The Supreme Court judgment in Versloot Dredging v HDI Gerling [2016] UKSC 45 has now been handed down and it is bad news for insurers as the court has overturned the decision of the Court of Appeal and upheld the appeal of an insured whose claim was previously held forfeit. For a recap of the background of the claim and the Court of Appeal Judgment, please review our previous article here.

Claim background

The claim arises as a result of an insurance claim in excess of €3,000,000 after the Claimant's dredging vessel began taking on water leading to a complete engine failure. The claim was rejected by insurers after it was proved that the Claimant had made several fraudulent statements in the course of the investigations.

Initial forfeiture

Initially, the claim was held to be forfeit by the Court of Appeal. This decision had been largely based on the test in Agapitos v Agnew [2003] QB 556 which is a two-fold test; the fraud must be (1) directly related to the claim (2) intended to enhance the prospects of the claim's success.

The Court considered that, whilst seemingly disproportionate in light of the fairly minor nature of the fraud, the approach taken was consistent with common law principles and that any change would lead to confusion and would be inconsistent with the objective to deter fraud.

'Collateral lies' 

Insurance contracts carry a duty of utmost good faith imposed by the Marine Insurance Act 1906. Any fraudulent or exaggerated claims would be forfeit and the insured would be unable to recover any legitimate portion of the claim. Section 17 of the Marine Insurance Act previously provided a remedy of avoidance for any breach of the duty of utmost good faith however this remedy has been removed by the Insurance Act 2015 (the Act), due in force next month.

The Act states that an insurer is not liable to pay a fraudulent claim and has the option to terminate a policy upon discovery of a fraudulent act (Section 12). Provisions within the Act in relation to fraudulent claims and any breach of the duty of utmost good faith will only apply to contracts entered into on or after 12 August 2016. Crucially, the Act does not define what a fraudulent claim is or whether the fraud needs to be substantive to lead to forfeiture of the whole claim.

The Supreme Court judgment in Versloot

The Supreme Court has now overturned the decision of the Court of Appeal and judgment has been awarded for the Claimants in the sum of €3,241.310.60 plus interest. The decision, made by a majority of four judges, is a departure from a common law doctrine used in the insurance field for over 150 years.

In considering the definition of a fraudulent claim, the court distinguished between three different circumstances:

  1. The whole claim is fabricated;
  2. The claim is genuine but has been dishonestly exaggerated; and
  3. The claim is genuine but information given in support has been dishonestly embellished.

It was confirmed that in the first two instances an insurer would not be liable (even for any part of the claim which was justified); however, they came to the conclusion that in the third instance, the common law rule in relation to fraudulent claims did not apply. The court considered that such embellishments (which they referred to as 'collateral lies') were not intended to obtain something to which the insured party was not entitled and were therefore irrelevant in the sense that they did not affect the recoverability of the claim. In short, a lie which has no impact on an insurer's actions is not sufficient to render the whole claim forfeit.

The court went on to consider that in the law of deceit, reliance on the misrepresentation is key and that if the deceived party would have done the same thing regardless of the deceit, the claim cannot be avoided.

Summary

It is clear that the judgment will not alter long accepted principles regarding false and exaggerated claims. An insurer will have no liability for these and the court remains unwilling to 'look behind fraud' to consider any genuine portion of the claim as the two cannot be severed.

However the judgment does indicate a new approach to more minor instances of fraud where the forfeiture of the entire claim is disproportionate to the offence. The key question to consider is "does the misstatement affect the insured's entitlement?" If the answer is no, then insurers are unlikely to be able to avoid liability.