According to Mark Twain, who may or may not have heard it first from Benjamin Disraeli, there are three kinds of lies – lies, damned lies and statistics. In the world of insurance, however, there may now be a fourth category of untruth – the collateral lie.
Under the so-called ‘fraudulent claims rule’, in the interests of deterring fraud, an insured’s claim against an insurer which has been fabricated or dishonestly exaggerated has historically been prohibited. That rule has more recently been extended to include fraudulent devices used by the insured to embellish an otherwise valid claim.
The Insurance Act 2015 (which came into force on 12 August 2016) left open the question of whether the penalty for making a fraudulent claim extends to the making of a legitimate claim supported by a lie. In Versloot Dredging BV and anor v HDI Gerling Industrie Versicherung AG and ors  UKSC 45, however, the Supreme Court in London recently held that it does not, in the process overturning rulings by the Commercial Court in 2013 and by the Court of Appeal the following year.
The original claim had its origins in irreparable damage sustained to the main engine of the cargo vessel DC Merwestone while she was loading a cargo of scrap metal in Lithuania in January 2010. The damage was caused by a flood, which was in turn caused by negligence on the part of the crew and of previous contractors, as well as by defects in the engine room pumping system and damage to the emergency fire system pump casing and filter.
In presenting their claim to the insurers, the ship owners maintained that the crew had told them that the bilge alarm had sounded but could not be investigated because the vessel was rolling in heavy weather. But this was a lie told by the owners to strengthen their claim, to accelerate payment under their insurance policy, and to divert attention from any defects in the vessel for which the owners might have been deemed responsible. Although the lie was irrelevant to the legitimacy of the claim, which was held to have been caused by a peril of the seas, the Commercial Court, and subsequently the Court of Appeal, held that the owners’ lie was a fraudulent device.
Lower court decisions
The Commercial Court, in a decision subsequently upheld by the Court of Appeal, found that insurers did not have to pay out in respect of the claim, which amounted to €3.24 million.
In the Commercial Court, Popplewell J found, ‘regrettably’, that the ship manager’s lie was a reckless untruth, rather than a carefully planned deceit. It was, nevertheless, a fraudulent device, with the result that the claim against insurers failed. This decision was upheld by the Court of Appeal, which adopted the ruling in the 2003 case of Agapitos v Agnew (The “Aegeon”)  QB 556, wherein Mance LJ noted that a fraudulent device is used if the insured believes that he has suffered the loss claimed, but seeks to improve or embellish the facts surrounding the claim by some lie. Mance LJ added that a fraudulent device forfeits the claim, provided that the fraudulent device was directly related to the claim, intended by the insured to promote prospects of success, and would have tended to yield a not insignificant improvement in the insured’s prospects of success.
The Court of Appeal held that the principles in The “Aegeon” were applicable and that Popplewell J had correctly decided that the owners’ claim was fraudulent by reason of the use of a fraudulent device and that the claim should be forfeited on that account.
Supreme Court ruling
Last month the Supreme Court, however, ruled, by a majority of four to one, that the fraudulent claims rule did not apply to so-called “collateral lies”, which were immaterial to the insured’s right to recover in respect of the claim.
In the Supreme Court, before Lord Clarke, Lord Sumption, Lord Hughes, Lord Toulson and Lord Mance (dissenting), it was held that, in the case of a collateral lie, the fraud is irrelevant to the insured’s right to recover, on the basis that the lie is dishonest, but the claim is not. It was also held that it would be disproportionate and contrary to public policy if a lie told in the course of litigation were to provide an insurer with an additional defence to a claim. Indeed, Lord Hughes described the fraudulent devices rule as:
Accordingly, the claim was a good one and insurers had to pay it, irrespective of the lie told by the ship owners.
This is a decision which, in certain respects, produces clarity and brings the response to fraudulent insurance claims more closely into line with the courts’ treatment of other types of fraud. But, as Lord Sumption noted:
“Fraudulent insurance claims are a serious problem, the cost of which ultimately falls on the general body of policyholders in the form of increased premiums”.
The Supreme Court decision does, however, raise questions about the continuing relevance of the principle of the utmost good faith in the post-contract stage, such as it is, and begs the question of how successful claims handlers and others involved in the process can be at determining whether or not a lie is properly collateral in nature. (Reports of pants being spotted on fire are – at least for the forensically minded – sadly apocryphal).
Insurers might react instead by tweaking their policy wordings in the light of the decision in Versloot.