Recovery by underwriters: an unconfident sequel to the Atlantik Confidence debacle.

It might look rather churlish for an insurer in paying out on a claim to talk in the same breath about what happens if it should later decide that it wants its money back. Nevertheless it was failure to do this that landed a group of marine underwriters in expensive satellite litigation in Aspen Underwriting Ltd & Ors v Kairos Shipping Ltd & Ors [2017] EWHC 1904 (Comm).

The background to all this was last year’s decision in Kairos Shipping v Enka & Co LLC [2016] EWHC 2412 (Admlty) (noted here for the benefit of our readers), where following the loss of the 27,000 dwt bulker Atlantik Confidence in the Middle East, cargo underwriters successfully broke limitation on the basis that the sinking was a put-up job. The vessel’s hull underwriters, having previously paid out on the orders of her owners’ bank under an insurance assignment provision, now sued the bank to recover their money. The bank, based in the Netherlands, tried to put a spanner in the works by denying the jurisdiction of the English courts under Art.4 of Brussels I Recast, and very nearly succeeded.

The agreement under which the underwriters settled the payout contained an English jurisdiction clause. However it had been signed by the underwriters and the owners, and not by the bank, which had merely given consent for any monies to be paid out to a third party rather than themselves (they were actually paid to the brokers).  Teare J was not prepared to infer that the owners had signed for the bank as principals, or that the bank by agreeing to payment to a third party (the brokers) had demanded payment so as to bring themselves within the doctrine of benefit and burden. The underwriters only won, by the skin of their teeth (and the skill of IISTL stalwart Peter Macdonald-Eggers QC), because of a just plausible alternative argument that some kind of tort of misrepresentation had been committed by or on behalf of  the bank which had had its effects in England, thus enabling the underwriters to invoke Art.7(2) of Brussels I.

Moral (it would seem): all policies should contain a term, rigorously enforced, stating that no monies will be paid out save against a signed receipt specifically submitting to the exclusive jurisdiction of the English courts in respect of any subsequent dispute respecting the payment.

Hopeful law professors will of course look forward to a decision on the substantive point of recovery (which raises interesting issues of tort law, not to mention restitution should the entire litigation take place here with the agreement of the bank). But one suspects they will do so in vain. It seems likely that this case, like so many others, will end up in the great mass of claims “settled on undisclosed terms.”

Farewell to the “Fraudulent Devices” Doctrine!

The recent decision of the Supreme Court in Versloot Dredging BV v. HDI Gerling Industrie Versicherung (The DC Merwestone) [2016] UKSC 45 has hit the insurance market like a bombshell! For more than a decade, it has been assumed that if a fraudulent device (such as a “lie”) is used to promote an honest claim, as long as the device used is material in the sense that it is likely to provide an advantage to the assured in securing a settlement, the claim will be treated as a “fraudulent” one. The Supreme Court ruled with a majority (4:1) that this is not the case!

The facts are relatively straightforward. The assured’s vessel, The DC Merwestone, suffered a flooding incident in January 2010. The incident resulted in irreparable damage to her engine, located at the aft end, even though water ingress was through the bow thruster space at the forward end of the vessel. The assured claimed from its hull insurer for the cost of replacing the damaged engine. The coverage defences put forward by the underwriters were rejected by the first instance judge, Popplewell, J, but he held that the assured had forfeited its otherwise valid claim as he used fraudulent devices in advancing said claim. During the casualty investigation, the underwriters’ solicitors sought the assured’s explanation for the ingress, its spread from the bow thruster room to the engine room and the reason why the crew were unable to control it using the vessel’s pumps. The assured’s General Manager responded in a letter which contained a representation that the crew had reported that they had heard a bilge alarm (which would have alerted the crew to the flooding) at noon on the day of the casualty but had failed to investigate the alarm on the basis that its sounding had been attributed to the rolling of the vessel. The representation was untrue in that the crew had never heard or reported a noon alarm and had never given an explanation for not investigating. This representation was held to be a reckless untruth.

The majority of the Court – Lord Sumption, Lord Clarke, Lord Hughes and Lord Toulson – appreciating that this is essentially a policy question considered it to be “a step too far” and “disproportionately harsh” to deprive an assured of his claim by reason of his fraudulent conduct if at trial years later it turns out that the fraudulent device used at the claims stage had been unnecessary because the claim was in fact always recoverable. Their Lordships seem to be influenced by the fact that an assured utilising fraudulent devices to advance his claim still has a genuine belief in the accuracy of the claim whilst the same cannot be said for an assured who creates the loss in order to make a claim or who exaggerates the extent of his claim. It is worth noting that Lord Mance delivered a dissenting judgment arguing that “Abolishing the fraudulent devices rule means that claimants pursuing a bad, exaggerated or questionable claim can tell lies with virtual impunity.”

