Miller's Marine War Risks
Page 241
CHAPTER 27
Wilful misconduct and fraudulent claims
Wilful misconduct and fraudulent claims
27.1 In order to maintain the expected level of losses, marine insurance law and practice developed a range of rules to control the insured’s behaviour during the period when the underwriter is on risk. This chapter is concerned with those rules that restrict the insured’s ability to bring about losses by deliberate or reckless conduct. The application of the rules has been less frequent in war risks insurance, as marine risks underwriters are more likely to face “scuttling” losses and the like, but war risks underwriters have defended claims before the courts, and these are reviewed in this chapter. 27.2 Historically, marine insurance relied in this regard on the “wilful misconduct” rule, whereby losses proximately caused by the insured’s deliberate or reckless actions were treated as outside the limits of cover. In more recent years, the courts have developed (and sometimes discarded) alternative mechanisms, including the continuing duty of utmost good faith and the forfeiture rule for fraudulent claims. These rules are not mutually incompatible, but vary in their requirements for application and remedy. What unites them is that in each case the underwriter will have a near total defence to liability to a claim connected to the misconduct and that this defence will normally be based on a principle of public policy rather than contractual choice. Each rule is reviewed in turn, before a consideration of their cumulative effect. As much of this chapter is concerned with culpable behaviour by the insured, we begin with a review of the standard and burden of proof.Proof of wilful misconduct and scuttling
27.3 Allegations of criminal and/or fraudulent conduct by the insured have serious consequences. If proven, there are likely to be long-term implications for the individuals concerned and their business interests. Criminal charges may follow, and there is the possibility of proceedings for contempt of court, where evidence is not given honestly. Where the allegations are not substantiated, there is a serious risk of reputational harm, and in some circumstances, the underwriters may face action for defamation. In light of these pressures, the courts have developed a detailed process for considering allegations of fraud. 27.4 The standard and burden of proof in the war risks insurance context was restated by Teare J. in The Brilliante Virtuoso.1 He drew extensively on the approach he had adoptedPage 242
- (1) The burden of proving scuttling to support a defence of wilful misconduct or fraudulent claim falls on the underwriter. The standard of proof is the “balance of probabilities”, but the evidence required to satisfy the court mist reflect the seriousness of the accusations made, and will “fall not far short of the rigorous criminal standard”;4
- (2) There is no presumption of innocence, but the court should give “due weight” to the effects of finding that the insured acted fraudulently and criminally;
- (3) It is not usually possible to find direct evidence of scuttling, and the Court will consider all “relevant indirect and circumstantial evidence” in making its decision;
- (4) The insurer will not normally be able to establish a complete narrative in how the scuttling occurred, and it is no bar to the underwriter’s claim that “parts of the canvas remain … blank”;5
- (5) The question for the court is whether the facts proved are sufficiently unambiguous to establish complicity;
- (6) The previous good character of the insured is not a bar to a finding of complicity;
- (7) Proof of motive is not required, but may assist in demonstrating “dishonesty in fact”.
In concluding, Teare J. adopted the guidance of the court in McGregor v. Prudential in respect of the overall standard of proof to be met: “even strong suspicion of the plaintiff’s guilt is inappropriate” and that the court need be satisfied that complicity is “the only probable conclusion”.6