FLOODS, FIRE AND FRAUD:

DEVELOPMENTS IN INSURANCE CLAIMS LAW

A lecture by Andy Stevenson and Philip Lomax, Elborne Mitchell LLP

29 July 2014

These notes are derived from a talk by Andy Stevenson and Philip Lomax of Elborne

Mitchell LLP, given at Lloyd's Old Library on Tuesday 29 July 2014.

Where specific reference is made to the law it is to English law as at 29 July 2014.

For specific advice, you should please contact Andy Stevenson or Philip Lomax at Elborne

Mitchell LLP.

Disclaimer: These Notes are for information only and nothing in them constitutes legal or

professional advice. They should not be considered a substitute for legal advice in

individual cases; always consult a suitably qualified lawyer on any specific legal problem

or matter. Elborne Mitchell LLP assumes no responsibility to recipients of these Notes.

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FLOODS, FIRE AND FRAUD:

DEVELOPMENTS IN INSURANCE CLAIMS LAW

Lecture given at Lloyd’s, One Lime Street, on 29 July 2014

By Philip Lomax and Andy Stevenson of Elborne Mitchell LLP

Introduction

This presentation is in three parts:

1. Part 1 considers recent cases involving disputes over the application of ‘Follow the

Settlements’ and ‘Follow the Lead’ clauses in insurance and reinsurance;

2. Part 2 looks at recent developments in the law on Fraud and the approach being taken

by the English Courts to tackle the problem of fraud;

3. Part 3 considers the decision in Sea Glory Maritime Co and Another v Al Sagr

National Insurance Co (“The Nancy”), a fire case.

Part 1 - ‘Follow the Settlements’ and ‘Follow the Lead’ clauses.

The key distinction between follow the settlements and follow the lead clauses is that a

follow the settlements clause governs the relationship between a reinsurer and reinsured

whereas a follow the lead clause is intended to govern the relationship between co-insurers or

co-reinsurers.

(i) Follow the Settlements

In the recent decision in Tokyo Marine Insurance Europe Limited v Novae Corporate

Underwriting1 (“Tokyo Marine”) the court dealt with, amongst other things, what a

reinsured must prove in order to claim under a follow the settlements clause.

The basic law governing the legal effect of follow the settlements clauses was set out in the

seminal decision of the Court of Appeal in The Insurance Company of Africa v. Scor (UK)

Reinsurance Co. Ltd2 (“Scor”), where it was held that if a reinsured wants to rely on a

follow the settlements clause and claim against a reinsurer under such a clause, he must

satisfy two requirements:

i) he must, as a question of fact, have acted honestly and have taken all proper

and businesslike steps in making the settlement; and

ii) he must prove that the claim so recognised by the reinsured falls within the

terms of the reinsurance contract.

1 [2013] EWHC 3362

2 [1985] 1 Lloyd’s Rep 312

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Tokyo Marine is an interesting case as the judge sought to set out, amongst other things, what

the reinsured must prove in order to claim under a follow the settlements clause, and in

particular, the standard to proof required in respect of the second part of the Scor test.

Tokyo Marine – the facts

This claim arose out of the Thai floods in 2011, which affected a large number of Tesco’s

shops and distribution centres. Tesco suffered considerable property damage and business

interruption losses as a result.

Tesco was insured under a global Master Policy issued by Ace Europe, under which a

number of local policies were issued by Ace entities in various places around the world

where Tesco had interests.

One such entity, Ace INA, had issued a local policy in Thailand (for ease of reference, we

will refer to Ace INA and Ace Europe collectively as “Ace”). Tesco’s claim was adjusted

and settled for £82.5m by Ace.

Ace was reinsured under a facultative reinsurance (“the Reinsurance”), to which Tokyo (the

claimant) subscribed to a 12.5% share. The Reinsurance was on the same terms as the

insurance and contained a follow the settlements clause.

Tokyo had purchased retrocession cover (“the Retrocession”) from Novae, under which

Novae had agreed to subscribe to 12.5% of Tokyo’s losses in excess of £53m, for each and

every “Loss Occurrence” subject to a limit of $25m each and every “Loss Occurrence”.

Tokyo paid its portion of the reinsurance loss and sought to claim a share of its loss from the

defendant Novae, under the Retrocession.

Novae denied liability on various grounds.

In the hope of resolving the parties’ disputes on liability, the judge was asked to determine 5

preliminary issues.

This note focusses on the fourth of those preliminary issues, namely:

To what standard of proof must Tokyo show that the Ace settlement fell within the

terms of the Retrocession as a matter of law – on the balance of probabilities (the

civil standard of proof) or that it arguably does so (which you will note is a

considerably lesser standard of proof than the civil standard).

The Retrocession contained a follow the settlements clause which read as follows:

“The contract is subject in all respects…to the same terms, clauses, and conditions as

original and without prejudice to the generality of the foregoing, Reinsurers agree to

follow all settlements (excluding without prejudice and ex gratia payments) made by

original insurers arising out of or in connection with the original insurance…”

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The Judge, Hamlin J, distinguished between ‘qualified’ and ‘unqualified’ follow the

settlements clauses - a qualified clause usually contains additional wording which requires

the reinsured to show that that the settlement falls within the terms of the insurance and

reinsurance.