This decision means that an insurer will not be able to defend against a claim in a case where the assured uses fraudulent invoices to secure a quick settlement for his claim (see, for example, Sharon’ Bakery (Euorope) Ltd v. AXA Insurance UK plc [2011] EWHC 210 (Comm)) unless, of course, the policy contains an express clause indicating that the claim will be forfeited if promoted by making use of fraudulent devices. Such express terms are common in fire policies but perhaps, in the light of this decision, insurers should consider incorporating them into marine and energy policies as well. Institute Hull Clauses 2003 could lead the way. Clause 45.3 stipulates:

“It shall be a condition precedent to the liability of the Underwriters that the Assured shall not at any stage prior to the commencement of legal proceedings knowingly or recklessly
… mislead or attempt to mislead the Underwriters in the proper consideration of a claim or the settlement thereof by relying on any evidence which is false
… conceal any circumstance or matter from the Underwriters material to the proper consideration of a claim or a defence to such a claim.”

Settlement of fraudulent insurance claims – Insurers 1, Fraudsters 0.

Among a slew of important commercial cases this week is the Supreme Court’s decision in Hayward v Zurich Insurance plc [2016] UKSC 48, which will we suspect gladden the hearts of underwriters everywhere.

A work accident victim, CH, took the opportunity grossly to overstate his disability and claimed some £400,000 from Zurich, the employer’s insurers. Zurich thought the claim might well be a wrong ‘un, and indeed pleaded that it was. But they settled it for about £135,000. Tipped off later that CH had indeed been lying all along, they sued to undo the settlement for fraud. The judge obliged, substituted an award of about £15,000 and ordered CH to repay the rest. The Court of Appeal reversed. Having themselves had suspicions about the claim, the insurers (it was held) couldn’t put their hand on their heart and say that they thought CH had been telling the truth: it followed that they couldn’t show the necessary reliance for the purpose of invoking CH’s fraud.

This holding was, to say the least, worrying for underwriters, and not only in injury cases brought against liability insurers. Theoretically, it seemed to mean that if any insurer thought a claim by a commercial policyholder was fraudulent and said so in the course of negotiation or litigation, the claimant was nevertheless safe in possession of his loot once he had extracted an agreement to settle.

The Supreme Court were understandably unhappy with this prospect. It accordingly restored the first instance judgment. To succeed in a claim of fraud, a person did not have to show that he had believed in the truth of what the defendant had said; he merely had to show that the untruths he had been told had acted as an influence on him. Since Zurich had clearly been influenced into settling by what CH had said, the necessary reliance was present; CH retained only the damages he was actually entitled to and had to return the rest.

This result is, it is suggested, welcome. It will add to the armoury available to insurers against fraud (already augmented, in the case of fraudulently exaggerated personal injury claims, by s.57 of the Criminal Justice and Courts Act 2015 allowing their dismissal in toto), and do something to make up for their loss last week in Versloot Dredging BV & Anor v HDI Gerling Industrie Versicherung AG & Ors [2016] UKSC 45 of the ability to decline payment on the basis of collateral lies told by the assured.

Note: the Supreme Court left open the question whether a court settlement could only be reopened for fraud on the basis of evidence not reasonably detectable at the time. It is to be hoped that the answer to this is No, as already suggested in Australia. Why, one might ask, should a settling underwriter owe any duty whatever to a fraudster to check for possible evidence of the latter’s dishonesty at the time of settlement?

Insurance Fraud Pays – Professor Barış Soyer Wins BILA Book Prize

It has just been announced that Professor Soyer’s recent book “Marine Insurance Fraud” has won the 2015 BILA Book Prize. This prize, for the best book on insurance law, is awarded annually by the British Insurance Law Association Charitable Trust, a body existing to promote research on the interrelationship between law and insurance.

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BILA 2015 Prize for Professor Barış Soyer’s book “Marine Insurance Fraud”

The announcement was made at BILA’s Annual General Meeting on 16 October 2015. Alison Green, Chair of the BILA Charitable Trustees, congratulated Professor Soyer, not only for having written a highly relevant, interesting and accessible book, but also for being the only author to win the Prize twice (having first won the Prize in 2002 for his first monograph on warranties in marine insurance).

soyerHis most recent prizewinning monograph, published last year, gives a comprehensive and coherent legal analysis of the impact of fraud on the position of various parties to a marine insurance contract. At the time of publication it was seen as a winner. In the foreword, Sir Bernard Rix (formerly a Lord Justice of Appeal) stated: “Professor Soyer has written a book on an important and fascinating theme which not only states the law in a clear and concise way, but also analyses it critically, insightfully and helpfully. I am confident that it will be used profitably by a wide range of readers.”

Professor Barış Soyer is the Director of the Institute of International Shipping and Trade Law, a research institute based in the College of Law at Swansea University. He has taught marine insurance and other aspects of commercial law at Swansea for some 15 years.

Insurance and fraudulent claims

Hard on the heels of legislation in the Insurance Act 2015 about fraudulent claims by the insured, readers may like to know that insurers can now take comfort from s.57 of the Criminal Justice and Courts Act 2015 concerning third party dishonesty. Essentially where there is substantial dishonesty in or about an injury claim the entire claim falls to be dismissed, subject to a “substantial injustice” exception.

Andrew Tettenborn