The Supreme Court rules that a collateral lie embellishing a valid claim does not amount to a fraudulent claim.

Versloot Dredging BV and another (Appellants) v HDI Gerling Industrie Versicherung AG and others [2016] UKSC 45

Facts The vessel DC Merwestone was incapacitated by an ingress of water which flooded the engine room. A claim was made in respect of damage to the engines under a policy of marine hull insurance in the sum of approximately €3.2 million.

The relevant individual employed by the vessel’s managers was frustrated by the delay in the insurers recognising the claim and making a payment on account. At a time when the cause of the flooding was unclear, the individual said that the bilge alarm had sounded but that the crew had been unable to investigate the leak because of rolling of the ship in heavy weather. The employee said that members of the crew had told him this when, in fact, it was merely his own theory.

The individual thought that, by making the statement, he could speed up payment of the claim when the insurers might otherwise focus on, for example, the potentially defective condition of the ship. In fact, the loss was covered by the policy and the issue of whether the bilge alarm had sounded was irrelevant.

Judgment

Categories of fraud The Supreme Court drew distinctions between:

a. entirely fabricated claims;

b. claims which are true but fraudulently exaggerated; and

c. claims which are valid but the information given in support of the claim was embellished by a collateral lie, for example, so as to secure faster payment or where the insured does not realise the strength of the claim.

An entirely fabricated claim is manifestly fraudulent. Similarly, where a claim is exaggerated, the law declines to sever any invented portion of the claim from the honest part.

However, the Supreme Court found important differences in quality between the fraud involved in cases (a) and (b) on the one hand, and collateral lies in case (c) on the other. Where collateral lies are concerned, the Supreme Court emphasised that the insured does not gain anything from the lie which it was not entitled to anyway. The immateriality of the lie to the claim therefore makes it appropriate to distinguish a collateral lie as a form of fraudulent device from a fraudulent claim in the true sense of the word.

Policy considerations In the context of insurance law, the courts have always been alive to policy considerations surrounding fraud, the cost of which ultimately falls on the general body of policy holders in the form of increased premiums.

However, the extension of the fraudulent claims remedy to collateral lies was thought to be disproportionate and not justified by a policy of deterrence. Furthermore, Lord Toulson doubted whether the Supreme Court’s decision would, in fact, have an impact on any given individual’s decision to lie in support of a claim.

Lord Mance, the only dissenting judge, thought that the majority’s analysis ignored the obvious reality that lies are told for a purpose, almost invariably to obtain the advantage of having the claim considered and hopefully met on a false premise and, in Lord Mance’s view, a person who uses fraudulent devices in the context of an insurance relationship deserves no real sympathy.

Commentary The Insurance Act 2015, which came into force last week, addresses the issue of fraudulent claims. The Act preserves the rule that a fraudulent claimant recovers nothing, including any unexaggerated element of a claim. However, the Act does not deal with the position where a valid claim is supported by a collateral lie. The Supreme Court’s decision clarifying that a collateral lie made in the course of the claims process will not deprive the insured of its claim will therefore have continued relevance.

The decision of the Supreme Court is consistent with a more general movement away from protecting insurers by limiting the scope of application of potentially harsh remedies and, instead, applying a more proportionate approach.