Court Of Appeal Authoritatively Confirms Fraudulent Devices Rule

Author:Mr Joe O'Keeffe and Elle Young
Profession:Ince & Co

Versloot Dredging BV v HDI-Gerling & others, The DC Merwestone [2014] EWCA Civ 1349

On 16th October 2014, in a judgment of great significance to insurers in all classes of business, the Court of Appeal has authoritatively ruled in underwriters' favour as to the consequences of the use of a fraudulent device by an assured in connection with the presentation of an insurance claim.

The Court of Appeal has ruled that there is a "bright line rule" whereby an assured who employs a 'fraudulent device' forfeits his claim, despite the fact that the claim would otherwise have been recoverable under the policy.

The decision confirms (with one qualification) the correctness of Lord Justice Mance's (as he then was) obiter (non-binding) and "tentative" dicta in Agapitos v Agnew [2003] QB 556 (The Aegeon) which was to the effect that an assured who embellishes his claim with a lie will lose his claim (even if it would otherwise have been recoverable in full) if the lie directly relates to the claim and satisfies subjective and objective tests as to intention and materiality respectively.

By way of context, there is a long line of authority to the effect that an assured who fraudulently exaggerates his claim under an insurance policy forfeits any lesser claim which he could otherwise properly make (provided that the exaggerated element is not, taken in isolation, de minimis). This is referred to as the 'fraudulent claim rule'. The express public policy rationale of the rule is one of deterrence: an assured should not have a one way bet whereby he loses nothing if his fraud is detected. In The Aegeon Mance LJ held that a fraudulent device is a sub-species of a fraudulent claim, and that the fraudulent devices rule applies by extension to the fraudulent claim rule such that the assured who employs a fraudulent device will accordingly forfeit its claim.

The Aegeon has been applied and followed in a number of decisions of first instance courts and applied by the Privy Council and recognised by the Supreme Court, although neither The Aegeon itself nor the subsequent authorities were, strictly, binding precedent.

At first instance in the present case, The Aegeon was subjected to a searching and hostile critique by Popplewell J, but nonetheless applied. The Court of Appeal's decision handed down today authoritatively confirms the correctness of Mance LJ's dicta in The Aegeon.

First Instance Judgment

In January 2010, the DC Merwestone suffered a flooding incident...

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