minimal or insignificant part of the claim is made fraudulently and non-payment of the remainder of the claim would be harsh and unfair”, then the court may order the insurer to pay such amount as is just and equitable in the circumstances.

Andrew Tulloch is a Partner in the insurance team at CBP Lawyers.