"The lie is dishonest but the claim is not": the Supreme Court rules on fraudulent devices in insurance claims

In the latest judgment in the case of Versloot Dredging BV v HDI Gerling Industrie Versicherung AG, the Supreme Court has ruled that the use of a fraudulent device, which it described as a "collateral lie", did not constitute a fraudulent claim.  This is an important decision at a time when fraud is high on the agenda of the insurance industry.

Factual Background

The DC Merwestone (a cargo ship) was incapacitated by an ingress of water which flooded the engine room and damaged the engine beyond repair. A genuine claim (worth over €3 million) for the cost of repairing the damaged engine was made by the ship's owners. During the investigation into the incident, the insurer's solicitors asked the owners for their explanation of the incident. The General Manager stated that an alarm that would have alerted the crew to the flooding had been heard but had not been investigated because they had attributed the alarm to the rolling of the vessel. The insurers declined the claim on a number of grounds, including that the representation by the General Manager in relation to the alarm was untrue.

Previous decisions

The court of first instance held that the representation about the alarm was a "reckless untruth" which related directly to the claim. The Judge felt compelled to follow the obitercomments made in Agapitos v Agnew (The “AEGEON”) [2003] which provided that a fraudulent device used in the presentation of a claim, even if it was irrelevant to the merits, would forfeit the entire claim. Thus he reluctantly found that the General Manager's statement meant he had to reject the claim, pointing out this was a "disproportionately harsh sanction".

The insured appealed but the Court of Appeal (CA) unanimously rejected the claim and ruled that an insured who employs a fraudulent device forfeits the entire claim, even if the claim would otherwise have been recoverable in full. The CA felt this was justified by the need to deter fraud in insurance claim.

Supreme Court Decision

The Supreme Court disagreed with the CA. It drew a distinction between claims that had been fraudulently exaggerated, and justified claims supported by collateral lies, where "the lie is dishonest but the claim is not". The Court found that the General Manager's statement about the alarm had been a collateral lie which made no difference to the validity of the claim.

The Court held that the fraudulent claims rule, which would forfeit the entirety of the claim, applied to wholly fabricated claims or genuine parts of exaggerated claims but it did not apply to a lie which was immaterial to the insured's right to recover. The Court held that to apply "the fraudulent claims rule to lies which are found to be irrelevant to the recoverability of the claim is…disproportionately harsh to the insured and goes further than any legitimate commercial interest the insurer can justify".

Comments

This decision may seem surprising at a time when the insurance industry and government are trying to reduce insurance fraud, for instance through the creation of the Insurance Fraud Enforcement Department a few years ago, and the more recent report from the Insurance Fraud Task Force.  However, it is clear that the majority in the Supreme Court (there is a dissenting judgment) was more concerned with achieving justice than with deterrence. 

The Insurance Act 2015 stipulates that fraud forfeits the entire claim but it does not define fraud. This was intended to allow courts to decide whether the fraudulent claims rule should apply to fraudulent devices. However, the rule continues to apply to fraudulent and exaggerated claims.

Another important aspect of this decision is that it brings insurance law more in line with tort law, most notably the decision in Fairclough Homes v Summers [2012], where a victim of an accident at work was entitled to recover the true value of his claim despite having grossly and fraudulently misstated the extent of his injuries (he claimed he could not walk when he was secretly playing football).  In Fairclough, the claim was against the victim's employer although the defence was run by the latter's insurers. Prior to the Supreme Court's decision, insureds claiming directly against insurers were treated much more harshly than third parties who, ultimately, benefit from the insurance proceeds.