Marine Insurance Fraud

Baris Soyer

• Publisher: Informa Law from Routledge
• Year: 2014
• ISBN:
  9781317746232
• Edition: 1
• Topic: Derecho
• Subtopic: Derecho marítimo

This book provides a comprehensive and coherent legal analysis of the impact of fraud on the position of various parties to a marine insurance contract, as well as the cover provided by standard marine policies. The issues under discussion in this invaluable guide are also equally relevant in the context of non-marine insurance contracts.

Helpfully divided into two parts; the first part deals with the impact of fraud committed by parties to an insurance contract i.e. the assured, brokers and insurers.The second part analyses the extent to which standard marine policies cover the fraudulent and dishonest activity of third parties to an insurance contract.

This book will be of huge practical assistant to practitioners specialising in marine insurance as well as insurance generally, and to professionals, academics and post-graduate students.

PART 1

CHAPTER 1

GENERAL OVERVIEW OF FRAUD IN MARINE INSURANCE

I FRAUD IN MARINE INSURANCE AND CONTRIBUTING FACTORS

1–1 It is estimated that the annual cost of insurance fraud for the sector is in the region of £2.1 billion.¹ Although this figure might seem frightening, the actual cost of fraud for the industry and society as a whole might well be much higher. It is not entirely clear whether the figures published are based on confirmed fraud cases or whether investigation and prosecution costs of suspicious cases have also been taken into account. It is also doubtful whether the cost of measures taken by the industry to prevent fraud is reflected in these figures. Furthermore, it is unquestionably the case that many forms of dishonest activity go undetected and on some occasions unreported, making it practically impossible to determine the actual cost of insurance fraud.

1–2 There is no reason to assume that the position is any different in the context of marine insurance. Although no data assessing the precise impact of fraud for the marine insurance industry is available, anecdotal evidence seems to indicate that the cost of fraud for the marine underwriting industry is immense. Fraud in the marine insurance context is frequently carried out by well-organised criminal syndicates capable of committing complex and expensive frauds. These syndicates usually concentrate their efforts on cargo insurance fraud, which requires substantial planning due to the number of parties that need to be involved to execute such a fraud. For example, generous insurance cover for cargo that never existed in the first place can be put in place by criminal elements with a view to making a claim for its mysterious disappearance during the transit. For a fraud of this nature to be successful, it is vital to secure the co-operation of a variety of individuals including warehouse personnel, drivers, shipping clerks and surveyors. However, it should not be assumed that marine insurance is immune to fraud perpetrated by opportunist individuals. Such individuals could be the owners of insured ships who decide to sink their ageing tonnage for insurance money, especially at a time of economic downturn,² or brokers who are prepared to stretch the truth or conceal material facts to secure a deal for their principals at a lower premium.

1–3 It would not be an exaggeration to suggest that almost every maritime fraud perpetrated might bounce back to the marine insurance or reinsurance markets as a claim. Let us take the example of a fraudster who sets up a paper company involved in international trade with the intention of inducing people to enter into a carriage contract with him.³ When the fraudster disappears from the scene with the cargo of the innocent shippers or consignees, the only feasible option available to them will be to pursue the cargo insurers (assuming, of course, their policy provides cover against this kind of risk). In a similar fashion, in a case of indemnifying the assured for losses resulting from the dishonest conduct of third parties, a marine insurer will probably turn to its reinsurers. In that way, the reinsurers might find themselves liable for any kind of dishonest conduct affecting the maritime sector regardless of where the fraud has been perpetrated.⁴ These examples demonstrate clearly the relationship between maritime and marine insurance fraud. However, it is also possible that criminal gangs or opportunist individuals might target marine insurers specifically with an intention of obtaining monetary benefits from them by deceit. At this stage, it is appropriate to evaluate the various factors that make the marine insurance market a fertile stomping ground for fraudsters.

(1) Nature of Marine Business and Organisation of Insurance Companies

1–4 Marine insurance is an international business. Most marine risks are brought to the market from overseas. Marine underwriters know very little (or in most cases, nothing) about the risk or the assured in question. This makes it very difficult and costly for them to inspect the proposed risks at the underwriting stage with the objective of adopting proactive fraud prevention strategies. Put another way, in the context of marine insurance there is more room available to an assured determined to expose the information asymmetry, which is inherent in insurance transactions, to its full potential against marine underwriters, due to the fact that marine underwriters would normally lack familiarity with the business of potential assureds.

1–5 Naturally, marine underwriters fighting against fraud must rely heavily on their claim departments which are expected to employ reactive investigation strategies. However, in practice, this is not often the case. Claim departments are often undervalued and under-staffed within an insurance company, as opposed to the underwriting and investment departments which are regarded as the true generators of profit.⁵ This might lead claim departments to settle, especially small claims, with little investigation in an attempt to keep costs down. The claim departments might also be tempted to adopt a similar approach in cases where the loss has occurred in a remote part of the world and there are limited opportunities for investigation. On reaching the conclusion that investigating the circumstances of loss could be a costly exercise with no real financial benefit, the claims department might well decide to pay for a loss, even if there might be a suspicion of foul play.

