The long awaited Supreme Court decision in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG has been delivered, which clarifies the law for insurers and insureds alike in relation to “fraudulent devices” or “collateral lies”. The decision confirms that a lie told by an insured when making a claim which has no relevance to the insured’s right to recover, does not give an insurer a right to repudiate a claim. The verdict is also important in addressing some unanswered questions posed by the Insurance Act 2015.
The facts concerned the flooding of a ship engine room which caused the main engine to be damaged beyond repair. The ship owner claimed on his policy. The cause of the flooding was initially unclear and the ship owner stated, untruthfully, that the bilge alarm had sounded but the crew had been unable to deal with the leak because of the rolling ship in heavy weather. In fact, the flooding was caused by negligence of the crew and contractors. However, the ship owner’s untruth was irrelevant to the insurance claim in one sense, because the loss was caused by perils of the sea covered by the policy.
The High Court and the Court of Appeal had ruled that the ship owner’s statement amounted to a “fraudulent device” entitling insurers to avoid the claim.
The Supreme Court allowed the ship owner’s appeal.
- At common law, if an insured makes a fraudulent claim on his insurance policy, the insurer is not liable to pay the claim. A fraudulent claim is a dishonest claim for money not due under the policy or a valid claim dishonestly exaggerated.
- The issue before the Supreme Court was whether the rule in relation to fraudulent claims should continue to apply in relation to a statement which is deliberately or recklessly untrue and told in support of a genuine claim (a so called “fraudulent device” or, as Lord Sumption put it, collateral lie).
- The Court held that the fraudulent claim rule should not apply to justified claim which were supported by collateral lies. This was in contrast to a situation where a claim was fraudulently exaggerated, where the insured’s dishonesty was calculated to get him something to which he was no entitled. In the latter situation, the reason why the insured could not recover even the honest part of the claim was that the law did not sever it from the exaggerated part, and the rationale for this was to deter fraud. The position was different where the insured’s lie was irrelevant to the existence or amount of the insured’s claim. The insured gained nothing by the lie, and the insurer was not prejudiced by the lie. The Court concluded that the policy of deterring fraud did not justify the application of the fraudulent claim rule in the present situation.
- Lord Mance dissented, and concluded that the fraudulent claim rule should extend to the use of fraudulent devices. He said that the assessment of risk and settlement of claims depended on good faith and fair information, and it was artificial to describe as “collateral”, a lie which the insured had considered necessary to promote settlement of his claim.
Implications for the Insurance Industry
The decision has been met with a mixed reception by insurers, with some arguing that permitting lies in the circumstances of the decision will push up the cost of investigating claims, and with it the cost of insurance, because insurers will need to establish the true implications of an untruth. However, the decision is consistent with FOS guidance on settling genuine claims which are not affected by the fraud, and there are some insurers who have said they are already assessing claims in accordance with the FOS guidance so the decision will not change anything from their point of view.
The Supreme Court have also clarified a question unresolved by Parliament in the Insurance Act 2015. Section 12 of the Act says that if an insured makes a fraudulent claim, the insurer is not liable to pay it (restating the common law rule), the insurer can recover any sums already paid in respect of the claim and the insurer can treat the policy as terminated from the date of the fraudulent act. However, the Act does not define “fraudulent claim” and was silent as to “fraudulent devices” so, prior to the Supreme Court’s decision, it was unclear whether the Act applied to fraudulent devices.Versloot resolves this uncertainty.