UK: Distinguishing ‘Collateral Lies' From The Fraudulent Claims Rules In Insurance Contracts: The Lie Is Dishonest But The Claim Is Not

In Versloot Dredging BV and another v HDI Gerling Industrie Versicherung AG and others [2016] UKSC 45, handed down, last month, the Supreme Court ruled that a "collateral lie" made during the course of an insurance claim would not lead to repudiation of the claim. Lord Sumption, giving the lead judgment, used the phrase "collateral lie" to mean "...a lie which turns out when the facts are found to have no relevance to the insured's right to recover."

A distinction was drawn between, on the one hand, entirely fictional claims or dishonestly inflated claims (where the insurer will not be liable to pay the entirety of the claim) and, on the other, valid claims "embellished" by a collateral lie. Following an examination of the common law, it was held that the claim itself remained valid as the collateral lie was not material to the insurer's liability and to hold otherwise would be disproportionately harsh.

While this claim related to a marine insurance policy, the position would apply equally to (consumer and commercial) non marine policies.

The facts A claim was made under a marine insurance policy for approximately €3.2 million in respect of damage caused when the engine room of a vessel was flooded during a voyage. During the course of making the claim, one of the owners' directors made a false statement, seeking to fortify the claim and expedite payment. This was a collateral lie. In fact, the causes of the damage were covered by the policy and the lie was irrelevant to the merits of the claim.

The issue on appeal was whether the insurers were entitled to repudiate liability when the insured had told a lie when presenting the claim, if the lie was immaterial to the validity of the insured's claim. The appeal was upheld by the Supreme Court, with Lord Mance dissenting. The €3.2 million claim was therefore held to be valid.

You can read the full judgment here.

Matters considered

• The court drew distinctions between three types of fraudulent claims. First, where the entire claim has been fabricated; secondly, where the claim is true but is fraudulently exaggerated; and thirdly (as was the case here), where the entire claim may be valid but the information given in support of the claim was embellished by a collateral lie, so as to secure faster payment or where the insured does not realise the strength of his or her claim.
• Consideration was given to the common law, where the clear position is that if an insured makes a fraudulent claim on his insurer, whether that be an entirely fabricated claim or an honest claim dishonestly inflated, the insurer is not liable to pay any part of the claim – this is known as 'the fraudulent claims rule'. This position is now codified in the Insurance Act 2015 (which came into force on 12 August 2016). However, the issue before the Supreme Court was to resolve an issue not in any event dealt with by the Insurance Act, namely whether the fraudulent claims rule applies to valid claims supported by collateral lies.
• Lord Sumption formulated the question before the court as "whether the insurer was entitled to repudiate a claim supported by a false statement, if the statement was irrelevant, in the sense that the claim would have been equally recoverable whether it was true or false." The Supreme Court found that it was not. The fraudulent claims rules did not apply to collateral lies.
• The Supreme Court recognised the scale and significance to the insurance industry of fraudulent claims. Equally, the key themes arising out of its approach in allowing the appeal included materiality, public policy concerns and the rationale behind the fraudulent claims rules. The Supreme Court adopted a pragmatic and commercial approach, overturning the more 'technical' application of the law engaged in at first instance by Popplewell J and by the Court of Appeal.
• The public policy behind the fraudulent claims rules was considered to be straightforward: the rules acted as a deterrent to fraudulent claims. The distinction drawn between claims which are entirely fraudulent or fraudulently inflated, as compared to ones where there is a valid claim but a collateral lie, is that in the case of the former, the insured seeks to obtain something from his dishonesty to which he is not entitled; conversely, the insured that has an otherwise valid claim but makes a collateral lie, seeks to obtain that to which he is entitled.
• Materiality was important here. In order to test the materiality of the collateral lie in relation to the claim, one needs to consider the position with hindsight, as the merits of the claim are actually shown to be, rather than based on the limited facts known at the time the lie was uttered. A truly collateral lie makes no difference to the validity of the claim.
• It was therefore considered disproportionately harsh to bar the entirety of the policyholder's valid claim in circumstances where the collateral lie was immaterial to the insurers' liability.
• In their appeal, the appellants relied on both the common law and Article 1 of Protocol 1 of the Human Rights Convention. Having decided the position based on examination of the common law, Lord Sumption did not consider the position under the Human Rights Convention.

Commentary This case provides clarity on the implications of this type of dishonesty and its remedy, which are not identified in the Insurance Act 2015.

The message here is not, of course, that policyholders and brokers should consider it acceptable to act dishonestly or to tell reckless untruths in the presentation of a claim as a means to an end to get the claim paid as easily and quickly as possible. Lord Toulson made clear that lies in support of a valid claim were not risk-free and he warned that such lies could impact on the insured's credibility and were, for instance, likely to be reflected in a costs order.

It seems logical that an insured's duty of disclosure, when purchasing subsequent insurance, would require the disclosure of the insured's history of making what might ultimately be deemed a "collateral" lie in a past claim; such conduct is unlikely to be viewed favourably by an insurer.

It is not yet clear what impact this decision will have on the market and the drafting of policies. Collateral lies do not alter an insurer's liability, but may at least affect the way in which claims are handled, as a consequence of the collateral lie. It therefore remains to be seen whether, in response to this judgment, insurers will seek to include express provisions and remedies in the insurance contract to cover circumstances where collateral lies are told in the advancement of an otherwise valid claim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.