A charter for untruth?
On 20 July 2016, the Supreme Court handed down its judgment in Versloot Dredging BV and another (Appellants) v HDI Gerling Industrie Versicherung AG and Others, dispelling the assumption that the deployment of a 'fraudulent device' by the insured in the course of an insurance claim entitles the insurer to decline the entire claim. The decision has, since publication, sent some shockwaves through the insurance industry, constituting however another step towards levelling the playing field between insurer and insured, of the type seen in other recent seismic legislative changes such as the Insurance Act 2015 and the Enterprise Act 2016.
The 'fraudulent claims rule' has been a fundamental principle of first party insurance law. Simply put, in the event of a fraudulent claim, the insured forfeits the entire claim. But what constitutes a fraudulent claim? The most obvious fraudulent claim is where the insured submits a claim for a loss or damage which it has never suffered to begin with. Alternatively, the insured may fraudulently exaggerate all or part of the claim.
Decisions in recent years have assumed that the same “fraudulent claims rule” applies, in effect, to ‘fraudulent devices’. A ‘fraudulent device’ is a dishonest lie told in support of an honest claim, usually to enhance the prospects of a claim being met, to speed up payment of the claim or to obtain payment with less hassle. In essence, even if the underlying event giving rise to the insurance claim is genuine, the insurer was under common law, thought to be permitted to decline the claim because the insured may have, for example, submitted a forged invoice or dishonestly embellished the facts surrounding the genuine loss.
The Versloot case was concerned with embellishments of this kind. Rather than use the accepted industry term of ‘fraudulent devices’, the Supreme Court adopted the expression 'collateral lies', noting its meaning as 'a lie which turns out when the facts are found to have no relevance to the insured’s right of recovery'.
In January 2010, a ship 'the DC Merwestone' was damaged beyond repair by sea water ingress to the engine room. The Claimant vessel owner made a claim under a marine insurance policy it held with the Defendant insurer. The value of the claim was €3.2m and it was accepted by both parties that this was based upon an honest and legitimate claim.
Frustrated that insurers were not paying up and hoping to prevent a lengthy investigation into whether the ship was seaworthy (there was no cover if it was found that the vessel owners had sent the vessel out in an unseaworthy condition), one of the directors of the Claimant told the Defendant that the shipmaster had confirmed to him that the bilge alarm had sounded but that the crew had been unable to react because of rough seas. That was not true, although it subsequently transpired at trial that the vessel was seaworthy and the loss was caused by perils at sea, and so the lie by the insured ultimately made no difference to the underlying substantive merits of the insurance claim.
Supreme Court decision
This is the first time that the Supreme Court has had the opportunity to resolve the question of whether the fraudulent claims rule applies to justified claims but which are supported by a ‘collateral lie’.
The court distinguished between (1) an entirely fabricated claim; (2) an exaggeration to an otherwise genuine claim; and (3) collateral lies again to an otherwise genuine claim. The fraudulent claims rule i.e. the right of the insurer to forfeit the entire claim was upheld in respect of (1) and (2). However, the rule was held (by a majority) not to apply to (3).
It followed that, notwithstanding the lie by the director of the Claimant, the claim could not be forfeited by the Defendant insurer.
The leading Judgment of Lord Sumption (with which Lords Clarke, Hughes and Toulson agreed) found that:
A collateral lie differs to a fraudulent claim as the insured 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. In this case, it was held that whilst “the lie was dishonest…the claim was not”.
A policy of deterrence did not justify the use of the fraudulent claim rule in the situation where the lie was immaterial to the claim.
This was not a one-way bet. “[T]he insured gains nothing from the lie which he was not entitled to have anyway [and] the underwriter loses nothing if he meets a liability which he had anyway”.
Whilst it may be true to say that an insurer may be “put off relevant inquiries or…driven to irrelevant ones”, wasted effort of this kind is no part of the mischief against which the fraudulent claims rule is directed and even if it were, the avoidance of the claim would be a wholly disproportionate response.
There is no other context in which the civil law avoids a transaction on account of a fraud which has had no impact on its intended target.
It is true that the moral character of the insured’s lie is in no way mitigated by the fact that it turns out to have been unnecessary, but there are principled limits to the role which a claimant’s immorality can play in defeating a legitimate civil claim.
It follows that the majority held that the fraudulent claim rule 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.
This however requires a great degree of hindsight on the part of the insurer which was a point of concern for Lord Mance who provided the only dissenting judgment. His judgment looked at the practical impact of the lie and noted that the majority had reviewed the collateral lie after the lie had been discovered or admitted and its materiality analysed. Lord Mance was of the view that the lie should be considered in the context of the state of mind with which it is deployed. It is a falsehood intended to improve the insured’s hand in the claims process. The insured’s state of mind was the same whether or not the lie proves to have been of relevance. The perpetrator intended to gain a benefit from the lie.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.