Dishonesty and insurers - beware!

Posted: 6th November 2014

In a guideline case which underlined the need for total honesty when communicating with insurers, the owners of a vessel which suffered more than Euros 3 million of damage in a near-sinking will go without a penny in compensation after one of its representatives told a reckless, and ultimately pointless, untruth.

shipDue to a combination of freezing weather and a sea inlet valve which was negligently left open by the crew, the vessel’s engine compartment had flooded and its main engine was damaged beyond repair. A judge accepted that the loss was caused by an insured peril and the owners would have been entitled to full compensation for their loss – but for the question of fraud.

The owner' representative had told the insurers that the ship’s master had reported on certain circumstances relating to the loss when he had not in fact done so. He had strayed from the truth in the hope that the claim would swiftly be settled and the accuracy of his statement was later confirmed by the master. However, the owners' claim was dismissed on the basis that a ‘fraudulent device’ had been used.

In challenging that decision before the Court of Appeal, the owners pointed out that the claim was entirely legitimate and that its value had in no way been inflated. In the circumstances, the dismissal of their claim in its entirety was neither just nor proportionate and amounted to a ‘manifest injustice’.

However, the Court noted the vital public interest in maintaining a ‘bright line rule’ by which those who resort to fraudulent devices against insurers forfeit their rights. In dismissing the appeal, the Court recognised that the result was a harsh one for the owners but decided that the absolute rule was a proportionate means of deterring fraud in the insurance context.