Drug-running lawyer's claim founders

A fraudulent, drug-running insurance lawyer and the demise of his pleasure craft, Boaty McBoatface, were the basis of an entertaining scenario developed by Professor Rob Merkin for the NZILA 2018 lecture series.

He then presented a mock judgement, which identified what Prof Merkin, Professor of Law at the University of Exeter, lecturer at the University of Auckland, and senior counsel at Duncan Cotterill, in the guise of Judge Once, found was a flaw in New Zealand law.

Boaty McBoatface was equipped with all the latest safety technology and the instruction manual said if the oil pressure dropped, switch the engine off immediately.

Dougal, in line with his training as an insurance lawyer, did not bother to read the manual, maintaining the established market custom that any issues can be sorted out at the claims stage.

On 1 April 2017, Dougal took Boaty McBoatface on a short trip across Auckland Harbour to Devonport. On board was a package containing a large quantity of methamphetamine, which Dougal was taking to his drug dealer friend Hamish.

Just after leaving, Boaty McBoatface's warning system came to life and the engine automatically dropped to half the cruising speed. Dougal decided the safest thing was to continue the voyage. After another minute the engine cut out entirely.

Boaty McBoatface was towed back to Auckland by harbour authorities. An official conducted a routine search and discovered the package. But, after the transfer of $100, the official decided his eyes had deceived him.

The engine was destroyed. Dougal submitted a claim to his insurer, BoatsRUs. The policy covered "accidents", excluded liability for loss caused by negligent repairers, and imposed an obligation on Dougal "to take all reasonable steps to avoid or prevent any loss".

The insurer sought the sale agreement, which Dougal could not find. He asked Hamish to draft and backdate a sale agreement, which Dougal presented to BoatsRUs on 30 April 2017.

On 5 May 2017 Dougal and Hamish argued over cricket and Hamish threatened revenge. On 7 May 2017 BoatsRUs received a letter "from a friend", saying the sale agreement was a forgery and Dougal had been using Boaty McBoatface to carry illegal drugs.

BoatsRUs declined the claim for the wrecked engine on the grounds Dougal:
(a) was committing an illegal act when the loss occurred
(b) had submitted a fraudulent claim
(c) was in breach of the reasonable precautions clause
(d) was in breach of the implied warranty of legality in the Marine Insurance Act 1908.

Dougal issued proceedings.

Doubtful Sound District Court Justice Once delivered judgement on 14 February 2018. (This is an abbreviated version.)

Dougal is of notoriously bad character. He is a criminal, seeks to corrupt public officials, is dishonest in his dealings with the insurer, is an idiot to an awe-inspiring level and knows nothing about NZ cricket. But does any of that justify summary judgement or strike out against him?

Dougal has committed two serious criminal offences, possessing narcotics and bribing a public official. But did those acts affect his ability to enforce his policy on the principle that a claimant is precluded from founding a cause of action on his own illegal acts?

The Contracts and Commercial Law Act 2017 says illegal contracts have no effect, however, a party to an illegal contract may be granted relief, including validation of the contract, if the court considers it "just" to do so.

An illegal act committed in the course of performance of a contract does not at common law make the contract illegal; in general the guilty party may lose the right to enforce the contract because of the illegality, but the overall validity of the contract is unaffected.

My conclusion is:
(1) The policy of insurance is not illegal as formed – there was no agreement to insure an illegal risk.
 (2) The policy of insurance is not rendered illegal as performed.
 (3) There is no connection between Dougal's criminal acts and the damage to Boaty McBoatface's engine. The damage would have occurred whether Dougal had been carrying drugs or law books. By the time the bribery took place, the damage had already been suffered.
(4) Even if some causal link could have been shown, the NZ courts should apply Patel v Mirza and determine the purpose of the legislation, whether public policy is served by denying recovery and whether such denial is proportional to Dougal's unlawful conduct.

The warranty of legality

S42 of the Marine Insurance Act 1908 states: "There is an implied warranty the adventure insured is a lawful one, and that, so far as the assured can control the matter, the adventure shall be carried out in a lawful manner."

A further provision, s89, preserves the ordinary rules of common law, including general principles applicable to illegality of contract.

Did Dougal's unlawful acts trigger the s42 warranty? It is possible the term "warranty" in s42 was intended simply to refer to situations in which the assured's insurance was incapable of enforcement at common law because of illegality of the underlying risk or because of the assured's commission of illegal acts in the performance of the insured adventure.

