Spotting a fraudster
THE fraudulent claim principle embraces the concept that, where there is a fraudulent claim, the claimant forfeits not only what was known to be untrue but also any genuine part of the claim. The fraud taints the whole. However, a distinction needs to be drawn between cases of fraudulent claims and cases where a fraudulent device is used where the insured believed that he had suffered the loss claimed but sought to improve or embellish the facts surrounding the claim by some lie.
The effect of the use of such a fraudulent device was recently considered by the Court of Appeal in the case of Agapitos & Others v Agnew. To provide some background to the case, the passenger ferry Aegeon was owned by Mr Agapitos and insured with the defendant underwriter against hull and machinery port risks under a slip policy for six months at August, 1995, "whilst laid up and undergoing general and cosmetic maintenance at Neo Molo Drapetsona, Greece". The conditions included "Wtd no hot work". An endorsement of January 12, 1996, incorporated another warranty, "Wtd/LSA/ certificate and all recs. complied with prior to commencement of hot work'. The vessel was lost by fire on February 19, 1996.
Mr Agapitos, followed by his son as successor in title, brought proceedings against the underwriters to recover his losses. The underwriters alleged a number of breaches of warranty and that hot works had commenced from January 16, 1996. Mr Agapitos denied any breach of warranty and alleged that hot works began on February 12, 1996. He added that, insofar as there was any warranty, the failure of the designated Salvage Association surveyor to make himself available prior to the commencement of the hot works constituted a change of circumstances which excused non-compliance.
The underwriters sought to amend their defence to plead fraud on the basis of sworn statements disclosed by the claimant on disclosure taken from two workmen. The statements, taken immediately after the casualty, attested that hot works of a substantial nature had been carried out from as early as February 1, 1996. Leave to amend was refused by the judge at first instance on the hypothesis that the underwriters had a valid defence of breach of warranty and that any continuing duty not to deceive the underwriters was discharged by that breach.
Any additional plea of breach of such continuing duty would be superfluous, the claimant was otherwise entitled to succeed, and the alleged lies could only be material if told in circumstances where the truth would have provided the underwriters with a defence. On the hypothesis being considered, the lies could not be material.
The Court of Appeal upheld the judge's decision at first instance, refusing leave to amend on the basis that the proposed amendments raised a case which would be bad insofar as it depended on the assertion of lying in breach of either a common law duty or a duty under Section 17 continuing after the commencement of litigation.
Lord Justice Mance considered the principles involved in a lengthy judgment including the recent House of Lords decision in the Star Sea and the Court of Appeal decision in the Mercandian Continent. Lord Justice Mance described his view of an acceptable solution in the Aegeon case in what he called the "present imperfect state of the law, fettered as it is by Section 17"as follows;
(a) To recognise that the fraudulent claim rule applies as much to the fraudulent maintenance of an initially honest claim as to a claim which the insured knows from the outset to be exaggerated.
(b) To treat the use of a fraudulent device as a sub-species of making a fraudulent claim - at least as regards forfeiture of the claim itself in relation to which the fraudulent device or means is used.
(c) To treat as relevant for this purpose any lie directly related to the claim to which the fraudulent device relates which is intended to improve the insured's prospects of obtaining a settlement or winning the case.
(d) To treat the common law rules governing the making of a fraudulent claim (including the use of fraudulent device) as falling outside the scope of Section 17. The Star Sea contains very powerful indications to the effect that the duty of good faith under Section 17 is superseded or exhausted by the rules of litigation once litigation is begun.
Lord Justice Mance concluded that the proposed amendments raised a case which would be bad insofar as it depended on the assertion of lying in breach of either a common law duty or a duty under Section 17 continuing after the commencement of litigation. The underwriters' appeal therefore failed.
The decisions in the Star Sea and Mercandian Continent have already established certain boundaries to be set relating to post-contractual duty of good faith. Each case will turn on its facts as to whether an insured is trying to advance a fraudulent claim or whether he is using a fraudulent device that will improve his prospects but will not affect the outcome of the case, as in the Aegeon.
In summary, the consequences of these recent decisions are as follows;
- The English courts are not prepared to extend without limitation the concept of good faith, despite it still carrying as much weight as ever in the pre-contract period.
- It is worthy of note that the Australian equivalent of the 1906 Act (Marine Insurance Act 1909) has recently been the subject of detailed analysis by the Australian Law Reform Commission. In relation to the Australian equivalent of Section17, they propose that it should be replaced by a revised section which makes clear that the duty of utmost good faith is an implied term of the contract of insurance and extends, with certain qualifications, for 'the duration of the relationship between the parties'.
The reference to the remedy of avoidance under the provision is deleted. A later provision would give a specific remedy to avoid the contract for a fraudulent breach of the obligations of disclosure in the pre-contract period. They, therefore, also reject the wide interpretation for which underwriters were seeking to argue in the Mercandian Continent case. It remains to be seen whether similar changes might be debated in the UK. - Whilst, from the underwriters' point of view, the decisions in the Mercandian Continent and Aegeon may seem unsatisfactory, the contrary result may perhaps have been too punitive from the assured's point of view, and the courts have sought to maintain a balance between the interests of both the assured and the underwriters.