THE Insurance Act 2015, in a neat sidestep, left open one of the most contentious issues in modern insurance law. The Act wanted the Courts to decide whether “the penalty for making a fraudulent insurance claim apply to an honest claim when a lie has been told?”
A fraudulent claim is a dishonest claim for losses that have not been suffered, or exaggerated. The consequences of making a fraudulent claim are clear: the insured has to give up, or forfeit, the claim. Up until recently the same rule applied to “fraudulent devices’, or where a dishonest lie is told to support an honest claim, (often to speed up payment).
In Versloot Dredging v HDI Gerling Industrie Versicherung AG the Supreme Court held by a majority that the rule does not extend to fraudulent devices.
The Case
An honest claim for ?3.2 million was made under a marine insurance policy for seawater flood damage to a ship’s engine room. It was not clear how the flood had happened because no hull breach was found near the engine room. The ship manager determined that water had got in through a faulty pump elsewhere. The water had probably set off an alarm that had probably been ignored because it was often triggered falsely. In an attempt to speed up payment and trying to avoid a detailed investigation into whether the ship was seaworthy or not (it needed to be to have cover) the manager claimed that the alarm had gone off, but was ignored. This was not, in fact, true. The theory as to how the water got in was correct, and the ship was seaworthy; the lie made no difference in the end.
At the trial the Claimant had to forfeit the claim. The Court of Appeal reluctantly agreed, both courts felt that they had been harsh. The Supreme Court said that any lie to fabricate or exaggerate a claim will always fail. However they went on to rename “fraudulent devices’ as “collateral lies’ which they defined as “a lie which?(has)? no relevance to the insured’s right to recover”. This lie would not invoke a forfeit, because: (i) while the lie is dishonest the claim is not; (ii) it would just be too harsh a remedy; (iii) it simply makes no difference that any gain of the insured or loss of the insurer; (iv) it would be wrong to give the insurer a new defence; and (v) there are other reasons not to lie (criminal prosecution, costs, termination of policy, future refusal and loss of credibility).
Impact
The decision applies to all kinds of insurance. There is no question of a proportionate response: the lie must be irrelevant. The definition of “collateral’ will be decided in each case on merit. Wise insurers (brokers beware!) will no doubt try to resurrect the rule by stealth by agreeing as part of the insurance contract just what will happen if a lie is told that would otherwise be defined as “collateral’. There may be life in the “fraudulent devices’ after all.
For more advice, contact Kevin Rogers – Partner at Wilson Browne Solicitors, and recently awarded the Northamptonshire Law Society’s coveted Solicitor of the Year Award for 2016-17. He leads the Commercial Litigation team and can advise on all types of contract disputes. Call 01536 410014 or email
