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10 March 2014
Reviewing recent case law in the field of insurance and reinsurance law is a considerable task. An electronic search produces 27 decisions in the past six months alone, of which a strikingly high proportion are judgments of the Court of Appeal.
There are several important cases among these, including the House of Lords decision in Aneco, concerning the application of the BBL principle to the measure of damages recoverable from reinsurance brokers that negligently fail to procure excess of loss reinsurance cover as instructed. On the particular facts of the case, the brokers were held to be liable for the whole loss, not merely the sums that would have been recoverable under the reinsurance. A few months earlier, in HIH v Chase, the Court of Appeal considered the effect of 'truth of statement' clauses in film finance insurance policies, which purport to exclude or limit the duty of utmost good faith.
One decision stands out in its general significance to all fields of insurance. This is the Court of Appeal's decision in Agapitos v Agnew, revisiting the question of the scope of the duty of utmost good faith at the claims stage following Star Sea.
The decision in Star Sea
The House of Lords decided in Star Sea in January 2001 that in order to make out a defence under Section 17 of the Marine Insurance Act 1906, underwriters had to show that a claim was "made fraudulently" (Lord Justice Hobhouse). The duty was limited to one of "honesty" (Lord Justice Scott). On the facts there was no finding of fraud in any respect, with the result that the defence necessarily failed and that no further refinement of the principles was required.
This decision left several questions open. For example, would fraud relating to a defence, as opposed to the claim itself, be sufficient? And is the remedy forfeiture of the claim or avoidance of the whole contract of insurance?
In Agapitos the Court of Appeal revisited this territory. There were two questions for consideration: first, whether it would be enough for insurers to prove that the insured had used fraudulent means to promote a claim, which might itself prove to be valid in all respects, or whether the claim itself must be fraudulent in some respect; second, whether the application of the common law rule and/or Section 17 ceases entirely with the commencement of litigation. In answering these questions, Lord Justice Mance embarked upon a full consideration of the nature and scope of the fraudulent claim rule and its consequences.
The litigation point appears to have given the Court of Appeal little difficulty. There were powerful dicta in the speeches of Lord Justice Clyde and Judge Hobhouse in Star Sea to the effect that once litigation starts, its rules govern the parties' rights and supply the remedies; there is no room for greater obligations or rights arising from Section 17 or a common law rule. Arguably, Lord Justice Steyn and Lord Justice Hoffmann had endorsed this view. The Court of Appeal in Agapitos applied the dicta, extending them to cover any separate common law rule regarding fraudulent claims, as well as the Section 17 duty with which the House of Lords was concerned in Star Sea.
This decision, which was the ratio of the judgments, probably precludes any reliance by insurers on steps taken by their insured in the conduct of litigation as a defence. In Agapitos, Judge Mance ruled that the courts will not permit insurers to "pick over the prior course of the litigation to find an additional defence".
Fraudulent devices and materiality
The more difficult question in Agapitos was whether reliance by insurers upon a 'fraudulent device' could be sufficient to amount to a defence.
Judge Mance, with whom Lord Justice Brooke and Mr Justice Park agreed, held that the use of a fraudulent device is a sub-species of fraudulent claim. Thus the fraudulent claim rule is not limited to fraud affecting the validity or amount of the claim. This avoids drawing a distinction between points going to the substance of the claim itself and points going only to a defence, which could give rise to difficulty. Judge Mance also held that the rule can apply to the fraudulent maintenance of an initially honest claim.
More importantly still, Judge Mance grappled with the difficult question of materiality. His "tentative" solution was to treat as relevant "any lie, directly related to the claim to which the fraudulent device relates, which is intended to improve the insured's prospects of obtaining a settlement or winning the case, and which would, if believed, tend objectively, prior to any final determination at trial of the parties' rights, to yield a not insignificant improvement in the insured's prospects - whether they be prospects of obtaining a settlement, or a better settlement, or of winning at trial".
The significance of this formulation is that it departs from the more stringent test proposed by Lord Justice Longmore in the Court of Appeal's decision in Mercandian Continent. In that case, Judge Longmore had held that the fraud must be material, in the sense that it would have an effect on underwriters' ultimate liability and that the gravity of the fraud must be enough to enable the underwriters to terminate the contract for breach.
Judge Mance's reasoning was informed by his analysis that there is a separate common law fraudulent claim rule in addition to the continuing, though limited, duty of utmost good faith under Section 17. Under the common law rule, a fraudulent claim gives rise to a complete defence to the claim itself, but does not terminate the contract. The only remedy under Section 17 is avoidance ab initio. By identifying a common law rule that does not give rise to this drastic remedy, and thus the policy considerations at the fore of the speeches in the House of Lords in Star Sea, Judge Mance opened the way for a wider fraudulent claim rule.
The diet of the Commercial Court, and of London commercial arbitrators, continues to be rich in insurance and reinsurance litigation. Many of the judgments handed down in the past months concern issues of conflicts of law, reflecting the international nature of much of this work.
Perhaps the greatest court time in the next months and beyond will be devoted to the film finance insurance litigation. The House of Lords is due to consider the effect of the exclusion and waiver clauses in HIH v Chase, while in a considerable case management exercise, these cases proceed towards trial at first instance. There is little doubt that the points considered in Agapitos will be before the courts again soon.
Julian Flaux QC and Rebecca Sabben-Clare are barristers at 7 King's Bench Walk