The Supreme Court has ruled that a lie told by an assured during the course of a claim presentation will not necessarily invalidate the assured's right to recover under his insurance.
What was previously known as a "fraudulent device" – an untruth which is told in order to promote an insurance claim but doesn't necessarily affect the merits of that claim – has been redefined by Lord Sumption as a "collateral lie". The use of a collateral lie by the assured will not, by virtue of the Supreme Court's decision, result in forfeiture of cover. A collateral lie is to be distinguished from a fraudulent claim which will result in forfeiture.
The decision of the lower courts
Versloot Dredging BV and another v HDI Gerling Industrie Versicherung AG and others  UKSC 45 involved the flooding of the vessel "DC MERWESTONE", resulting in the vessel's main engine being damaged beyond repair. In the claim presentation, Mr Kornet (the relevant individual in the vessel's managers) claimed that he had been told by the crew that the bilge alarm had been activated during the flooding, but the crew had been unable to deal with the leak due to the rolling of the ship in heavy weather.
Popplewell J at first instance found that Mr Kornet's statement regarding the activation of the bilge alarm was a reckless untruth; he had not been told this by the crew and had no reason to believe that the crew would support the statement. Mr Kornet believed that the statement would fortify the claim and accelerate payment if the casualty could be blamed on the crew. Ultimately, the lie was irrelevant to the merits of the insurance claim as it was held that the loss was proximately caused by perils of the sea, namely the fortuitous entry of seawater.
Popplewell J therefore concluded that there was a valid insurance claim for some EUR3.124million. However, that insurance claim was lost as a result of the collateral lie. The Court of Appeal reached the same decision with reference to the The Aegeon . In that earlier Court of Appeal case, Lord Justice Mance (as he then was) held that a fraudulent device used to promote a claim should result in forfeiture of the assured's cover, even though the claim was in all other respects valid. The Court of Appeal considered there to be good public policy grounds for such an approach, namely the deterrence of fraudulent insurance claims generally.
The decision of the Supreme Court
By a four to one majority (Lord Mance dissenting), the Supreme Court held that the assured's use of a fraudulent device/collateral lie in the claims process will not result in forfeiture of cover. A collateral lie is to be distinguished from a fraudulent claim which will result in forfeiture of the claim. In terms of the distinction between a fraudulent claim and a collateral lie, Lord Sumption concluded:
"…the fraudulent claims rule applies to a wholly fabricated claim. It applies to an exaggerated claim. It applies even to the genuine part of an exaggerated claim if the whole is to be regarded as a single claim, as it must be. But it does not apply to a lie which the true facts, once admitted or ascertained, show to have been immaterial to the insured's right to recover."
Lord Sumption held that where the lie is immaterial to the assured's right to recover, the assured 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. It is a "collateral lie" which should have no bearing on the right of recovery. Lord Sumption stated:
"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. I do not accept that a policy of deterrence justifies the application of the fraudulent claim rule in this situation. The law deprecates fraud in all circumstances, but the fraudulent claim rule is peculiar to contract of insurance."
Lord Sumption noted that where the assured's dishonesty amounts to a collateral lie, the assured gains nothing from the lie which he was not entitled to have anyway. Furthermore, the underwriter loses nothing if he meets a liability that he had anyway. Lord Sumption rejected insurers' arguments that the lie should be material to the potential merits of the claim as they would have appeared to a hypothetical insurer at the time that the lie was uttered, when the full facts were not necessarily known. In this context Lord Sumption thought that hindsight was necessary.
Lord Mance (dissenting) disagreed with the rest of their Lordships in relation to the correctness of looking at the lie with hindsight. Lord Mance took the view that the dishonesty taints the claim even if it turns out that the lie had no bearing on the claim at a later date. The lie is told precisely because the assured does not believe that he has a good claim, even though at a later trial it may be shown that his fears were unfounded. Lord Mance considered the decision to amount to a "charter for untruth" sanctioning a lack of integrity in the claims process, which was otherwise encouraged by the fraudulent devices rule.
Lord Hughes, however, observed that there were a number of other deterrents against dishonesty in the claims process. He noted that the likelihood of criminal prosecution may well be remote. However, in circumstances where an assured is proven to have acted fraudulently:
- he will forfeit all or most of his credibility in any debate, in court or out of it, as to his entitlement under the policy;
- he will likely be penalised with expensive inter-party cost orders if there is litigation involved;
- the policy is likely to be terminated by insurers, at least prospectively; and
- that history of dishonesty will be disclosable in any other insurance proposal which the claimant may make.
This is an important decision which could be considered to jar with the fundamental principle of utmost good faith which governs the operation of insurance contracts. However, for commercially minded businesses that depend upon insurance and the hedging of risk in order to operate, the decision is unlikely to be used as a "charter for untruth" when one considers Lord Hughes' valid observations about the other consequences of a collateral lie in the claims process.
Nevertheless, as Lord Mance observed at the end of his judgment, a prudent underwriter may well wish to make express in their policies the effect of a collateral lie when discovered to have been used by an assured during the claims process.