Agapitos v Agnew

The common law fraudulent claim rule may apply before litigation where an insured uses a lie directly related to an insurance claim, intending to improve the prospects of settlement or success, and the lie would objectively yield a not insignificant improvement if believed. This extension to fraudulent devices was expressed tentatively.

Once hostile litigation begins, however, the parties’ conduct is governed by the procedural rules and the court’s powers. Neither the common law fraudulent claim rule nor the duty of utmost good faith under section 17 of the Marine Insurance Act 1906 supplies an additional defence merely because an insured lies in the litigation. If the underlying claim remains good, the litigation lie does not itself require judgment for the insurer.

The insured claimed under a marine policy following the destruction of a passenger ferry by fire during hot works. The insurers alleged breach of warranties concerning the prior issue of a Salvage Association certificate. After workmen’s statements were disclosed, the insurers sought to amend their defence to allege that the insured and his predecessor had knowingly misrepresented in pleadings when the hot works began.

Toulson J refused permission to amend. The insurers appealed with permission from Clarke LJ. The central issues were whether fraudulent devices used to promote an otherwise valid insurance claim could forfeit the claim, whether the relevant common law rule or section 17 of the Marine Insurance Act 1906 continued after litigation began, and whether the proposed amendments disclosed an arguable defence.

1. Appeal dismissed unanimously. Mance LJ delivered the leading judgment. Park J concurred and Brooke LJ agreed with both judgments. The proposed plea was legally untenable because it depended on alleged lies made after the litigation had begun.

2. Mance LJ considered, obiter, that the fraudulent claim rule can apply when an initially honest claim is maintained after the insured discovers that it is exaggerated. A deliberately suppressed, known defence may also bring a claim within the rule. There is no relevant distinction between a defence based on breach of warranty and a known right to avoid for misrepresentation or non-disclosure.

3. Mance LJ tentatively considered that the use of a fraudulent device before litigation should be treated as a form of fraudulent claim, at least for forfeiture of the claim concerned. The lie must be directly related to the claim and intended to improve the insured’s prospects. If believed, it must objectively be capable, before final adjudication, of producing a not insignificant improvement in the prospects of settlement, a better settlement, or success at trial. Actual inducement is unnecessary. The common law rule should operate outside section 17 of the Marine Insurance Act 1906, so that avoidance ab initio would not follow merely from its application.

4. The decisive rule was different once hostile litigation had begun. The procedural rules, disclosure obligations, privilege rules, sanctions for perjury and the court’s case-management powers then govern the parties’ conduct. The policy considerations limiting section 17 after litigation also require the common law fraudulent claim rule, including any extension concerning fraudulent devices, to end at that point. The alleged false statement in a pleading therefore created no additional insurance defence.

5. Park J agreed that a litigant whose lies are exposed does not lose an otherwise valid case merely because the evidence was embellished. The insurers remained entitled to prove at trial that hot works began early and that the insured was in breach of warranty, but the alleged litigation lie could not independently defeat the claim. Permission to appeal to the House of Lords was refused.

1. Court of Appeal: The insurers’ appeal was dismissed unanimously. Toulson J’s refusal to permit the proposed fraud amendments was upheld, although the court did not adopt his primary reasoning.

2. Queen’s Bench Division: Toulson J refused the insurers permission to amend their defence to allege fraudulent representations and breach of the duty of utmost good faith during the litigation.