Versloot Dredging BV & Anor v HDI Gerling Industrie Versicherung AG & Ors  UKSC 45
Fraudulent insurance claims are a serious and expensive problem. The cost of fraudulent claims is distributed amongst policyholders generally via increased premiums. The fraudulent claims rule is well established in English law and operates to bar the whole of the policyholder’s claim where that claim is either wholly invented or fraudulently exaggerated. There is a clear public policy rationale for discouraging such claims.
The question which arose in this recent Supreme Court case was whether the rule extends to bar a claim where the insured has not invented or exaggerated a claim which is otherwise good and in the correct amount, but has, in effect, gilded the lily, by adopting a ‘fraudulent device’ in presentation of the claim, typically telling a lie or presenting bogus evidence in order to bolster a claim but which is otherwise irrelevant to the question of whether or not underwriters are liable under the insurance contract or not.
By a majority of 4-1 (Lord Mance dissenting) the Court found against the insurers deciding that they were not entitled to repudiate a claim supported by a false statement where the false statement was irrelevant to the claim and the Insured’s right to recover.
The claim arose in a marine insurance policy in respect of sea damage to the engines of a ship. However, the law in question applies to any commercial or domestic insurance policy and the decision is accordingly of significance.
A lie was told by a manager on behalf of the policy holder with respect to the activation of an alarm. In the circumstances the lie told was entirely irrelevant to the question of whether or not the policy holder had a valid claim in the correct amount under the policy.
The Judge at first instance found, reluctantly and accepting that the result was disproportionately harsh, for the insurers. The Court of Appeal agreed upholding the insurer’s repudiation of the policy.
In his dissenting Judgment Lord Mance, reflecting the judgment of the Court of Appeal, accepted that “…it may seem harsh that the insured loses everything. But policy must by definition look at the position overall, as the core fraudulent claims rule does. In any event a person who uses fraudulent devices in context of an insurance relationship deserves no real sympathy”.
The majority disagreed that a policy of deterrence justified the application of the fraudulent claim rule in these circumstances. There was an obvious and important difference between a fraudulently exaggerated claim and a justified claim supported by collateral lies.
Where a claim has been fraudulently exaggerated the insured’s dishonesty is calculated to get him something to which he is not entitled. Lord Sumption, giving the leading judgment, commented “The policy of deterring fraudulent claims goes to the honesty of the claim…the position is different where 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 the lie is dishonest, but the claim is not. The immateriality of the lie to the claim makes it not just possible but appropriate to distinguish between them”.
The Judgment has been met with considerable surprise by the insurance market who have expressed concern that the decision will undermine efforts to counter fraudulent claims and further complicate the claims process.
Insurers do not have the benefit of the majority in the Supreme Court who were able to determine the full impact of the lie told with the benefit of hindsight (a point made in the dissenting judgment of Lord Mance). In practice the lie will be uncovered (if at all) during the claims process rather than following a trial and an insurer is unlikely to have the ability to ascertain the full implications of the lie until some later point. Insurers may be required to make a difficult call without all the relevant facts to hand to distinguish whether a lie is collateral (for which there is no remedy) or material to the claim (which would allow repudiation of the policy). The position will be made more difficult for Insurers following implementation of the Enterprise Act next year which gives policy holders the right to pursue insurers for the late payment of insurance claims. This means insurers will have to weigh up the risks involved in delaying against the risk of paying out for a fraudulent claim.
Lord Mance concluded by encouraging insurers to review their policy wordings, “insurers will no doubt be advised about whatever may be the potential merits of making express in future whatever understanding they have, or action they may wish to take, regarding the effect of fraudulent devices, as and when such are discovered to have been used by an insured during the claim’s process.”
Many insurers, if they have not done so already, will be following Lord Mance’s recommendation and specifically providing a contractual term to the effect that the making of a false statement or declaration in support of a claim will result in the forfeiture of that claim. However because the Judgment defines and limits scope of the term “fraudulent claim” in section 12 of the Insurance Act 2015, in force as of 12 August 2016, where a policy includes a more disadvantageous clause than the Act prescribes, then for the clause to be valid, the insurer must comply with the transparency requirements contained in the Act. This means drawing the disadvantageous clause to the attention of the insured before entering into the contract and making sure that disadvantageous term is “clear and unambiguous” including its effect (ie spelling out the default position and the deviation from it).