This clause contained no such additional wording so Hamlin J found that it was therefore an

unqualified clause.

The law concerning the effect of unqualified follow the settlement clauses was set out in Scor

(detailed above).

Under the second of the Scor provisos, the reinsurer is not able to challenge the settlement of

the original insured’s claim, but it can argue that the original claim is not covered by the

reinsurance contract.

It was this second proviso that this case was concerned with. Hamlin J had to decide whether

Tokyo had to prove that the claim settled by Ace arguably fell within the terms of the

retrocession or whether it fell within the terms of the retrocession on the balance of

probabilities.

Hamlin J found that the test, or the standard of proof, that Tokyo had to satisfy was that Ace’s

claim arguably fell within the terms of the retrocession.

In reaching his decision, Hamlin J provided a thorough analysis of the relevant case law and

said that he was bound by the Court of Appeal’s decision in Assicurazioni Generali SpA v

CGU International Plc3 (“Generali”) where it was found that:

“... by reference to the words ‘the claim so recognised’... the insurers do not have to

show that the claim they have settled in fact fell within the risks covered by the

reinsurance, but that the claim which they recognised did or arguably did…”

However, despite finding that he was bound by Generali, Hamlin J said that he disagreed

with the decision and that “in principle it is difficult to see why a lesser standard of proof

than the civil standard [i.e. the balance of probabilities] should govern the [second] Scor

proviso to the reinsurance.”

It does seem to be quite an odd conclusion to have different burdens of proof in, effectively,

back to back policies.

Nevertheless, this decision makes it clear that where cover is either back to back or on

“materially identical” terms and an unqualified follow the settlements clause has been used,

the standard of proof required to prove cover under the reinsurance policy is only arguability

and not balance of probabilities.

3 [2004] Lloyd’s Rep IR 359

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In conclusion, it may be sensible for those concerned to review their follow the settlements

clauses and consider whether the wording does what they intend it to do (i.e. ensure that it is

clear from the wording whether it is either a ‘qualified’ or an ‘unqualified’ clause and thus

whether the balance of probabilities burden of proof or the lesser arguability standard of

proof is being utilised).

(ii) Follow the Lead clauses

In the case of San Evans Maritime Inc and Others v Aigaion Insurance Co SA4 (“San Evans”)

the court considered a follow the lead clause, rather than a follow the settlements clause, and

considered whether the following underwriter had to follow the settlement of the lead

underwriter in circumstances where the lead underwriter’s settlement agreement with the

assured purported not to bind the following underwriter.

San Evans – the facts

The vessel, the St Efrem, was insured under two separate insurances. Three Lloyd’s

Syndicates, Catlin, Ark and Brit, insured 50% of the interest in the vessel under a policy (“the

Lloyd’s Policy”). The second policy of insurance, for 30% of the risk, was subscribed by

Aigaion, (“the Aigaion Policy”). The remaining 20% was uninsured.

At the end of July 2010, the vessel grounded at Paranagua, Brazil and suffered a generator

breakdown. The assured claimed under both policies. The Lloyd’s Syndicates settled the

claim against them for US$779,500.

The Aigaion Policy contained a “Follow Clause” which read:

“Agreed to follow London’s Catlin and Brit Syndicate in claims excluding ex gratia

payments”

Clause 7 of the Lloyd’s Syndicates’ settlement agreement with the assured provided as

follows:

“The settlement and release pursuant to the terms of this Agreement is made by each

Underwriter for their respective participations in the Policy only and none of the

Underwriters that are party to this Agreement participate in the capacity of a Leading

Underwriter under the Policy and do not bind any other insurer providing hull and

machinery cover in respect of the St. Efrem.”

The Assured claimed that Aigaion was obliged to follow the Lloyd’s Syndicates’ settlement,

in light of the follow the lead clause. Aigaion denied that it was so bound. Its reasons for

denying liability gave rise to 3 preliminary issues for the court to determine. The issues were

as follows:

4 [2014] EWHC 163 (comm)

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i) Did the “Follow Clause” in the Aigaion Policy require Aigaion to follow the

settlement of the Lloyd’s Syndicates or did it merely authorise the Lloyd’s

Syndicates to negotiate and/or agree a settlement with the Assured on

Aigaion’s behalf (as alleged by Aigaion)?

ii) Did the Assured agree by clause 7 of the Settlement Agreement that the

settlement would not be binding on Aigaion (as contended by Aigaion); and if

so, was Aigaion entitled to rely on the Contract (Rights of Third Parties) Act

1990 to enforce that term?

iii) If the “Follow Clause” required Aigaion to follow any settlement made by the

Lloyd’s Syndicates, was the “Follow Clause” triggered by the Settlement

Agreement (as the Assured claimed)?

Preliminary issue (i)

In respect of point (i), Teare J noted that follow clauses come in various forms. Some, for

example, require the underwriter to follow the lead underwriter in respect of modifications of

cover, some are concerned only with the acceptance of declarations under an open cover and

others extend to settlements.

He made it clear that since the subject matter and terms of follow the lead clauses can differ

significantly, the scope and operation of such clauses depends, ultimately, on an examination

of the terms of the individual follow clause in question.