My view of s42 is that it is a statement of the circumstances in which the policy is of no effect, and that in turn can only be the position if the general law recognises the illegality of the underlying risk or the illegality of the performance of an otherwise lawful risk.

This court is not free to ignore a statutory provision, but NZ's dearth of authority permits the conclusion it is permissible to peer behind the legislation to see exactly what s42 means. Lifting the cloak shows s42 should be construed as no more than a statement that there is an implied limitation in a marine insurance policy that an adventure or performance rendered unlawful by ordinary law is not covered by the policy. It follows that the warranty of legality stands or falls with ordinary principles of illegality affecting contracts.

Dougal's misdeeds do not give BoatsRUs an illegality defence at common law. 

The alternative view of s42, that it is a contractual warranty whose effect is to terminate the risk, still does not assist BoatsRUs. There was nothing illegal in the adventure and it is straightforward for Dougal to show that his breach of the warranty had no causal effect on the loss he actually suffered.

Fraudulent claim

That Dougal has attempted to deceive his insurers is not open to question. He has procured and presented a forged document to substantiate his claim. Is this a fraudulent claim and – if so – what are its consequences?

Fraud is more than negligence and requires deliberate or reckless conduct on the part of the assured. The civil standard of proof is applicable to establish fraud. The duty is sometimes expressed in terms of utmost good faith, although the main significance of that point is in relation to the insurer's remedy for a fraudulent claim.

Dougal's fraud was deliberate and constitutes "fraud" on any definition of that word. However, fraud by the assured in the claims process is not necessarily equated with "fraudulent claim". There is a potential distinction between cases where the assured is making a claim in circumstances where he is not entitled to do so, and cases where the assured has an entitlement to payment but has been dishonest in establishing that entitlement.

Dougal's claim must be dismissed on this ground. This is one of the rare situations where a judge is forced to an outcome she did not wish to reach. However, should permission to appeal be sought so the matter can be reconsidered by the Court of Appeal, I would have no hesitating in acceding.

Firstly, an insurance claim is a property right. Confiscating that right because of an attempt to defraud that is doomed to failure has a smack of lack of proportionality.

Secondly, while I appreciate that the amount of loss suffered by the insurance industry from fraudulent claims runs into millions of dollars annually, this type of fraud does not lead to payment of claims that were not otherwise payable. To the contrary, insurers receive a windfall if the assured tells a pointless lie.

Thirdly, there is something of an incongruity here. Collateral lies are designed to secure payment and the facts of at least some of the decided cases show that such lies are often told when all other avenues to secure payment have been exhausted.

Fourthly, the loss suffered by the assured by use of a fraudulent means or device is the entire claim whereas the loss suffered by the insurer is the cost – if any – of investigating and pinning down the lie.

Finally, the underlying ethos of 1970s statutory reforms to contract law in general, and insurance law in particular, is a move towards proportionality. Adopting Versloot is a progressive step this jurisdiction would be wise to take.

I am driven by the authorities to hold that there was a fraudulent claim by the use of fraudulent means and devices. The claim should be struck out on that ground.

Accident and negligence

It is common ground that if there was an accident the policy responds but subject to the defence that the loss was the result of Dougal's negligence in contravention of the policy requirement of reasonable care.

BoatsRUs has raised the fundamental question of whether the gross negligence of an assured precludes recovery either because it means there is no "accident" or that there is an absence of "reasonable care".

A reasonable person unaware of the significance of the alarms on Boaty McBoatface would probably have decided a short trip would do no harm and was preferable tobobbing around in the harbour waiting for relief.

Maybe a reasonable person would have read the documentation before firing up, but that imposes an objective standard, namely that of a reasonable person aware of the oil pressure alerts and thus the need to stop immediately. I am satisfied the loss was accidental.

Disposition

Dougal is unable to recover for the loss of Boaty McBoatface. He is not precluded from doing so by reason of public policy, the absence of an accident, negligence or the warranty of legality, but because, under NZ law as it presently stands, he has made a fraudulent claim. This outcome is highly unsatisfactory.

Of his various transgressions, forging a document of title is the least of them. It is unrelated to the merits of his claim and at worst has caused the insurers minor inconvenience.

Click here for the full scenario.

Click here for the full judgement.