In a marine judgment handed down this week the Supreme Court found, by a four to one majority, that the ‘fraudulent device’ rule does not apply to collateral lies told by an insured that are immaterial to the insured’s right to recover.
The decision is important as from at least 2003 (per the judgment of Lord Justice Mance (as he then was) in Agapitos v Agnew (the AEGEON1) the law has proceeded on the basis that there was no distinction between the following situations:
- The claim was fabricated.
- The amount of a valid claim was dishonestly embellished.
- The entire claim (both substance and quantum) was valid but the information given in support of the claim, albeit ultimately immaterial, was dishonestly embellished.
In all three cases the result was that the insured was not able to recover from the insurer in respect of that claim and the insurer was entitled to terminate the policy.
However, the Supreme Court has in this respect set new law and found that where an insured tells “collateral lies” – lies that ultimately turn out to have no relevance to the insured’s right to recover as per situation (3) above – the insurer is not entitled to repudiate the claim (and, by definition, is not entitled to terminate the policy). If a collateral lie is to preclude the claim then it must be material and, importantly, the test for materiality is to be determined on the true facts as found by the court. Materiality is not determined at the time the lie was told. In this regard, it does not matter that the collateral lie was told with the aim of improving the position of the insured, nor, according to Lord Sumption, that the lie “set a hare running in the insurer’s claims department”.
The justification for the decision seems to be that whilst the lie is dishonest, the claim is not and the fundamental character of the valid claim is not tainted by what turns out to be an irrelevant or immaterial lie. In telling the lie the insured has not obtained something that he was not otherwise entitled to, therefore according to Lord Clarke, “public policy does not require that the insurer should have a defence”.
The obvious question to ask is will the Insurance Act 2015 (IA 2015) alter any of the above when it comes into force on 12 August. The simple answer is, no. Whilst the IA 2015 codifies the remedies available to the insurer in the event of a ‘fraudulent claim’ (see section 12), it does not seek to define what a ‘fraudulent claim’ is, instead this is left to the common law. Consequently, in carving out claims involving collateral lies the Supreme Court has restricted the scope of what amounts to a ‘fraudulent claim’.
It is perhaps worth noting that at the time the IA 2015 was being prepared, the common law position was that claims involving collateral lies amounted to ‘fraudulent claims’. An interesting, but now wholly academic, question is had the common law been different, (and it is now, following this judgment), would the Law Commission have proposed to define ‘fraudulent claims’ to expressly include those involving collateral lies. The answer is probably “no” but we will never know.