In this case the wording was very short and related only to “claims” and excluded ex gratia

payments. As detailed above, the Follow Clause provided:

“Agreed to follow London’s Catlin and Brit Syndicate in claims excluding ex gratia

payments”

Whilst he recognised that there is uncertainty in the case law, Teare J rejected Aigaion’s

argument that the Follow Clause merely authorised the Lloyd’s Syndicates to act as an agent

on Aigaion’s behalf when settling a claim.

He was satisfied that the Follow Clause was understood to mean that Aigaion had agreed

with the Assured that it would follow any settlement made by the Lloyd’s Syndicates.

Teare J also held, in accordance with the decision of Rance J in Roare Marine v Bimeh Iran5,

that the obligation to follow the Lloyd’s Syndicate’s settlement was not subject to a condition

that the settlement had to be concluded in a proper and businesslike manner – a notion which,

as detailed above, is relevant between insurer and reinsurer where an unqualified follow the

settlements clause has been included in the reinsurance contract.

Preliminary issue (ii)

5 [1998] 1 Lloyd’s Reports 423

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In respect of the second preliminary issue, the court had to decide whether the assured had

agreed by clause 7 of the Settlement Agreement that the settlement would not be binding on

Aigaion; and if so, was Aigaion entitled to rely on the Contract (Rights of Third Parties) Act

1990 (“the Act”) to enforce that term?

Clause 7 of the Settlement Agreement read as follows:

“The settlement and release pursuant to the terms of this Agreement is made by each

Underwriter for their respective participations in the Policy only and none of the

Underwriters that are party to this Agreement participate in the capacity of a Leading

Underwriter under the Policy and do not bind any other insurer providing hull and

machinery cover in respect of the St. Efrem.” [emphasis added]

Teare J found that clause 7 meant that in settling the insurance claim, the Lloyd’s Syndicates

were not purporting or intending to bind any other insurer of St Efrem (such as Aigaion). He

held that the reference to “any other insurer” was not a reference to the underwriters who

subscribed to the Lloyd’s Policy but to other insurers such as Aigaion.

The purpose of clause 7 was to ensure that a Syndicate which settled a claim did so on its

own behalf and not for any other insurers, to avoid the risk of a potential claim (for breach of

a possible duty) by another insurer, such as Aigaion, who might otherwise be bound by the

settlement.

In light of his findings, Teare J went on to consider the effect of the Act.

The Act provides that if A and B conclude a contract which purports to confer a benefit on C,

C is entitled to enforce the benefit against the contracting parties.

Citing the decision of Dolphin Maritime v Svergies6, Teare J held that the purpose of clause 7

was to protect the Lloyd’s Syndicates from any possible liability to Aigaion and not to confer

a benefit on Aigaion. Clause 7 did not contain a promise from the Assured not to rely upon

the Follow Clause against Aigaion. Therefore, Aigaion was not entitled rely upon the Act to

enforce clause 7 of the Settlement Agreement.

The effect of the Follow Clause was a contractual agreement between the Assured and

Aigaion in the Aigaion Policy – upon which the Assured could rely. Teare J added that:

“Clear words [in the settlement agreement] would therefore be required to justify a

conclusion that the Assured intended to give up that valuable right.”

Preliminary issue (iii)

The final question that Teare J had to answer was whether the Follow Clause required

Aigaion to follow the settlement, which was expressly agreed in the Settlement Agreement

not to be binding on Aigaion.

6 [2009] 2 Lloyd’s Reports 123

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Aigaion argued that it would be an implied term of the Follow Clause in the Aigaion Policy

that the Follow Clause would not apply to settlements which are not purported to be made by

Catlin or Brit on behalf of Aigaion.

Teare J did not accept this argument. He held that, in light of a number of authorities which

suggest that a lead underwriter may owe a duty of care to a following underwriter, a

statement by the lead underwriter that the settlement was not binding on the following

underwriter, is a means of protecting the lead underwriter from any claim from the following

underwriter.

Teare J held that this statement did not countermand the effect of the Follow Clause which

required Aigaion to follow any settlements of the Lloyd’s Syndicates.

He therefore concluded that the Follow Clause was triggered by the Settlement Agreement.

San Evans - conclusions

This case demonstrates the conflicting authority in respect of the operation of follow the lead

clauses. In some cases they have been found to establish the lead underwriter as the agent of

the following underwriter (which may give the following underwriter a right of action against

the lead in the event of an unsatisfactory settlement) whereas in other situations, such as the

present, the agreement of the lead underwriter is said to act as a trigger for the obligations of

the following underwriter (where no such right of action arises). Much will turn on the

wording of the follow the lead clause in question.

The case confirms that a following underwriter can still be bound to follow a lead

underwriter’s settlement of a claim even if the lead underwriter purports not to bind the

following underwriter in that settlement. Clear words will be required in a settlement

agreement if it is to be inferred that an assured intended to give up its right to rely on a follow

clause in a separate policy.

One way around this problem might be to ensure that the following underwriter is joined to

the settlement agreement and then execute the agreement as a deed (to avoid any potential

argument that the following underwriter has not provided adequate consideration to make the

agreement legally binding.)

It would be a sensible for following underwriters to review their follow the lead clauses to

ensure that they do not get stuck with a settlement that they did not intend on being bound by.

It should be noted, however, that Aigaion have been given leave to appeal so watch this

space.

Part 2 – Fraud

It is no secret that fraud is currently a big problem for the insurance industry.

