Versloot Dredging BV and another v HDI Gerline Industrie Versicherung AG and others (Supreme Court)
Rough seas ahead: Setback in the combat of fraudulent claims.
It is a well-established principle in English common law, and it often forms the expressed terms in an Insurance Contract, that fraudulent or misrepresented claims, i.e. staged deliberate claims, or claims which are knowingly or recklessly exaggerated, are forfeited in their entirety; including both the fraudulent part and the non-fraudulent, legitimate part of the claim.
In practice, the recent ruling in the Supreme Court means that in circumstances where the Insured submits false information, ('fraudulent device'), in support of a property insurance claim, the Insurer is no longer entitled to repudiate a claim if the fraudulent device was irrelevant to the legitimate aspect of the claim and the claim would have been equally recoverable irrespective of the collateral fraudulent device.
Insurance fraud is an industry-wide challenge. Counter-fraud expenditure has been estimated to cost the insurance industry in excess of £200 million per year in one ABI members' survey.
Currently, there is a strong drive by both the insurance industry and government bodies to combat fraud. For example, the industry funded initiatives of the Insurance Fraud Enforcement Department, the Insurance Fraud Bureau, and other Anti-Fraud Organisations designated by the Home Office; all of which are forming a strong allegiance to drive down insurance fraud.
According to the Insurance Fraud Taskforce: Final Report published in January 2016, insurance fraud is estimated to cost the UK economy more than £3 billion: the detected fraud value being in excess of £1 billion and the undetected fraud value estimated to be in excess of £2 billion a year.
The Versloot Supreme Court ruling means that Insurers can no longer repudiate a claim in circumstances where the Insured has told a collateral lie when making their claim, provided that the misrepresentation/ fraudulent device does not affect the validity of the substantive claim.
The impact of the ruling is likely to 'distort the claims process' as Judge Lord Mance outlined in his dissenting judgment in Versloot. Following this decision, in order to defend a fraudulent claim, an Insurer or claims handler will be required, not only to identify and investigate the suspected fraud or dishonesty, but also to determine whether or not the fraud/lie is a collateral lie, and/or to what extent, (if any), the fraudulent device impacts on the substantive legitimate claim itself.
The practical long term consequences of this decision are that there may be further delays in agreeing to indemnify and pay out on claims in circumstances where fraud is suspected. Furthermore, the time and incurred expenses in investigating claims is likely to increase. Ultimately, Insurers may be required to raise premiums in order to cover the increased incurred investigations and expenses which will be required to establish, not only whether the claim is dishonest, but also whether the dishonesty is collateral or material to the claim itself. Insurers will also be liable to indemnify claims (in full) in circumstances when they are aware beyond reasonable doubt that the Insured has relied upon collateral fraudulent devices.
Investigating a fraudulent device and late payment
The Insurance Act 2015 will clarify the remedy available to Insurers for fraudulent claims. However, the Act does not define what a fraudulent claim is.
The ramifications of this decision are likely to have even further consequences on the claims process when the full effects of the Insurance Act 2015 and Enterprise Act 2016, come into effect, making it an implied term of every contract of insurance that, following a claim, the Insurer must pay sums due under an insurance policy 'within a reasonable time'. Failure by the Insurer to do so will entitle the Insured to pursue the remedies available under contract law, including damages. Those remedies will be separate to the Insured’s existing rights to recover the sums due under the policy together with interest on those sums.
Whilst an Insurer can defend a claim for breach of the implied term, Insurers will need to demonstrate reasonable grounds for disputing a claim or its quantum.
What the court will determine to be a reasonable time when investigating suspected 'fraudulent devices', particularly ones which do not affect the validity of a claim, is likely to be the subject of future disputes.