Fraudulent claims rule: when can an insurer avoid a claim?
Kate WilsonVersloot Dredging BV and another (Appellants) v HDI Gerling Industrie Versicherung AG and others (Respondents) [2016] UKSC 45 resolved one of the most contentious issues in modern insurance law.
Fraudulent claims are dishonest claims for losses which were never suffered or which exaggerate a genuine loss. In such cases, the insurer is able to avoid the claim and the insured therefore forfeits his claim – this is often known as the “fraudulent claim rule”. The rule exists at common law for contracts concluded prior to 12th August 2016 and is restated in section 12 of the Insurance Act 2015 for later contracts. The common law rule originated in Britton v Royal insurance Co (1866) 4 F & F 905 per Willes J: “the law is, that a person who has made such a fraudulent claim could not be permitted to recover at all. The contract of insurance is one of perfect good faith on both sides, and it is most important that such good faith should be maintained…”
Recent decisions have confirmed that the same rule applies to “fraudulent devices” i.e. a dishonest lie told in support of an otherwise honest claim.
The question of what is a “fraudulent claim” has always been controversial and was not resolved by the Act. The Supreme Court provided guidance on this issue in their Judgment on 20th July 2016.
Facts
Versloot involved a claim related to the flooding of a ship engine’s room, causing damage in excess of 3 million euros. It was initially alleged that the flowing had occurred because the crew had been unable to deal with a leak due to the rolling of the ship in stormy weather. This transpired to be false and in fact the flooding was caused by the crew’s negligent failure to close a sea inlet valve; the negligence of contractors in failing to seal bulkheads appropriately and fails in the engine room pumping system. In the High Court and Court of Appeal the insurers were allowed to avoid a claim, claiming that the shipowner’s initial account constituted a “fraudulent device” and therefore satisfying the fraudulent claim rule. The shipowner’s falsehood, however, was irrelevant to the merits of the claim, given that the cause of the flood was the peril of the seas, which was covered by the insurance policy.
Judgment
The law provides that an insurer was not liable under the fraudulent claim rule where (a) the entirety of the claim was fabricated, or (b) where there was a genuine claim but the amount of the claim was dishonestly exaggerated.
The Supreme Court was asked to consider whether the fraudulent claims rule applies to justified claims supported by collateral lies. Lord Sumpton provided the leading judgment (Lord Mance dissenting) and determined that:
- Insurers are not entitled to avoid a claim where the claim is justified but is supported by collateral lies;
- There is an obvious and important difference between a fraudulently exaggerated claim and a justified claim supported by collateral lies. In the former case, the insured is trying to obtain more than the law regards as his entitlement and in the latter case whilst the lie is dishonest, his claim is not dishonest;
- A collateral lie is a lie which turns out when the facts are found to have no relevance to the insured’s right to recover;
- While a collateral lie told in the course of making a claim might be material to his decision on how to deal with it, it cannot be material to his liability for it;
- A lie must at least go to the recoverability of the claim on the true facts. The fraudulent claim rule does not therefore apply to a lie which the true facts, once established, show to have been immaterial to the insured’s right to recover.
Comment
This is the first time the Supreme Court has had the opportunity to consider the application of the “fraudulent claims rule” to collateral lies. The case found that there were “principles limits to the role which a claimant’s immorality can play in defeating his legitimate civil claims”.
Lord Sumpton confirmed that the law of insurance is concerned more with controlling the impact of a breach of good faith on the risk than with the punishment of misconduct.
Whilst Versloot was a marine insurance case, Lord Hughes stressed that “the law in question applies in exactly the same way to any commercial or domestic insurance policy”.
The decision should assist to provide some clarity and certainty in cases concerning the fraudulent claims rule. The decision also aligns the response to fraudulent insurance claims more closely with the courts’ response to other types of fraudulent claims, and in particular the issue of “fundamental dishonesty” in the context of personal injury claims and more generally in Summers v Fairclough Homes [2012] UKSC 26 (the court confirmed that fraudulently exaggerated claims in litigation will be struck out only in exceptional circumstances)
Kate Wilson is a member of Park Square Barrister’s insurance team and is regularly instructed on behalf of insurer clients in road traffic, property which involve allegations of fraud and dishonesty.