According to the latest (2013) figures from the Association of British Insurers (ABI):

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Around 15 fraudulent claims are detected every hour. That’s c. 340 fraudulent claims

a day, with a value of around £3 million.

So £21 million a week – or around £1.1 billion for the 124,000 dishonest claims

uncovered by insurers per annum.

ABI estimates suggest that there is in excess of a further £2 billion of undetected

fraud.

And they estimate that fraud adds at least an extra £50 to the insurance bill of every

UK household.

What we wanted to explore in this part of the lecture is the way in which English law tackles

fraud and the approach that the Courts are taking.

At his keynote speech at the ABI’s fraud conference in November 2013, Aiden Kerr of the

ABI began by listing the various steps the industry itself was taking to tackle the problem

before going on to address what was happening outside it. He said:

“And turning now to outside of the industry, there are a number of developments that

have an important interplay with insurers’ efforts to tackle fraud.

One is the apparent growing willingness of the judiciary to play its part in stamping

out insurance fraud. There is, I think, increasing evidence that the Courts are

beginning to adopt a zero tolerance approach to fraud cases.”

What we want to look at is whether recent cases coming out of the Courts support that

position. Although a number of them relate to personal injury and road traffic injuries claims,

the principles are equally applicable to other classes of business.

(i) Entirely fraudulent claims

There is a long-standing rule of law that where an insured advances a fraudulent claim he

loses any right he might have to bring a lesser, non-fraudulent, claim he could have properly

made (see Levy v Baillie7).

That principle operates regardless of whether there is a fraud exclusion in the wording.

In addition, the Courts have, over time have developed wide-ranging common law powers.

With regard to claims that are entirely fraudulent, there is certainly evidence of the Courts

taking a hard-line approach to claimants at the moment.

Liverpool Victoria Insurance Company Ltd v Thumber8

This is a very recent case – from July 2014. Mr Thumber claimed that his £6,000 Audi had

been hit by another car, a BMW, that it had been written off and he had suffered whiplash.

He also claimed for £130,000 in car hire fees.

7 (1831) 131 E.R. 135

8 (July 2014), unreported.

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Liverpool Victoria (“LV”) were the BMW driver’s insurers and believed the claim was

fraudulent and pleaded that. The case went to trial but on the day of trial Mr Thumber

abandoned his claim. He was ordered to pay indemnity costs to LV. They went further and

applied for him to be committed to prison.

The committal proceedings were adjourned whilst Mr Thumber went through the usual array

of tactics designed to find a way out (e.g. claiming he had not had enough time to

prepare/seek legal representation, claiming serious illness etc).

The Court was not impressed and found that:

“there was powerful evidence of fraud and dishonesty and the excessive amount claimed for

car hire had been [his] undoing. It was plainly a fraudulent claim involving false witness

statements and if [Thumber] had proceeded to trial he would have sought to gain money by

perjury. Giving evidence dishonestly was plainly a contempt of Court”

The Court held that the seriousness of the fraud justified 12 months’ imprisonment.

Another good recent example of the Court’s stern approach comes from the following:

Mohammed Adris Aziz v (1) Ansar Ali (2) Esure Services Ltd

Abbul Jamil v (1) Sherzad Serwan (2) Liverpool Victoria Insurance Services

(1) Farhana Kazmi (2) Shamila Saleem v (1) Sherzad Serwan (2) Liverpool Victoria

Insurance Services9

This is another recent case, from June 2014. It involved four claims for injuries resulting

from two separate road traffic accidents. The insurers, again including Liverpool Victoria,

disputed they had ever occurred.

In the first claim, Mr Aziz claimed that he had been struck by a vehicle while he travelled

with two friends towards Leeds / Bradford airport. Mr Aziz was a private hire driver and had

been in his work vehicle at the time of his collision. The second claim involved a Mr Jamil

who was also a private hire driver who claimed that he was driving two customers (Mrs

Kazmi and Mrs Saleem) to a destination in Leeds when a car collided with them in the Hyde

Park area of the city. Insurers denied that either of these accidents ever occurred.

The Court ordered that Mr Aziz and Mr Jamil's claims be consolidated along with the claims

of Mrs Kazmi and Mrs Saleem. Other claims brought by alleged passengers were struck out

at various times.

Insurers’ investigations into the claims revealed overlap between them, including that the

insurance policies of the drivers alleged to have caused the accidents had incepted shortly

beforehand and the accidents had been paid for using the same bank account. Insurers also

9 [2014] EWHC 1846 (QB)

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relied upon a motor reconstruction expert who said that the damage sustained by the vehicles

was inconsistent with the type of collision described by the claimants.

In the run up to trial, the claimants got cold feet and so the solicitors acting for the claimants

were instructed to serve Notices of Discontinuance in the claims.

Ordinarily, that would be the end of the proceedings. But the insurers applied to Court to set

aside the Notices of Discontinuance and to proceed with the trial. The judge was conscious

that the insurers wished to pursue the claims in order to clarify the case law and make an

example of fraudulent claimants. He was also aware that evidence adduced at the civil

hearing would be used at committal proceedings for contempt of court. Nevertheless, the

application was successful and the cases were also transferred to the High Court.

