28 November 2014
Insurance Brief
Introduction
Welcome to this month’s edition of Insurance Brief.
In this issue, we report on a recent Court of Appeal decision which develops the law concerning the availability of the “fraudulent device” defence for underwriters.
We also revisit a tree root subsidence case from last year, in which we acted for the successful Claimants, which considers the perennial issue of the recoverability of loss adjuster’s fees.
Finally, we provide a timely review of the Insurance Bill, which is currently being scrutinised by a Special Public Bill Committee in the House of Lords.
As always, we hope you enjoy this month’s edition and welcome your feedback. Nick Williams
Head of Insurance Division
NUISANCE
Subsidence
Technology and Construction Court holds claimant homeowners entitled to costs for remedial works, loss adjuster’s fees and general damages for damage to property as result of subsidence caused by neighbour’s tree roots - Saqib Khan & Shazia Khan v Harrow Council & Helen Sheila Kane [03.09.13]
In November 2000, the Khans carried out a survey on the property prior to purchase. It was noted that mature trees and shrubs were present, so the Khans were advised to insure particularly against subsidence. They purchased the property in July 2001.
By September 2006, the Khans noticed damage in the form of cracks to the property and contacted insurers. Loss adjusters were appointed and a preliminary report advised that additional investigations and monitoring should commence before carrying out any repair works.
Further investigations revealed that a Cypress hedge (H1) belonging to Mrs Kane had the “potential to be a significant factor in current damage”. It was recommended that a section of H1 should be removed. An oak tree on the Khans’ property (T2) and an oak tree on Mrs Kane’s property (T1) were also identified as a possible causes of damage and it was recommended not to allow T1 and T2 to exceed their current dimensions.
Further damage to the Khans’ property was reported in June 2009 and the Khans’ solicitors wrote to Mrs Kane asking for the nuisance to be abated by felling H1. Repair works were undertaken to repair the damage to the Khans’ property.
Proceedings were subsequently commenced against Mrs Kane for the damage caused by H1 and T1.
Decision
The Technology and Construction Court held that H1 and T1 had caused damage to the property, as had T2. With regard to foreseeability, the court found that a reasonably prudent landowner would have appreciated that there was a real risk that subsidence might be caused by H1 but not by T1. It was also found that Mrs Kane failed to take appropriate steps to eliminate the risk of subsidence damage and was, therefore, liable in nuisance. There was a finding of contributory negligence (assessed at 15%) due to the Khans’ failure to communicate with Mrs Kane and inform her of the risk of damage to their property.
In assessing damages, Mrs Kane argued that the Khans’ loss adjuster fees were irrecoverable because the fees represented the cost of “managing the relationship” between the insured and the insurer and not a subrogated claim. The Khans argued that the fees were, in fact, for investigating the damage and organising the specification for remedial works and putting them out for tender, not adjusting the loss for insurers. The court found in favour of the Khans based on the dates of the invoices, although the invoices did not specify the work undertaken.
Comment
This decision from late last year underlines the fact that in some circumstances loss adjusters’ fees may be recoverable.
Although the claimants in this case were claiming loss adjuster fees as damages, as opposed to a disbursement, the decision should act as an important reminder to insurers that the court will examine the nature of the work performed by the loss adjuster pre-instructing a solicitor when determining if their fees are recoverable. As always, all cases are fact sensitive, but if a loss adjuster is carrying out work for the benefit of the insured rather than the insurer as was the case here then some or all of the fees may be recoverable as damages. If a loss adjuster is appointed after instructing a solicitor, a true agency agreement should exist, and the work undertaken by the loss adjuster should be easier to recover. Insurers should ensure, however, that the work carried out by the loss adjuster is properly itemised.
Kennedys acted for the successful Claimants.
For further information, contact Paul Carter, Kennedys, 020 7667 9538 and
paul.carter@kennedyslaw.com and Simon Namnyak, Kennedys, 020 7667 9362 and
simon.namnyak@kennedyslaw.com
POLICY
Fraud
Court of Appeal rules in favour of “fraudulent device” defence for underwriters – (1) Versloot Dredging BV (2) SO DC Merwestone BV v HDI Gerling Industrie Versicherung AG & others [16.10.14]
The assured was the owner of the DC Merwestone (the “Vessel”). In January 2010, the Vessel’s engine room flooded causing irreparable damage to the engine. The assured made a claim under its hull and machinery policy for the resultant losses. The Judge at first instance rejected Underwriters’ coverage arguments but reluctantly held that the loss, although technically covered under the policy, had been forfeited by the assured as a result of the employment of a fraudulent statement or device. The fraudulent device in question was a false representation made by the assured’s general manager about the flood, namely that the crew had reported that the bilge alarm had sounded but it had been ignored by the crew who attributed it to the rolling of the vessel in heavy weather. He had done so to try to focus the blame on the crew rather than the owners.
