There are many grounds on which an insurer can avoid having to meet a claim under a policy: nondisclosure; misrepresentation; breach of warranty or condition precedent; or fraud by the insured. What constitutes a fraudulent claim is well understood: a claim for a loss that did not occur, or which was caused or procured by the insured, or alternatively, a genuine claim that has been exaggerated.

There are ways in which an insurer can avoid a genuine-looking claim where it has considerable concerns about the insured’s story, even though it is unable to prove the kinds of wrongdoing outlined above. An insured’s lies to an investigator – told, perhaps, to conceal wrongdoing or a defence that might be available to an insurer, or to embellish an account about which the insured has anxieties – may, in themselves, defeat the insurance claim. This issue was explored by the Court of Appeal in Agapitos v Agnew [2003] QB 556. In giving the leading judgment (with which Lord Justice Brooke and Mr Justice Park agreed), Lord Justice Mance noted that ‘such devices’ are a not unfamiliar response to insurers’ probing of the merits of a claim.

Fraudulent devices

Strictly speaking, Lord Justice Mance’s observations in Agapitos on “fraudulent means and devices” (meaning a fraud where an insured gives a false statement to embellish or improve the surrounding facts of a genuine claim) were expressed to be a tentative view and that they have been followed and approved by both the judiciary and commentators.

If a claim is found to be fraudulent, the insurer can avoid liability for that claim and any subsequent claim made under the same policy, even if the subsequent claim is genuine. Should the same remedy be available when it comes to otherwise genuine claims where the policyholder tells lies to the insurer?

It is not any lie, though, that will give an insurer a remedy. Lord Justice Mance contemplated “the possibility of an obviously irrelevant lie”. The fraud, he said, must be “directly related to and intended to promote the claim”. In such a case, the usual reason for the use of a fraudulent device “will have been concern by the insured about [the] prospects of success and desire to improve them by presenting the claim on a false factual basis”.

Lord Justice Mance then turned to the question of the appropriate legal response to a fraudulent device used to promote a claim “which may… prove at trial to be otherwise good, but in relation to which the insured feels it expedient to tell lies to improve his prospects of settlement or at trial”.

Giving a tentative answer to the question, Lord Justice Mance said that the law should treat the use of a fraudulent device “as a subspecies of making a fraudulent claim – at least as regards forfeiture of the claim itself in relation to which the fraudulent device or means is used”. For this purpose, the law should treat as relevant any lie:

  • directly related to the claim to which the fraudulent device relates; and
  • which is intended to improve the insured’s prospects of obtaining a settlement or winning the case; and
  • which would, if believed, tend “to yield a not insignificant improvement in the insured’s prospects… for obtaining a settlement, or a better settlement, or of winning at trial”.

In Wisenthal v World Auxiliary Insurance Corporation (1930) 38 Ll L Rep 54, Mr Justice Roche told the jury: “Fraud… was not merely lying. It was seeking to obtain an advantage, generally monetary, or to put someone else at a disadvantage by lies and deceit. It would be sufficient, within the definition of fraud, if the jury thought that, in the investigation, deceit had been used to secure payment or quicker payment of the money that would have been obtained if the truth had been told”.

So a lie to an investigator that is intended to improve the likelihood of the claim being paid, the amount of the payment or the speed of the payment is likely to constitute a “fraudulent device”. Any such false statement will give the insurer a strong weapon to defeat the claim.

An insurer does not have to show that:

  • it was persuaded by the lie into taking action; or
  • that the lie was an attempt by the insured to conceal grounds on which the insurer could decline or limit the claim (although that would still be one reason to categorise a lie as a fraudulent device).

The insurer can rely on lies told by the insured’s agents or representatives. However, it cannot rely on lies told after the start of legal proceedings, as the rules relating to contempt of court take over at that point.

What’s happened since Agapitos?

How have the courts dealt with lies to insurers since the Agapitos case? The short answer is that there have been very few reported cases on this point. This is surprising, given Lord Justice Mance’s observation that deceitful statements to insurers’ investigators “are a not unfamiliar response” to investigations.

In Eagle Star Insurance v The Games Video Company (GVC) SA [2004] EWHC 15, which concerned the destruction of a ship, the insurer avoided having to indemnify the owner of the vessel. During the course of the insurer’s investigation into the cause of the loss, the vessel owners presented fabricated documents about the supposed nature and value of the ship. The court concluded that these documents had been created and presented to try and bolster what the vessel owners had said about the ship’s value: “They were asked for documents”, said Mr Justice Simon, “and they handed over the documents whose contents were deceitful. They used fraudulent devices in order to advance the claim, with the intention and expectation that the insurer would accept the documents at face value, be reassured and promptly pay the assureds”.

The Commercial Court in Marc Rich Agriculture Trading SA v Fortes Corporate Insurance NV [2004] EWHC 2632 (QB) responded favourably to the insured’s argument: an alleged failure by the insured to disclose information to an insurer did not constitute a fraudulent device. In recognising that Lord Justice Mance’s comments in Agapitos were incidental rather than central to the decision – and given the developing nature of the relevant law – Mr Justice Cooke in Marc Rich dismissed the insured’s application for summary judgment on certain aspects of the insurer’s defence. However, the judge went on to say that “were the matter to come before me at trial, my inclination would be to say that Lord Justice Mance is right in the approach that he has adopted”. Mr Justice Cooke would prefer the insured’s arguments on non-disclosure during the insurer’s investigations.

In Stemson v AMP General Insurance (NZ) Ltd [2006] UKPC 30, the Privy Council allowed the insurer to rely on a fraudulent device defence. Following a fire at the insured property, the insured lied to the investigator about his intention to sell the property. That was a fraudulent device and remained so even though the insured admitted his true intention before the insurer’s rejection of the claims.

Handling and assessing lies

As has been shown in both the law courts and in numerous surveys, many people are willing to lie to insurers. The Agapitos case provides a powerful response to people who tell lies to insurers during investigation.

At a practical level, it is important for investigators to keep thorough and detailed records of their communications with insureds. Audio recordings are often useful. Wherever possible, verbal statements should be confirmed in written statements, signed if possible, or in confirmatory letters to the insured. Investigators’ notes of conversations should be accurate, legible, timed and dated, and stored securely. As was shown in the Eagle Star case, fraudulent devices can take the form of fabricated documents; all documents received from the insureds or their representatives must be kept securely and with a record of when they were received.

In addition to the storing and recording of communications, it is vitally important that such communications are reviewed in the light of material received subsequently.

However, as Lord Justice Mance stressed in Agapitos, it is not every lie that will constitute a fraudulent device. Consequently, where lies are detected, their purpose and intended effect must be considered carefully.