So the trial went ahead earlier this year. The claimants were unrepresented in Court and Mr

Aziz gave evidence, Mr Jamil did not attend and Mrs Kazmi and Mrs Saleem attended with

an interpreter.

In relation to Mr Aziz, he gave three different accounts of how he came to make the claim

and details surrounding his loss. The Judge found that there was no doubt that the accident

described by Mr Aziz did not occur.

In respect of the claims of Mr Jamil, Mrs Saleem and Mrs Kazmi, witness statements were

read out stating that the accidents occurred, however so too was a letter from Mrs Kazmi in

which she confessed that the claim was fraudulent and that she had been pressured into taking

part by third parties. This was accepted by the Judge who ruled that the second accident had

not occurred either.

As it was clear the accidents had not occurred, it was held that there was no negligence of the

sort the claimants had alleged and that they colluded in order to fraudulently obtain insurance

payouts.

At the time of writing there is no news on committal. The significance of this case in the

present context is the decision of the Court not to accept the Notices of Discontinuance and

require the case to proceed. It is a clear to warning to those contemplating a ‘try on’.

So far, so good then as far as entirely fraudulent claims are concerned, particularly in the road

traffic accident field.

But, what about otherwise valid claims that are tainted with fraud? What if part of a claim is

valid and part of it fraudulent? What about exaggeration of claims that perhaps don’t amount

to fraud?

As is often the way, it is something of a grey area and the approach of the Courts has not

always been as consistent as one might perhaps expect.

(ii) Exaggeration of claims

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For clarity, this section deals with the scenario where a claimant has a valid claim but acts

fraudulently or dishonestly in advancing it or in its quantum (e.g. by alleging to have ongoing

medical problems which do not in fact exist). It is different from the position where a

claimant puts his/her claim at its highest (e.g. by claiming for each and every expense

incurred in connection with an injury), perhaps in the expectation that insurers’ loss adjuster

will apply an arbitrary discount to whatever amount is claimed.

Summers v Fairclough Homes Ltd10

Mr Summers broke his ankle in an accident on a building site whilst working for the

defendant. That did give rise to a valid claim.

However, he embarked on a grand scheme to exaggerate his claim for damages. He

maintained, for example, that he was dependent on crutches and incapable of working, when

extensive surveillance conducted by the defendant’s insurer, Zurich, and by the Department

of Work and Pensions showed that he was independently mobile and working in a burger

van. He even convinced his doctors to perform an operation which, the trial judge found,

would not have been deemed necessary had he been honest about the true extent of his

recovery. Nevertheless, the trial judge determined that Mr Summers was entitled to damages

of £88,000 for the valid part of his claim, plus interest and part of his costs (though some

costs were disallowed).

Zurich were somewhat aggrieved and appealed that on the ground that the Court should use

its inherent power to strike out this substantially dishonest claim in its entirety as an abuse of

process.

The Court of Appeal, standing by its earlier decision in Shah v Ul-Haq11

, upheld the judge’s

award of damages for the genuine part of the claim, and said that, as a matter of public

policy, a person cannot be deprived on the ground of abuse of process of a judgment for

damages to which he is otherwise entitled.

It also held that the power to strike out a claim under CPR 3.4 could only be exercised

‘summarily’ in the sense of ‘before trial’ and not therefore at the end of trial, as contended by

the defendant.

The Supreme Court overturned the Court of Appeal’s decision on both of these points,

although the Court declined to exercise the power to strike out Summers’ claim in its entirety.

The Supreme Court held that deliberately to make a false claim and to adduce false evidence

is an abuse of process and the power to strike out such a case (under CPR 3.4(2)(b) or the

inherent jurisdiction) is available at any time in proceedings, including at the end of trial. The

circumstances in which the court might strike out a claim on the ground of abuse of process

at the end of a trial are however very exceptional, and the power will only be exercised where

it would be just and proportionate to do so. If, after a trial, notwithstanding the claimant’s

10

[2012] 1 W.L.R. 2004 11

[2010] 1 W.L.R. 616

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dishonesty, the court is able to assess both the liability of the defendant and the amount of

that liability, it should normally do so.

The Supreme Court also provided valuable guidance on the approach to be taken in dealing

with cases of fraudulent exaggeration, including the drawing of appropriate inferences against

the fraudster claimant at trial, imposing penalties in costs, reducing interest on the valid part

of the claim and pursuing the claimant for contempt and/or under the criminal law.

Importantly, the Court acknowledged that Part 36 is of no real assistance in dealing with

claims tainted by fraudulent exaggeration and encouraged the use of Calderbank offers to

settle the genuine part of the claim, but at the same time offering “to settle the issue of costs

on the basis that the claimant will pay the defendant’s costs incurred in respect of the

fraudulent or dishonest aspects of the case on an indemnity basis.”

Comment

So the Supreme Court has declared that the court has the power to strike out a case for abuse

of process at any stage of the proceedings including at the end of trial, even when it had

already been determined that the claimant was, in principle, entitled to damages for the valid

part of a claim, and that deliberately to make a false claim and to adduce false evidence is an

abuse of process. However, the power to strike out is to be exercised only where it was just

and proportionate to do so, and that was likely to be only in very exceptional circumstances

when such application is made at the end of trial.

