In the recent insurance case of Versloot Dredging BV and anr (Appellants) v HDI Gerling Industrie Versicherung AG and ors (Respondents)  UKSC 45, the Supreme Court ruled that it was acceptable to tell a “collateral lie” when making a claim. But with concerns that this could prompt a surge of false claims on car and household policies, Insurance lawyer Michael Wood examines the case and what constitutes a fraudulent claim.
The Versloot Dredging BV judgment
The Supreme Court has given its judgment in the Versloot Dredging BV case on the liability of insurers to pay a claim where, when making the claim, the insured has been ‘economical with the truth’. A strong Supreme Court panel of five judges gave judgment on 20 July 2016 following a two-day hearing on 16 and 17 March 2016.
Lord Sumption asks, in his judgment, ‘what constitutes a fraudulent claim?’ He raises three possibilities:
(i) there may be a claim which is entirely fabricated; or
(ii) there may be a genuine claim but the amount of the claim has been dishonestly exaggerated; or
(iii) there may be a situation where the claim is genuine, the amount claimed is honest, but the insured has misstated the facts with a view to bolstering the prospects of the claim being agreed by the insurer.
The Versloot case deals with the situation falling in the third category where there are so-called ‘fraudulent devices’. As Lord Sumption points out, this phrase is somewhat antiquated and is perhaps not helpful in the context of modern language in describing the problem.
Nevertheless, where the insured has used ‘fraudulent devices’, should the insurer be entitled to reject the claim? The decision of the Supreme Court is that the insurer should not be allowed to reject the claim. Amusingly, depending on your point of view, the ABI has described the decision as being one that is “bad for honest customers”.
In this case, the claim was made for damage to a ship which was incapacitated by a flood of water into the engine room. The shipowners had a good claim under their policy, but their managers made “a reckless untruth” to the insurers in support of the claim. The Judge in the Commercial Court found that the shipowners had a bad claim because of the reckless untruth of the manager. He made this decision based on the common law and made it with regret because he felt that the so-called reckless untruth was not a carefully planned deceit.
In his judgment, Lord Sumption gives a comprehensive view of some cases going as far back as 1866 and also refers to some court decisions made in Australia and the USA. He allowed the appeal from the Court of Appeal and held that insurers were liable to pay shipowners €3,241,310.60 plus interest. Three other Supreme Court Judges agreed with Lord Sumption.
Interestingly, given the power of his intellect and his deep knowledge of insurance law, Lord Mance dissented from the decisions of the other four judges. His reasons are interesting and, to some, may appear persuasive. He takes issue with some of the remarks of Lord Sumption and Hughes. He says that the relationship of insured and insurer is a special one in relation to which the good faith or uberrimae fidei principles have long been fundamental.
However, given the fact that millions of people have insurances covering a great variety of risks, it is difficult to see why the relationship between insurers and insureds should be ‘special’. The vast majority of insureds are ill-educated and unsophisticated, and even many of the better-educated and sophisticated ones will not pay particular attention to the precise terms of their insurance policies. Lord Mance refers to a general imbalance in information and control in insurance relationships. He suggests that the imbalance favours the insureds. However, is this really correct? The insurers write the policies, most insureds do not read them, so who is favoured by this imbalance?
The essence of Lord Mance’s remarks is that it is easy for insureds to overstate their claims and, by so doing, cheat the insurers. He refers to the ‘core fraudulent claims principle’ which is that an insured that fraudulently exaggerates its claim should not be entitled to make any recovery at all. This principle remains in the Insurance Act 2015 which will shortly come into effect.
The phrase ‘fraudulent claim’ is pregnant with different meanings. The flaw in Lord Mance’s judgment is at paragraph 128. He states that ‘abolishing the fraudulent devices rule means that claimants pursuing the bad, exaggerated or questionable claim can tell lies with virtual impunity.’ But is this really correct? Self-evidently, the greater the exaggeration or questionability of the claim, the more likely it is that the insurer will reject it or require the insured to explain the circumstances and value calculation relating to the claim.
The judgment of Lord Mance (albeit immaterial in that he is in a minority of one) is too harsh. He says that an insured that uses a fraudulent device in the context of an insurance relationship deserves no real sympathy. This is too sweeping a remark.
No doubt all will agree that where a claim falls into Lord Sumption’s first category (where the whole claim is fabricated), the claimant deserves no sympathy from anybody and such a claim should be dismissed out of hand. However in circumstances where insurers are alive to every point available to them to challenge claims, Lord Mance goes too far in his suggestion that the fraudulent device principle should be upheld. Fortunately, his view has not prevailed and, consistent to an extent with the new Insurance Act, a slightly more level playing field will now be available in the insurers v insureds games of risk management.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.