Decision
The Court of Appeal considered that the appeal raised two key issues: (1) Whether the rule about fraudulent claims applied to fraudulent devices.
(2) If so, whether it could stand in light of Article 1 of the First Protocol to the European Convention on Human Rights, which provides that “every natural or legal person is entitled to the peaceful employment of his possessions”.
By way of recap, an assured who fraudulently embellishes his claim forfeits any lesser claim which he could properly make. This is known as the “fraudulent claim rule”. In Agapitos v Agnew (The Aegeon) [2003], Mance LJ suggested that the fraudulent claim rule should be extended to fraudulent devices such that an assured who employs a fraudulent device (which is where the assured believes he has suffered the loss claimed but seeks to embellish the claim with some lie) also forfeits his claim.
In this instance, the Court of Appeal acknowledged that while the decision in The Aegeon was obiter, there were several compelling reasons why it should be applied:
The Aegeon was authoritative, having been cited without disapproval in subsequent cases and having some support from antecedent authority and from the Law Commission’s view of the law and its proposals for reform.
An assured owed a duty of utmost good faith to underwriters. This was the foundation for the fraudulent claims rule. The reasoning behind the forfeiture rule for fraudulent claims applied to fraudulent devices (fraudulent devices being a “sub-species” of a fraudulent claim).
There was a public policy justification for the forfeiture being applied to both fraudulent claims and devices, namely the deterrence of fraud by assureds. As to the possible infringement of Article 1, the Court of Appeal concluded that the aim of the rule (i.e. deterring fraud) was legitimate and that the sanction (i.e. forfeiture) was not disproportionate to achieving that aim. As the rule only applied in the case of fraud, it did not affect all assureds. Accordingly, the limitation on the scope of the rule rendered it a proportionate response to the aim.
In light of the above, the assured’s appeal was dismissed. Comment
This decision will come as welcome news to underwriters. It is the first time that a court has applied the dicta in The Aegeon as ratio. The decision will serve as a
warning to assureds when making a claim under their policy. Use of a fraudulent device will have the same effect as making a fraudulent claim, namely the forfeiture of an otherwise valid claim.
It should also be noted that the Court of Appeal rejected the opportunity to develop the fraudulent device rule in the direction of a more pragmatic materiality test. The aim is to deter fraud. In any event, fraudulent device will still need to be proved on the facts.
For further information, contact Karoon Akoon, Kennedys, 020 7667 9017 and
karoon.akoon@kennedyslaw.com
THE INSURANCE BILL
The English and Scottish Law Commissions’ joint review of insurance contract law primarily sought to resolve the ambiguities in respect of a business insured’s pre-contractual duty of disclosure and to address criticisms of the law of warranties regarding materiality of risk and the perceived partiality towards insurers following a breach. The joint review sought to achieve fairer, more proportionate remedies and to provide more certainty within the legal framework.
The resulting Insurance Bill, which sets out the new provisions regarding the application of insurance contracts and also seeks to amend the Third Parties (Rights against Insurers) Act 2010, has now been submitted to a Special Public Bill Committee of the House of Lords.
Given the scope of the Bill as it currently stands, this article will focus on the three main reforms to the statutory framework – regarding an insured’s duty of disclosure, insurance warranties and remedies for fraudulent acts.
Duty of fair presentation
In an effort to resolve ambiguity surrounding the extent of a business insured’s pre-contractual duty of disclosure, the Bill provides that the insured must make a “fair presentation of the risk”. That duty encompasses an insured’s duty of disclosure, the manner in which disclosure is made and the duty not to make any misrepresentation.
A “fair presentation of the risk” is one that:
Makes disclosure of every material circumstance which the insured knows or ought to know, failing which, disclosure which gives the insurer sufficient information so as to put a prudent insurer on notice that it needs to make further enquiries in an effort to identify any material circumstance.
Makes that disclosure in a manner which would be reasonably clear and accessible to a prudent insurer.