The insurance community remained unhappy at the decision because it was felt that the case

did not send out a strong enough message to deter fraudsters. However, it was a decision of

the highest English and Welsh Court and therefore not capable of being overturned except by

another Supreme Court decision or an Act of Parliament. It appears that the second of these

may in fact be what is happening. Although to explain the context of that, it is worth looking

at another recent case.

Gosling v [A ladder manufacturer] and Screwfix Ltd12

Qualified One Way Costs Shifting (QOCS) was introduced with the Jackson reforms in 2013

and allows claimants in personal injury claims to be protected from adverse costs orders

against them.

It is designed to level the playing field in such actions by providing that a defendant who

successfully defends a personal injury action, cannot generally recover its costs against the

unsuccessful claimant.

The CPR outlines two exceptions to QOCS:

1. The claim is struck out (in which case no court order is needed to enforce) – CPR

44.15; and

12

Unreported, Cambridge County Court, 29th March 2014

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2. The claim is found, on the balance of probabilities, to be “fundamentally

dishonest” – CPR 44.16 (in which case a court must order that the claimant was

fundamentally dishonest and allow the defendant to recover its costs).

Facts

On 31 July 2008 Mr Gosling sustained an injury to his knee, after falling through the rung of

a ladder. The ladder was designed by the first defendant and was supplied to Mr Gosling by

Screwfix. He made a claim for damages, of which over half of the total related to on-going

problems resulting from the accident.

The claim was issued in December 2011. It was defended on liability, causation and quantum

by the defendants. During the litigation Screwfix’s legal team had noted certain

inconsistencies in the reporting of the claimant’s symptoms and decided to carry out

surveillance on Mr Gosling to determine whether he was swinging the lead. That surveillance

revealed significant exaggeration which was then corroborated by Screwfix’s medical

experts.

The trial was listed for December 2013. Approximately eight weeks before the trial, the

claimant notified Screwfix that his claim was funded by Before the Event insurance and that

QOCS applied to his claim. Thus, Screwfix found themselves in the position of not being

able to get a costs order against Mr Gosling, even if they won, unless they could get

permission under the ‘fundamental dishonesty’ exception.

A week prior to the trial, he settled his claim with the first defendant ladder manufacturer and

served a Notice of Discontinuance on Screwfix, intending to bring matters to an end.

Screwfix opted to ask the Court to set aside the Discontinuance, proceed with the trial and

apply for an order for costs using the ‘fundamental dishonesty’ exception.

It was held, in the first decision of its kind in relation to the new QOCS regime, that

notwithstanding that the circumstances of the accident and the fact that Mr Gosling had

undoubtedly suffered some level of injury, Mr Gosling was ‘fundamentally dishonest’ and

that the exception therefore applied.

The judge held that the term “fundamentally dishonest” had to be looked at in context and

with regard to what its purpose was. In this particular case, the question the court had to

answer was whether Mr Gosling deserved the costs protection afforded to him by QOCS.

The judge held that there was a distinction to be drawn between dishonesty that was

fundamental to the claim and that which was not. Dishonesty that was ‘incidental’ or

‘collateral’ to the claim would not be fundamental. However, dishonesty that went to the

‘whole or a substantial part of the claim’ was.

The Court concluded that, in significantly exaggerating/misrepresenting the extent of his on-

going symptoms, Mr Gosling’s conduct was dishonest and that, on the facts, it was sufficient

to be characterised as fundamental.

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Therefore Mr Gosling lost his QOCS protection. The case doesn’t record whether his BTE

insurers picked up the tab or whether they were themselves able to escape liability under the

policy (perhaps via a fraud/dishonesty exclusion or a misrepresentation/non-disclosure point).

Comment

This is the first case in which QOCS has been reversed and clarified what ‘fundamental

dishonesty’ means in this context.

Mr Gosling exaggerated the injuries by approximately 50% in order to dishonestly inflate the

quantum of the claim. There was no question that the accident and some injury were genuine

but the judgment shows that any acts of dishonesty which go to a substantial part of the claim

can make it ‘fundamentally dishonest’ and therefore removes, as a matter of public policy, a

claimant entitlement to the protection of the QOCS regime.

Parliamentary Developments

It is notable that, as at the time of writing, Parliament is contemplating changing the law in a

manner that is linked to both Summers and Gosling.

A Clause 45 has been inserted into the Criminal Justice & Courts Bill that proposes to give

Courts the power to dismiss a Personal Injury claim if a claimant has been ‘fundamentally

dishonest’ – even if has an entitlement to damages. The only exception is where the claimant

would suffer ‘substantial injustice’ as a result.

The proposed wording was approved by the House of Lords on 24 July 2014 and the Bill as a

whole sent back to the House of Commons for further consideration.

The government has indicated that its view is that dishonesty in insurance claims should not

be permitted to prosper, even where there is an underlying valid claim. Opposition has come

from claimant PI lawyers and victims’ groups and it remains to be seen whether the proposals

will become law in their present form or with amendment.

(iii) Use of a ‘fraudulent device’ in an otherwise valid claim

Separate from the issue of exaggeration, the question arises of whether it makes a difference

if the insured uses some form of fraudulent device (meaning a document or other evidence) in

an otherwise valid claim? What if, legally, the device in fact has no bearing on the validity of

the claim – i.e. it is not material?

That was the issue that arose in the following case. It is a marine claim but has a general

application across other classes of business.