1–6 Another organisational difficulty stems from the fact that there is usually little interaction between the claims and underwriting departments of an insurance company. This might put a strain on the ability of claims departments to discover fraudulent misrepresentation and/or concealment on the part of the assured or his agents at the pre-contractual stage. In some reported cases, it has been observed that the communication might be less than efficient even within the same department of an insurance organisation.⁶

(2) Nature of Marine Policies

1–7 ‘A valued policy is a policy which specifies the agreed value of the subject matter insured.’⁷ It is a very common practice to insure marine risks by using valued policies. In case of a total loss, under a valued policy the assured is entitled to receive the value specified in the policy regardless of the market value of the subject matter of insurance. The use of valued policies has advantages for both parties to a marine insurance contract. From the assured’s perspective, it removes the difficulty of proving the true market value of the insured property⁸ and satisfies the needs of financiers for foreseeability, ensuring that insurance proceeds will be adequate to finance the acquisition of a replacement asset or to discharge financial obligations attached to the acquisition of the insured property.⁹ For the insurer, a higher agreed value not only secures a higher premium income but might also, in some cases, reduce the possibility of liability arising.¹⁰

1–8 Despite its practical benefits, a valued policy could provide the necessary platform for a shipowner facing financial difficulties to perpetrate insurance fraud by obtaining a hull policy above the market value of an ageing ship before deliberately sinking her.¹¹ If the fraud succeeds, this will generate a cash flow which might be sufficient to rescue an insolvent or waning business. Of course, the valuation is conclusive between the parties only in the absence of fraud,¹² and the insurer could possibly deny liability for misrepresentation if fraud on the part of the assured could be established;¹³ but the burden of proving that the assured’s intention in overvaluing the subject matter of insurance is on the insurer and that is not always an easy task.¹⁴

(3) Absence of Successful Prosecutions/Convictions for Marine Fraud

1–9 It is often said that an effective use of criminal law could act as a deterrent against insurance fraud. Despite the soundness of the theoretical foundations of this view, in practice it is a rarity to witness convictions being secured for insurance fraud. This is not to suggest that the criminal law is not well equipped to deal with this type of fraud. Generally speaking, the introduction of a new ‘offence of fraud’ under the Fraud Act 2006 should provide the necessary framework for securing convictions for those individuals who take part in insurance fraud.

1–10 Section 2(1) of the Fraud Act 2006, for example, provides that a person is guilty of fraud if he dishonestly makes a false representation with the intention to make a gain for himself or another, to cause loss to another, or to expose another to a risk of loss.¹⁵ Although the Act does not attempt to describe the meaning of ‘dishonesty’, there is a vast amount of case law on the subject which indicates that for dishonesty the defendant’s conduct must fail to conform: (a) to generally accepted standards of honest conduct (as they are and as the defendant believes them to be); and (b) to the limits of what he is legally entitled to do (at least as he believes those limits to be, and arguably also as they actually are).¹⁶ There can be no doubt that an assured who fraudulently misrepresents the attributes of the proposed risk at the outset could potentially be charged with a criminal offence under this section.¹⁷ The same is true of an assured who submits a fraudulent claim to an insurer, as it is invariably the case that submitting such a claim would involve a dishonest misrepresentation regarding the circumstances surrounding the loss. In a similar vein, s 3 of the Act makes it an offence when a person dishonestly fails to disclose to another person information which he is under a legal duty to disclose, with the intention of making a gain for himself or another, to cause loss to another, or to expose another to a risk of loss. It is evident that the intention of the draftsman was to extend the application of this section to insurance contracts even though full disclosure is merely a condition precedent to the enforceability of the transaction and the retention of benefits conferred under it, and strictly speaking there is no legal duty to disclose.¹⁸ Accordingly, an assured who dishonestly conceals material facts at the pre-contractual stage is liable for conviction under s 3 of the Act.¹⁹ Needless to say, the position will be the same for an insurer who dishonestly makes material misrepresentations at the pre- or post-contractual stage with the intention of making a gain for himself or another, to cause loss to another, or to expose another to a risk of loss. Under the Act, it will be also possible to convict an independent agent of the assured or insurer who abuses his position dishonestly with the intention to make a gain for himself or another, to cause loss to another, or to expose another to a risk of loss, by virtue of s 4.²⁰

1–11 For the sake of completeness, it should be stressed that there is criminal legislation in force that can be utilised to secure convictions for those who are not parties to an insurance contract but, nevertheless, play a significant role in assisting the assured or his agents in perpetrating insurance fraud. For example, a surveyor who provides false survey reports to assist a criminal organisation in obtaining cargo insurance for goods that never existed in the first place could be charged under s 17(1) of the Theft Act 1968 which stipulates:

Where a person dishonestly, with a view to gain for himself or another or with intent to cause loss to another,—

(a) destroys, defaces, conceals or falsifies any account or any record or document made or required for any accounting purpose; or

(b) in furnishing information for any purpose produces or makes use of any account, or any such record or document as aforesaid, which to his knowledge is or may be misleading, false or deceptive in a material particular;

he shall, on conviction on indictment, be liable to imprisonment for a term not exceeding seven years.²¹

In similar fashion, a shipping agent or a warehouse supervisor who falsifies various documents to assist the assured in bringing a claim for loss of cargo that never existed in the first place, or for short delivery when in fact the goods have been delivered in good condition and order, could be charged w...