Insurance claims – when is a fraudulent device not fraudulent? When it is a collateral lie

In Versloot Dredging BV and another v HDI Gerling Industrie Versicherung AG  the Supreme Court took another step in requiring there to be some link, some materiality, between the dishonesty and the outcome of the claim. 

The policy was one of marine insurance.  The vessel suffered main engine damage.  The court had found that the proximate cause of the damage was a peril of the sea – a fortuitous ingress of sea water.  But during the presentation of the claim, someone on behalf of the insured had provided a statement which was untrue. This lie was immaterial to the outcome.  The claim was valid on the facts, without the need for any lie to support it. 

The court distinguished 3 situations of dishonesty.

First, the whole claim is a fabrication.  Secondly, there is a genuine claim, but the amount has been exaggerated.  Thirdly, the entire claim is justifiable but information has been provided to further the claim and which information  is dishonest.  This had previously been known as a “fraudulent device”, the court noting the origin of this was fire insurance policies in wide use in the 19^th and early 20^th centuries.

The case centred on this third type of dishonesty.

The court preferred to rename it as a “collateral lie”.  Essentially, the court found that this kind of lie is dishonest, but the claim is not.

In these circumstances, using the yardstick of materiality, the Supreme Court found that the claim was good.

 What is material?  If the lie does not affect the insured’s right to recover, it is not material.  The insured is entitled to an indemnity. 

One of the judges, Lord Mance, dissented.  His dissent was clearly based upon public policy grounds – the relationship between the insurer and the insured as a special one of good faith and there is an asymmetry in this relationship ( with the information generally in the hands of the insured); and, secondly, insurance fraud is a major problem requiring judicial deterrence. 

And here is the nub – the fact is, because of this level of fraud, insurers simply don’t like being lied to .And Lord Mance gave the remedy.  If insurers don’t like being lied to and want to be able to decline to pay a claim when they are lied to, then they would be advised to say so in their policy.

Now, I suspect that your standard fraud clause in any insurance policy  will not only refer to the insurers being allowed to avoid the insurance if “a false declaration or statement is made or fraudulent device put forward in support of a claim” by inserting the words “or collateral lie”.

This decision is based on common law but it was noted that section 12 of the Insurance Act 2015, when it shortly comes into force, would not alter this decision.  The fact is the Law Commission declined to provide a statutory definition as to what amounts to insurance fraud generally.

A further ( I think unintended by the Supreme Court ) by product is that if insurers don’t like fraud then some cases might go through to trial. Why? Because the court said  that that was the time when the materiality of the lie be tested against the ultimate outcome of the claim. It is ironic, therefore, that the insured in this particular case told a lie in order to speed up the claims process.  The result of the decision may be that exactly the opposite will be the result.