The Supreme Court has now handed down its decision in the final chapter of the long-running Versloot Dredging BV litigation. This decision is important for insurers across all business lines as it signals an unexpected shift in the treatment of certain dishonest conduct by policyholders.
Insurance fraud is classified in three varieties. The first is fictitious or deliberately self-inflicted loss. The second is genuine loss which is dishonestly exaggerated. The third is the genuine claim which the insured supports with some lie or deception either (i) to improve their chances of a faster payout; or (ii) because they mistakenly believe that the truth would entitle insurers to decline cover.
It is this third variety, traditionally referred to as a 'fraudulent device', that concerned the Court. Ever since The Aegeon (2002) an insured has been understood to forfeit a valid claim by telling a lie which:
"if believed would tend to yield a not insignificant improvement in the assured’s prospects of success prior to any final determination of the parties’ rights"
Unlike the other types of fraud, the insured is trying to obtain no more than they are entitled to by law, using dishonest means.
The Supreme Court now prefers the term 'collateral lie' to 'fraudulent device'. It has also shifted the focus to whether the deception has in fact improved the insured's positon, rather than whether it would have improved that position if believed.
What were the facts of the case?
A lie had been told in support of the insured's claim for damage to a ship. At a time when the cause of damage remained unclear, the purpose of the lie was to convince insurers that the loss had occurred due to the negligence of the crew and not the condition of the vessel. It was feared that the defective condition would afford insurers a defence to the claim under the terms of the policy. The trial judge concluded that whilst the condition of the vessel was in fact irrelevant to policy cover in this case, the claim failed because it was supported by a lie. The decision was reached reluctantly by the judge because of the perceived unfairness of rejecting a valid claim of over €3m for what was perceived to be a minor untruth. However, the Court of Appeal upheld the decision and emphasised the need to deter insurance fraud of any kind.
What did the Supreme Court decide?
The majority of the Supreme Court disagreed with the earlier decisions. It held that the lie must be relevant to the existence or amount of the insured's entitlement. This is to be determined at the end of the trial once all of the facts are known. Unlike the old fraudulent device test, it is not judged by how the situation might have appeared to the parties at the time the lie was told.
It was recognised that a collateral lie is immoral. It may also have wasted insurers' time or influenced their decision to make the payment when they did. However, these reasons were not deemed convincing enough to prevent an insured from receiving the insurance monies to which they are legally entitled. This was different to the fraudster looking to make an illegitimate or exaggerated claim.
Some members of the Supreme Court noted that, following the Star Sea (2001), a lie told by the insured once proceedings commence does not have the effect of barring recovery of a genuine claim. They therefore considered it inconsistent to penalise an insured for lying during the earlier investigation of a genuine claim.
The discovery of the collateral lie was also viewed as bringing with it sufficient sanctions for the insured. Whilst perhaps unlikely, the risk of prosecution remained. Their credibility both in and out of court would be lost. They would likely be penalised when it came to third party costs. Their insurance would probably be cancelled early and they would face difficulty in obtaining cover in the future as well as increased premium. It was regarded as disproportionate to add the rejection of a valid claim to this list of consequences.
How big a change does this change represent?
A lie calculated to improve the insured's positon will no longer be enough in and of itself to repudiate the claim if it has no actual impact on the validity of the claim. It will not trigger the remedies currently available for fraudulent claims under the common law and, from 12 August 2016, the Insurance Act 2015.
However, the law still does not allow insureds to benefit from fraud.
An insured who deliberately burns down premises may tell a material lie by relying on a false alibi. Similarly, the submission of false or forged documents which inflate an otherwise genuine loss is material and entitles insurers to decline the entire claim.
It is only where the fraud has no impact on the insured's entitlement that insurers will be unable to reject the claim. For example, if the insured provides a false alibi but is ultimately found to be innocent of the fire, the policy will respond. Similarly, where the insured provides a forged invoice which evidences an otherwise genuine payment, insurers will be obliged to indemnify.
Whilst the decision may be controversial, it does bring clarity. The old 'fraudulent device' test was arguably convoluted. Now the question would seem to be more simple. Has the insured actually improved their entitlement under the policy through fraud? If so, they forfeit the claim. If not, they will likely suffer a variety of negative consequences, but the rejection of the valid claim will not be among them.
One member of the Court also recognised that a claim against the insured might nonetheless lie in damages. Whilst the issue was not considered, it is arguable that insurers might be able to claim in the tort of deceit for the wasted costs of having to investigate the lie.
Finally, it remains open to insurers to review their wordings and take a stricter approach to any collateral lie told by a non-consumer policyholder. This would be provided it was made clear to the insured that fraud under the policy went beyond what constitutes a fraudulent claim under the law as it now stands.