Versloot Dredging BV v HDI Gerling and others (The DC Merwestone)13

13

[2013] EWHC 1666

16

The Claimant was the owner of The DC Merwestone, a cargo vessel (“The Vessel”). The

defendant insurers were the hull and machinery underwriters. The Claimant sought €3.2m in

respect of the total loss of the Vessel’s engine when sea water flooded the engine room on 28

January 2010.

On 21 January 2010 the Vessel arrived at Klaipeda, Lithuania to discharge its cargo of soya

meal and load a cargo of scrap steel.

It was exceptionally cold (between -10C and -35C) and the Vessel’s gangways and hatch

covers were covered with ice. To open the hatch covers the crew chipped off the ice and then

used the Vessel’s emergency fire pump and hoses to draw sea water in and blast the chipped

ice away. When they had finished they put the pump away but forgot to drain it of sea water

or to close the sea inlet valve to the pump, as both parties later agreed they should have done.

On the morning of 28 January 2010 the Vessel left Klaipeda for Bilbao. Later that evening,

the engineer noticed water on the floor of the engine room. He raised the alarm and attempts

were made to use the engine room pumps to pump out the water. That failed and the water

continued to rise before, early on the morning of the 29 January 2010, the engine room

became fully submerged and the engine stopped working.

The Vessel was subsequently towed to Gdynia and then on to Bremehaven for an

investigation and permanent repairs to be carried out, including a new engine as the original

was damaged beyond repair.

It was subsequently determined that the cause of the water ingress of the engine room was

that the water that had been left in the emergency fire pumps had frozen, expanded and

cracked the casing and a filter. When the Vessel set sail, the ice melted and water got in

through the sea inlet valve which had been left open. It then made its way through the crack

in the pump and the filter and into the hull of the Vessel and then, through various non-

watertight points, into the engine room.

In theory the engine room pumps ought to have been able to cope but they failed to do so.

The Claim

Having appointed lawyers and conducted their investigations, the underwriters sought to

reject the claim on three main alternative grounds:

1. The loss was not covered as the proximate cause was crew negligence with regard to

the fire pump and valve, rather than a “peril of the sea” (i.e. ‘fortuitous’ or accidental

water ingress) which was covered.

2. The loss was caused by the Vessel’s unseaworthiness due to, amongst other things,

the blockages in the engine room pumping system and, as the Claimant allegedly

knew about this, so the underwriters could reject the claim on the basis of s.39(5)

Marine Insurance Act 1906.

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3. The claim submission contained a fraudulent statement by a member of the crew.

Thus, it was alleged, the claimant forfeited the claim by reason of a fraudulent device

in support of it.

It is the last of these that is of particular note for today, but it is necessary to briefly address

the other two.

As to the first, the Judge held that the proximate (i.e. immediate) cause was ingress of water

due to the negligence of the crew and that this was a fortuity or accident which would

normally constitute a peril of the sea. So underwriters’ defence failed.

On the second ground, the underwriters’ defence also failed on the basis that the Judge found

that the Claimant did not know of the deficiencies in the engine room pumping system

therefore there was no question of s.39(5) applying.

As to the third defence, the use of a fraudulent device, the position is that after the claim was

made, underwriters were investigating and asked the claimant for its view as to what had

happened and why the water ingress had not been dealt with.

In response, underwriters received a letter dated 21 April 2010, signed by a director of the

claimant, stating that according to the crew the bilge alarm had sounded at noon on the day of

the flood (about nine hours before the alarm was raised about water in the engine room),

however, as the vessel was in heavy weather, this had not been noticed. That was why the

flood had not been noticed until later.

Underwriters’ lawyers subsequently raised further queries during the investigation and

owner’s proceeded to give unclear and inconsistent answers about the alarm sounding. It was

later admitted that this was untrue and the bilge alarm had not sounded at noon and therefore

the explanation as to why the flood was not investigated was also untrue.

The law on fraudulent devices

The leading case is Agapitos v Agnew (The Aegeon) (No. 1)14

. There the Court determined

that the basic principle stood – i.e. that an insured who has made a fraudulent claim forfeited

any lesser, non-fraudulent, claim he could have made. It went further and decided that a

fraudulent device was used if the insured believed he had suffered the loss claimed, but

sought to improve or embellish the facts surrounding it by telling a lie. The test for

materiality was low – there was no requirement that the insurer should have believed the lie

or that it played any part in the insurer’s decision whether or not to pay the claim. It was the

insured’s attempt to deceive that gave rise to the forfeiture.

The Judge in the present case found that the owner had been reckless as to whether it

believed the crew’s version of events and, as the owner was aware that the policy covered

crew negligence, it was happy to accept the explanation. He further found the untrue

explanation had been advanced in order to expedite settlement of the claim.

14

[2002] EWCA Civ 247

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Therefore, the Judge found that, this being a lower Court, he was required to apply the

Agapitos test and conclude that, since a fraudulent device had been used, the entirety of the

otherwise valid claim had been forfeited. Thus underwriters’ final defence prevailed.

However in making the Judgment, the Judge expressed regret in the decision, saying that

whilst he was bound by the decision in Agapitos, he felt the forfeit of the claim in the

circumstances was “disproportionately harsh”. He had found that, on the scale of culpability

in the context of the making of fraudulent claims, owners’ conduct was at the low end. It was

a reckless untruth, not a carefully planned deceit, it was a lie only told on one occasion and

not maintained during the trial.

