The recent decision by the Supreme Court in Versloot Dredging BV & Another v HDI Gerling Industrie Versicherung AG & others  UKSC 45 ("Versloot Dredging") gives an insight into how the provisions of the Insurance Act 2015 dealing with "collateral lies" may be interpreted.
The Insurance Act 2015 (the "Act") came into force on 12 August 2016. This legislation introduces several widespread changes to non-consumer contracts in the insurance industry. These include:
- Introduction of a duty of fair presentation on the part of the insured when entering into a contract of insurance.
- A scheme of proportionate remedies for instances of material non-disclosure or misrepresentation.
- Abolition of certain laws that allows an insurer to discharge their liability under an insurance contract on the grounds of breach of warranty.
- Abolition of certain laws permitting an insurer to avoid a contract on the grounds that a duty of utmost good faith has not been observed.
The latter point was touched upon in the recent case of Versloot Dredging, which also dealt with another aspect of insurance law addressed by the Act: fraudulent devices (also called "collateral lies").
Dealing first with the facts, in January 2010 the cargo ship "DC MERWESTONE" was carrying a haul of scrap iron from Lithuania, when it became incapacitated by an ingress of water into the engine room. During the investigation, one of the vessel's managers claimed that the bilge alarm had sounded at about noon the day prior, but the crew had been unable to investigate or deal with the leak because of the rolling of the ship in heavy weather. The manager pretended that he had been told about the alarm activation by members of the crew. The judge at first instance (Popplewell J) found that this was a reckless untruth, apparently borne out of frustration with the insurers' delay in recognising the claim and making a payment on account. Also, by making the bilge alarm the focus of attention and the crew's failure to respond, the manager was hoping this would deflect attention from the general poor condition of the vessel.
The lie was in fact irrelevant to the merits of the claim. Popplewell J found that the proximate cause of damage was the peril of the seas and rejected an argument that the vessel had been sent to sea with defective bilge pumps (and so potentially in breach of an implied warranty by virtue of section 39(5) of the Marine Insurance Act 1906 ("MIA")). In spite of this, Popplewell J held the claim still failed, due to the collateral lie told by the manager, in spite of observing it was a "disproportionately harsh sanction" to deprive what he held to be a valid claim on this basis. This decision upheld the common law position that an entire claim failed if it was found to contain an element of fraud, as reinforced by section 17 of the former MIA, which holds those bringing a claim to a duty of utmost good faith. This decision was then upheld by the Court of Appeal.
In overturning the decision, the Supreme Court held that there are in fact circumstances where fraud could occur in a claim that threw doubt on whether an insurer should, therefore, be able to repudiate the entire claim. This included situations, as in Versloot Dredging, where a claim is supported by a false statement, but the statement was irrelevant, in the sense that the claim would have been equally recoverable whether it was true or false. This is in contrast with other claims where either the whole claim is fabricated or the claim is genuine but the amount is fabricated.
The point regarding collateral lies was summarised by Sumption LJ, who states at S26:
"The position is different where the insured is trying to obtain no more than the law regards as his entitlement and the lie is irrelevant to the existence or amount of that entitlement. In this case the lie is dishonest, but the claim is not. The immateriality of the lie to the claim makes it not just possible but appropriate to distinguish between them."
A test of materiality should then be applied as to whether it is an exception that a lie is a fraudulent device that would not materially affect the insured's right of recovery. Subject to these caveats, their Lordships (with Mance LJ dissenting) therefore allowed the appeal and the insured was entitled to make the claim in spite of the collateral lie having been made during the investigation.
This decision provides an interesting pre-emption as to how insurance claims involving collateral lies may be interpreted going forward, in light of the Act coming into force. This is particularly as the Act has now repealed parts of MIA (including part of section 17) that allows insurers total freedom to avoid contracts where the duty of utmost good faith has not been observed. Nevertheless, in spite of the decision in Versloot Dredging, it remains to be seen whether insurers will continue to defend these claims in any event on the grounds that the collateral lie does actually material affect the claim, since each claim will, as always, turn on its facts.