In July 2016, the Supreme Court ruled in favour of the owners of the DC Merwestone, ending a six-year battle with their underwriters and changing the law on ‘fraudulent devices’.
At first, it seemed as if the owners of the DC Merwestone had been extremely lucky. In January 2010, when water from the emergency fire pump system flooded the engine room, the crew could have found themselves on board a sinking vessel in the middle of the Baltic Sea. But fortunately for everyone involved, the DC Merwestone didn’t sink; a tug was able to tow the vessel to safety.
All that remained was for the owners, a Dutch family with a fleet of ten ships, to claim for the ensuing damage. Unfortunately what should have been a cut-and-dried case turned into a six-year battle with the underwriters that put a huge financial and personal burden on the family – and resulted in a change in English law.
A sign of things to come
Following the incident, the underwriters instructed a law firm to carry out an investigation. No one could work out how the vessel had flooded, so they needed to establish the root cause of the damage.
It was several months before the underwriters stated their position and much to the owners surprise and concern they had a real issue with the case. In the meantime, the owner had to reschedule loans with the banks and carry out repairs to the ship, without knowing if the underwriters were going to cover the EUR 3.2 million claim. Soon it became apparent that, in addition to these expenses, the owner was going to have to fund litigation and, at the insistence of underwriters, provide security for their legal fees, too.
Fortunately, in addition to the family interests, the ship owning company’s main stakeholder for this vessel was an industrial company who were able to fund the action, and an ‘after the event’ insurance policy, brokered by JLT, covered the initial security for costs. Still, being one ship down in a fleet of ten was bound to have a big impact and the ongoing stress and uncertainty was taking its toll.
A key decision
Unfortunately before instructing their own lawyers, and under the financial stress of not knowing if the claim would be covered, a fateful decision was made to tell a lie.
In response to a long list of questions by the underwriters, the owner claimed, a low-level alarm had gone off, which should have happened when water flooded initially into the forward part of the vessel. In fact, there was no evidence that the alarm had sounded, and the crew said they hadn’t heard anything.
Shortly after, the family appointed Jim Cashman, Partner and Shipping Specialist at the law firm, Holman Fenwick Willan (HFW).
To Jim, it was clear that this was a legitimate claim from an honest family, and there was no reason why it shouldn’t be paid. But even though the owner retracted the lie before the case went to court, English law was against him.
Off to good start
At the first hearing, in the High Court, HFW said that the owner’s claim was valid because the cause was water ingress – one of the so-called ‘perils of the sea’. At first, things went in the family’s favour. Not only did the judge uphold HFW’s view, but he also rejected three of the underwriters’ other defences, including that the DC Merwestone wasn’t seaworthy. Then, close to the end of the hearing, the underwriters sighted the defence of ‘fraudulent device’.
A disproportionately harsh sanction
“Anyone making a claim under a policy can tell a lie in three ways,” explains Jim. “They can exaggerate what their losses actually were. They can create an event that never actually happened, or they can have a perfectly legitimate claim, and tell a small lie in the presentation of that claim, in the hope of getting it through quicker.”
It’s the latter kind of lie – known as a fraudulent device, or ‘collateral lie’ – that derailed the family’s case. The judge ruled that, although the claim was valid, this point of law obliged him to reject it. He did so with reluctance, noting that: “To be deprived of a valid claim of some EUR 3.2 million as a result of such reckless untruth is, in my view, a disproportionately harsh sanction.”
Still determined to claim what was rightfully theirs, the family took the case to the Court of Appeal, which upheld the ruling on the same grounds. Finally, in March 2016, the case went in front of the Supreme Court.
It was there that the family’s fortunes turned a corner. In July 2016, the Justices overturned the previous rulings to find in the owner’s favour. As one of them put it in the judgment, “The position is different where the insured is trying to obtain no more than the law regards as his entitlement, and the lie is irrelevant to the existence or amount of that entitlement. In this case, the lie is dishonest but the claim is not.”
The impact on the insurance market
This ruling brought the family’s six-year struggle to an end. But, understandably, not everyone’s happy about the corresponding change to the law.
“There was an awful lot of publicity when the judgment first came out, and a predictably knee-jerk reaction from the underwriting community,” says Jim. “The reality is that they do face a problem with people exaggerating and fabricating claims, but this judgment has no impact on those claims whatsoever.” The media has made a particular point about the impact this ruling could have on high-volume insurance, saying that people might be tempted to claim that their house or car alarm was on when it wasn’t, for example. But Jim sees this as not really the point.
“I don’t think people are going to read this judgment and think, I’m going to tell lies next time I fill in the form to recover a claim” he says. “People will behave the way they’ve always behaved. If they’re susceptible to telling lies they will do and we are certainly not condoning that behaviour in any way.”
Rob Whaley, Head of Marine Claims at JLT Specialty, does think there’s likely to be an impact on policy wordings over time. “This case is still reverberating around the markets, so we haven’t seen anything happen yet,” he says. “But at the end of the day, underwriters can always create a clause that specifically excludes cover where a fraudulent device was involved.”
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For further information, please contact Rob Whaley, Head of Marine claims on +44 (0)20 7558 3982 or email firstname.lastname@example.org
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