In which every material representation as to a matter of fact is substantially correct, and every material representation as to a matter of expectation or belief is made in good faith.
An insured is not required to disclose a circumstance if:
It diminishes the risk or in circumstances where an insurer knows, ought to know or is presumed to know it.
It is something to which the insurer waives information.
These exceptions reflect the current position under the Marine Insurance Act 1906 in respect of an insurer’s knowledge, however the Bill sets out detailed provisions concerning both an insured’s and insurer’s knowledge.
The duty on each insured under a contract of insurance, whether joint or composite, will not change from the current position in that each and every insured will be subject to a duty of disclosure (or rather, a duty of fair presentation as set out above).
Where an insured breaches its duty of fair presentation, the Bill expands the scope of remedies available to an insurer and reflects a more proportionate approach. Avoidance of the policy, at present the only remedy available to an insurer, does not distinguish between an innocent and reckless breach by an insured and has long been perceived to be unduly harsh on an insured in some circumstances.
The option for an insurer to avoid the contract remains open where an insured’s breach was found to be deliberate or reckless, as well as the option to refuse all claims or elect not to return any of the premiums paid. Where a qualifying breach was neither deliberate or reckless, then an insurer can elect to vary the terms of the contract (on the basis that it would have entered into the contract on different terms) and/or make a reduction on the amount to be paid on a claim.
Where a composite policy is in place, an insurer’s remedy will be against the insured in breach only.
Warranties
Under the Bill in its present form, “basis of contract” clauses are abolished. This will ensure that insurers expressly indicate whether any representation by an insured is to constitute a warranty under the contract.
The Bill also seeks to abolish the application of any rule of law in which an insurer’s liability is discharged where an insured is in breach of a warranty (either express or implied). This proposed reform follows industry concern that the current law, which demands strict compliance with a warranty irrespective of materiality to the risk, is disproportionate and unjust to insureds and also seeks to resolve the problematic and difficult application of sections 33(3) and 34(2) of the 1906 Act, which require exact compliance despite materiality or remedy of a breach.
An insurer’s liability under a contract of insurance in respect of any loss occurring, or attributable to something happening, will be suspended following breach of a warranty (express or implied) by an insured, save where:
The warranty ceases to be applicable to the circumstances of the contract because of a change in circumstances.
Compliance with the warranty is rendered unlawful by any subsequent law. The insurer waives the breach.
An insurer’s liability under a contract will be restored once the breach has been remedied by the insured (where remedy is possible).
A breach of warranty will be taken to have been remedied if the risk to which the warranty relates later becomes essentially the same as that originally contemplated by the parties. In any other case, if the insured ceases to be in breach of the warranty, it will be taken to have been remedied. This provision allows an insured to take steps to restore a risk to the state it would have been prior to the breach. However, it appears to be the case that an insurer may rely on a breach of a warranty even if that breach is not material to the loss that has occurred, provided the breach remains unremedied.
Fraudulent claims
Where an insured makes a fraudulent claim, the Bill provides that the insurer will not be liable to pay the claim and may recover any sums paid in respect of the claim from the insured. An insurer may also be entitled to terminate the contract from the time of the fraudulent act, following which all liability to the insured under the contract may be refused from the time of the fraudulent act. Where group insurance has been effected, an insurer’s remedy will only apply against the party for whom the fraudulent claim was made, thereby protecting the rights of innocent insureds.
These provisions provide a clear unambiguous framework for an insurer’s remedies against fraudulent claims and replaces the current remedies of forfeiture and avoidance.
Comment
The Bill as presently drafted not only provides a clear framework for an insured’s duty in respect of disclosure, but also seeks to redistribute responsibility for presentation of the risk among all parties to a contract of insurance. In turn, the remedies proposed reflect a more proportionate, fairer approach where an insured is in breach of its obligations, either in respect of disclosure or warranties.
The Bill signifies a move towards encouraging a collaborative framework for policy holders and insurers and serves to address criticisms of the current law which is considered to be outdated and lacking in certainty. The Bill also reflects a considered, modern and pragmatic response to the needs of businesses and insurers and should provide a competitive edge in the global market.
We will report further as the Bill progresses through the House of Lords and then the House of Commons.
For further information, contact Emily Brett, Kennedys, 020 7667 9485 and
emily.brett@kennedyslaw.com
Kennedys is a trading name of Kennedys Law LLP. Kennedys Law LLP is a limited liability partnership registered in England and Wales (with registered number OC353214).
