Fraudulent Claims: the Rights of Underwriters Clarified

In the first, Super Chem Products Ltd v American Life and General Insurance Co Ltd [2004] 2 AII ER 358, the Privy Council rejected a long-standing suggestion that an insurer who defends a claim by alleging fraud against the assured is unable to rely upon any other defence, a suggestion which leads to the possibility that if fraud is not proved then the assured is entitled to recover come what may. In Super Chem the assured’s chemicals factory in Trinidad was damaged by fire in April 1990. The assured’s insurance covered material damage and business interruption. The policies contained provisions to the effect that the making of a fraudulent claim deprived the assured of all benefit under the policy and that any action by the assured on the insurance had to be brought within 12 months of a loss. In November 1991 the insurers denied liability on the grounds that the assured had been guilty of arson and that proceedings had not been brought against the insurers within the stipulated period. The assured brought an action against the insurers in the Trinidad courts, and allegations of fraud were found not to have been made out. That left the defence based on the contractual limitation period, and it was the ability of the insurers to rely upon this clause which ultimately reached the Privy Council.

The assured relied on Jureidini v National British and Irish Millers Insurance Co Ltd [1915] AC 499. In that case insurers pleaded fraud against their assured, and were then sued in the courts. The insurers applied to have the judicial proceedings stayed, on the ground that the policy contained an arbitration clause. The House of Lords held that the arbitration clause extended only to disputes as to the amount of loss and not as to allegations of fraud, so that it could not operate. Viscount Haldane, however, based his decision on the notion that a plea of fraud was a repudiation of the insurers’ obligations, which disentitled them from relying upon the conditions of the policy, including the arbitration clause.

In Super Chem the Privy Council rejected the views of Viscount Haldane, and ruled that a plea of fraud did not remove the entitlement of the insurers to rely upon other terms of their policy. As Lord Steyn pointed out, an allegation of arson by insurers was not a breach of contract at all, let alone a repudiation of contract, but instead was a reliance on their right (expressed in the contract itself in Super Chem) not to pay a fraudulent claim. Further, even if there was a repudiation, as a matter of law this could be effective only if the assured chose to accept it by bringing the contract to an end: however, making a claim on the policy was the very opposite of accepting any repudiation. Lord Steyn also noted that the argument was not open to the assured in the present case, because the contractual time limit had expired by the time that the insurers pleaded arson, so that the assured’s rights had been lost long before the insurers had chosen to respond. The more general point from the reasoning in Super Chem is that insurers are not required to put all of their eggs in the basket of fraud, and are fully entitled to plead fraud as an alternative to other defences.

The second decision, Eagle Star Insurance Co Ltd v Games Video Co SA, The Game Boy [2004] 1 Lloyd’s Rep 238, confirms that a claim which is perfectly genuine, in that there has been a loss by an insured peril rather than by the hand of the assured, can become fraudulent if the assured deliberately makes false statements to the insurers in the hope of obtaining speedy payment. The case concerned a floating casino insured under a valued policy for US$1.8 million although in fact it was worth only about 10 per cent of that amount, as scrap value. The vessel became a total loss. Simon J held that the policy could be set aside for pre-contractual misrepresentation as to the value of the vessel, but independently of that defence he held that the assured had lost any rights by virtue of a fraudulent claim. After the loss the assured had shown to the insurers’ loss adjusters a series of documents which purported to demonstrate that the vessel had been worth the full US$1.8 million. These included the contract by which the assured had purchased the vessel, a charterparty of the vessel after its purchase, and receipts for payment and invoices showing that repair and refurbishment works had been carried out.

After a careful review of the evidence, the Court concluded that each of these documents was false, and had been created by the assured after the loss in order to paint a picture of the value of the vessel. Thus, even if it had been the case that the policy had been valid from the outset, the way in which the claim had been made deprived the assured of an indemnity.

The lesson is clear: fraud encompasses not just the circumstances of the loss, but also the manner in which the claim is made.

Robert Merkin is a Consultant at BLG and Lloyd’s Law Reports Professor of Commercial Law at the University of Southampton.

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