The English Court of Appeal has upheld a decision by a lower court that an insurance underwriter must pay under a liability policy even though the insured had given it a forged letter, Singapore's Shipping Times has reported.
The court held that although the forgery was a deliberate act to deceive the insurer, it did not affect the insurer's liability to pay under the policy and, as such, was not a breach of the insured's duty of utmost good faith.
The claimants were the owners of the vessel Mercandian Continent, which had undergone repairs in a shipyard in Trinidad.
The shipyard was insured under a policy that covered it for negligent repairs. Shortly after the vessel was repaired and delivered to the claimants, the vessel exploded, causing severe damage.
Eventually the parties agreed that the cause of the explosion was the negligent repairs at the shipyard, namely, insufficient tightening of bolts in one of the engine cylinders.
The claimants spent almost S$1.9m (£715,000) to repair the vessel and lost another £250,000 as a result of the vessel being held up in a yard for repairs.
They claimed these amounts from the shipyard, which in turn notified its insurer of the claim.
The contract between the claimants and the shipyard did not contain any express term on which country's law should apply in the event of a dispute. The claimants commenced proceedings in England based on an agreement made between them and an assistant manager of the insured (the shipyard).
The insurer's solicitor wanted the matter to be heard in Trinidad as he was under the (mistaken) impression that it was a more favourable jurisdiction for the insurer and wanted to oppose the proceedings in England.
The senior management of the shipyard decided to help the insurer's solicitor by forging a letter which made it appear that the claimants had been informed that the shipyard's assistant manager had no authority to agree to the jurisdiction of English courts. This letter was given to the insurer's solicitor.
As soon as the insurer discovered the forgery, it disclaimed liability. Eventually the claimants obtained judgement against the shipyard.
The shipyard failed to pay and was duly wound up by the claimants, who then went after the insurer for payment under the liability policy. The insurer declined liability on the basis that under section 17 of the UK's Marine Insurance Act 1906, it may avoid the policy as the forgery by the shipyard's senior management was a breach of the duty of utmost good faith.
At first instance, Justice Aikens in the English Commercial Court held that the shipyard had not breached its duty of utmost good faith as the forgery could only have influenced whether English or Trinidad courts had jurisdiction and not the liability of the insured to pay under the policy.
The insurers appealed but lost.
Under section 17 of the Marine Insurance Act 1906, either party to an insurance contract could avoid the contract if the other did not observe utmost good faith but the Act did not provide any further guidance on the matter.
The Court of Appeal held that under the circumstances, it was only appropriate to invoke section 17 in a post-contractual situation if the forgery was such that it gave the insurer the right to terminate the contract and for this the fraud must have been material.
For the fraud to have been material, it must have had an effect on the insurer's ultimate liability.
However, in this case the insurer had not suffered any prejudice as a result of the insured's fraudulent conduct. The forgery related only to the question of whether the claim against the insurer could be heard in England and had no legal relevance to any argument that the insurer could have sustained to deny liability under the policy.
In any event, the law in England and Trinidad was the same and so it made no difference to the insurer's liability that the matter was heard in England, held the Court of Appeal.