Instead, he indicated that he would prefer a test which “look[ed] at whether it was just and

proportionate to deprive the assured of his substantive rights taking into account all the

circumstances of the case”

The claimant was given permission to appeal for further guidance but it is not clear whether

or not the case is still going and whether any such appeal will be made.

Ironically, the Judge (Popplewell J) had been leading counsel for underwriters in Agapitos

and therefore instrumental in getting the law formulated in this way in the first place!

(iv) Conclusions

We can draw the following conclusions as to the present state of play in relation to fraud.

1. As to entirely fraudulent claims, it is clear that the Courts are prepared to exercise the

full array of powers they have, including the imprisonment of the perpetrators of

fraud.

2. Many insurers were unhappy that the decision in Summers v Fairclough Homes did

not send a more decisive message to would-be fraudsters in relation to valid claims

that are fraudulently exaggerated. However, this may soon be corrected by the

proposals in the Criminal Justice & Courts Bill to empower the Courts to strike out

‘fundamentally dishonest’ claims even when they are underpinned by an otherwise

valid claim.

3. The law on ‘fraudulent devices’ is arguably more strict than the position in Summers

since it requires the Court to declare an otherwise valid claim to be invalid even

where there is little evidence to show the alleged deceit was material to insurers. The

Judge in Versloot Dredging expressed a desire to see a more lenient test, based on the

individual facts, but that may prove to be a lone dissenting judicial voice in a general

move towards more decisive action to stamp out fraud in insurance claims.

Part 3

Sea Glory Maritime Co and Another v Al Sagr National Insurance Co (“The Nancy”)15

15

[2013] EWHC 2116 (Comm)

19

The Claimant ship-owners sought an indemnity from their marine insurers after a fire on-

board the vessel, “The Nancy” in February 2009. The Vessel was declared a constructive

total loss.

The Defendant Insurers sought to avoid the policy on several grounds, most notably including

misrepresentation and material non-disclosure in respect of port state control detentions,

breach of warranty (that the vessel would comply with ISM code) and breaking US sanctions

against Iran in that the ship-owners’ US bank processed the charter payments.

Background

Insurers took on the risk in December 2008 and the ship-owners did not declare that in the

four years prior to policy inception, the vessel was subject to four Port State Control (PSC)

detentions, the most recent of which (in October 2008) identified inadequate fire safety

measures which the owners were made to rectify immediately. The vessel had annual safety

and audit checks and at all times had an ISM document of compliance.

In January 2009, the Vessel carried cargo from Iran to China and payments under the Charter

were processed by the Claimants’ US bank in US dollars. In February 2009, there was a fire

on the vessel at the Russian port of Nakhodka. The vessel was deemed a constructive total

loss and the owners sought to claim under their hull insurance which named fire as an

applicable peril.

PSC detentions

The Defendant insurers claimed that failure to disclose the PSC detentions was a material

breach of the policy.

It was held that, had the Claimant disclosed the PSC detentions, the Defendant insurers would

have simply required that any safety deficiency be rectified and all relevant codes be

complied with. Blair J found that the fire safety deficiencies had been rectified to the standard

required by the PSC officer. As all rectifications were made at the time of the detention, the

Defendant would have always entered into the policy on the same terms and therefore had not

be induced into the policy by any material non-disclosure.

ISM compliance

The Defendant said that it was a warranty of the charter that the vessel was ISM compliant.

Ship-owners argued that such a warranty only required documentary compliance and that this

was achieved as the owning company held a valid Certificate of Compliance and the vessel

had a Safety Management Certificate. Insurers argued that the warranty required actual

compliance from the date of policy inception.

Blair J held in favour of the Claimants. He found that a “class maintained” warranty is a

purely paper warranty and added that, should the warranty be applied in the way suggested by

insurers, it would be “difficult to apply, difficult to evaluate and would give rise to

commercial uncertainty”. The Court was reluctant to impose a broader standard of warranty

20

where demonstrating non-compliance would take a detailed review of all practices and

records at any given time.

Breach of US sanctions against Iran

Defendant insurers also attempted to avoid the policy on the grounds that, by transporting

cargo from China to Iran and using a US bank account to process the payments, the owners

were violating the US sanctions on Iran and by doing so this amounted to a breach of

warranty of legality under section 41 of the Marine Insurance Act 1906. It was held that

whilst the payments were in breach of US law, this was entirely different from the cause of

action that the claim was made in connection with. The breach of US law had ceased at the

end of the charter to deliver cargo from China to Iran. As the fire occurred after this, there

was no causal link between the violation of sanctions and the claim for an indemnity.

Furthermore, to avoid a claim under s.41 of Marine Insurance Act, the “adventure insured”

needs to be an unlawful one. In this instance, the “adventure” was the transportation of cargo,

not the payment under a charter party.

Comment

The case provides some useful reminders that (alleged) non-disclosures have to have a

material effect on the underwriter’s decision whether to accept the risk or on what terms, and

that warranties, which do not have such a materiality element, are construed narrowly by the

Courts because of their draconian effect.

Last, actual or alleged illegality is not in itself a valid ground for avoidance of liability and

there needs to be a causal link between the illegality and the claim.