1.          General remarks

C1        Article 3.3 deals with the case of a fraudulent claim made by the reinsured (paragraph (1)) and of a fraudulent conduct on part of the reinsurer (paragraph (2)), and defines the available remedies. As in the context of a primary insurance contract, fraudulent conduct by one of the parties may also occur in the context of a contract of reinsurance. Fraudulent conduct by the reinsurer to the detriment of the reinsured may be rare in practice but cannot be ruled out. A reinsurer may, for instance, fraudulently miscalculate the premium due or fraudulently delay paying a claim under false pretences. The remedies listed in paragraph (1) should be applied with the necessary modifications to a fraud committed by the reinsurer (“mutatis mutandis”).

C2        If a party acts fraudulently, it simultaneously breaches its duty to act in utmost good faith under Article 2.1.2. Article 3.3, as lex specialis, supersedes Article 3.1(1) and makes Article 3.1(2) applicable with regard to the right to terminate the contract, which presupposes that the aggrieved party cannot reasonably be expected to uphold the contract.

C3        Article 3.3 does not govern the situation in which one party has, by fraudulent behaviour in the process of negotiation, induced the other party to form the contract. These situations are dealt with by the provisions on remedies for breach of the pre-contractual duty of disclosure in Article 3.2, which govern fraudulent behaviour by the reinsured, and Article 3.2.5 PICC, which governs fraudulent behaviour by the reinsurer.

C4        Article 3.3 takes its inspiration from UK Insurance Act 2015, section 12(1)(a)–(c) as well as the estoppel provisions contained in many national insurance contract laws. However, Article 3.3(1)(c) and (d) do not follow the approach taken in UK Insurance Act 2015, section 12(1). In particular, Article 3.3(1)(d) does not have retroactive effect going back to the date of the fraudulent act. This avoids uncertainties that may arise in determining the retroactive date. Moreover, the aggrieved party is sufficiently protected by the remedies provided.

C5        Article 3.3 is a rule of substantive law, not procedural law. If a party has obtained a final court judgment or arbitral award by fraud, the remedies available to the party prejudiced by the fraud are not governed by the Principles. This kind of procedural fraud must be addressed by other rules, such as civil procedure rules or tort law.

2.          Fraudulent conduct

C6        Article 3.3 does not define the terms “fraudulent claim” and “fraudulent conduct” in order to allow for a broad, flexible interpretation, as it is not practically possible to identify every case that could conceivably fall within the scope of the provision. This is in line with the UK Insurance Act 2015 (see UK Insurance Act 2015, Explanatory Note No 99, referring to common law principles on fraud) and the PICC (see Article 3.2.5 Comment 2 PICC).

C7        In order to ensure a uniform interpretation (Article 1.1.6(1)), the notion of fraud follows the meaning given to it in the context of Article 3.2(3)(a) (see Comment 31 to Article 3.2) as well as Article 3.2.5 PICC (see Article 3.2.5 Comment 2 PICC). Accordingly, Article 3.3 is based on the following general understanding of the term “fraud”: conduct is fraudulent if a party, through deception, intends to gain an advantage to the detriment of the other party. This includes situations in which a party is reckless as to the truth of a statement and situations in which a party is indifferent to whether the other party would suffer detriment. Moreover, the remedies provided by Article 3.3 will apply irrespective of whether the advantage to the fraudulent party materializes.

C8        The interpretation of the term “fraudulent claim” in paragraph (1) is unproblematic if only a single claim is fraudulently presented. This is the case where a reinsured falsely asserts that it has losses within the cover of the primary insurance contract. This also includes cases e.g. where a claimant presents a justified claim but inflates the amount of the claim, e.g. by manipulating documents. Article 3.3 also applies to the whole claim if a part of the claim is tainted by fraud, but other parts are not. What constitutes one claim or several independent claims is a matter of construction of the contract of reinsurance.

C9        If several independent claims are asserted and only one of these claims is fraudulent, the forfeiture provision of Article 3.3(1)(a) only covers the claim that has been fraudulently presented. However, the fraudulent presentation of a claim (in addition to the presentation of an independent justified claim) can lead to the termination of the entire contract pursuant to Article 3.3(1)(d).

C10     Article 3.3(1) also governs the presentation of a justified claim if the reinsured uses fraudulent means, e.g. by submitting a fake receipt when the original cannot be found, in order to circumvent evidential difficulties or to assert a justified claim more quickly or easily than would be possible without deception. In this respect, Article 3.3(1) differs from English law (The DC Merwestone [2016] UKSC 45).

3.          Paragraph (1): Remedies for fraudulent claims

a.          Subparagraphs (a) and (b): Forfeiture of the fraudulent claim

C11     Subparagraph (a) provides that the aggrieved party is not liable to pay the fraudulent claim. As Lord Hobhouse noted in Manifest Shipping ([2001] Lloyd’s Rep 389), the logic behind these rules is simple: “The fraudulent insured must not be allowed to think: if the fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing”. The forfeiture of the entire claim that is fraudulently asserted mitigates the moral hazard and thus protects the aggrieved party.

C12     Subparagraph (b) consistently entitles the aggrieved party to recover any sums already paid in respect of the fraudulent claim. The provision applies, in particular, to advance payments or partial payments that have already been made on the asserted claim. An advance payment is typically subject to the expressly declared or implied understanding that its justification depends on the legitimacy of the asserted claim and the absence of fraud.

a.          Subparagraph (c): Right to additional damages

C13     Subparagraphs (a) and (b) prevent the aggrieved party from suffering damage because of the fraudulent claim. However, the aggrieved party may suffer additional loss, for example by incurring costs to uncover the fraud. The right to damages under subparagraph (c) is governed by Chapter 7, Section 4 PICC. In this respect, Article 3.3(1) differs from UK Insurance Act 2015, section 12 which does not provide for an entitlement to additional damages.

b.          Subparagraph (d): Right to terminate the contract

C14     Subparagraph (d) expressly invokes Article 3.1(2). Consequently, the party affected by fraud may terminate the contract if it cannot reasonably be expected to uphold the contract. This condition will regularly be met when a fraudulent claim is made. However, exceptional cases are conceivable in which the fraud is not of such importance that termination of the entire contract would appear to be proportionate. Depending on the circumstances of the individual case, this may be the case, for example, if the fraud relates solely to the swifter fulfilment of a justified claim.