Louise Cruise expands on her latest blog post, providing in-depth analysis on the consequences of the Versloot case.
Back in July the Supreme Court ruled that an insurer is not entitled to repudiate a claim for fraud on the basis of a ‘collateral lie’ made by a policyholder in the presentation of a claim (Versloot Dredging BV and anr (Appellants) v HDI Gerling Industrie Versicherung AG and ors (Respondents) [2016] UKSC 45).
In this case, the ship’s engine was damaged beyond repair following a flood in the engine room. On presenting the claim, the policyholder’s representative advised the insurer that he had been told by members of the crew that they were unable to investigate an alarm which had been activated because of the rolling of the ship in heavy weather. This turned out to be a lie imparted by the policyholder’s representative because he believed that it would encourage the insurer to accept the claim and make a payment on account. He also wanted to divert attention away from any concerns which may have been raised by insurers in respect of the defective condition of the ship.
Nevertheless, whether or not the crew members failed to react to the alarm was not relevant to the damage which had been caused by the entry of seawater through a sea inlet valve. Consequently, the lie told by the policyholder’s representative was a ‘collateral lie’ i.e. one which did not affect the validity of the claim.
The Supreme Court held in its decision that the insurers were unable to rely on this ‘collateral lie’ to repudiate the claim.
The court advised that insurers are unable to rely on ‘collateral lies’ which are “irrelevant to the existence or amount [of the insured’s] entitlement” and that “the fraudulent claims rule does not defeat a claim which is wholly good in law, even if a lie is told in support of it”.
It should be noted, following this judgment, that the common law position in respect of fraudulent claims and exaggerated claims remains the same.
The issue considered by the Supreme Court was specific to fraudulent devices and explicitly whether or not an insurer is able to repudiate a claim in circumstances where the claim is justified but the policyholder has provided false information in support.
The Supreme Court deemed that, in respect of the lie told in the Versloot case, the policyholder was seeking to obtain no more than what he was legally entitled to under the policy and that the lie was not relevant to whether or not he had a valid claim.
The court’s main focus was that the claim was valid and that the lie which had been told did not make any difference in real terms (i.e. as to the cause of the damage or the amount of it) to the policyholder’s entitlement under the policy. Therefore it would be unfair and unjust to allow insurers to repudiate claims in these circumstances.
With this decision the court has set out very clear moral parameters with regards the consideration of fraudulent claims. In future under the common law the mere fact that a policyholder has told a lie when presenting a claim will not entitle an insurer to repudiate a genuine claim which would otherwise have been payable under the terms of the policy.
This does not mean that an insurer can never depend on a lie told in the presentation of a claim to repudiate it. However, the court has said that, in order to justify an insurer repudiating a claim, there has to be a “significant improvement of the insured's prospects [of successfully obtaining a payment] before a claim is barred” because of any such lie.
This is likely to come as a blow to insurers who may incur time and money in dealing with, and investigating, a lie which is then found to be immaterial, as they will now be unable to rely on it to repudiate a claim pursuant to the common law.
The court has recognised this and stated that, in circumstances where a policyholder has submitted lies which are not material to the claim (collateral lies), there is still the possibility of the policyholder being penalised in costs should any claim go before the court.
Insurers will still be able to repudiate fraudulent claims presented by their policyholders.
The Versloot decision reiterates the common law position that an insurer is able to repudiate a claim for fraud if the entirety of the claim is false or in circumstances where there has been a genuine claim but the amount has been dishonestly exaggerated.
An insurer will also still be able to rely on false statements and documents submitted by a policyholder in support of a claim provided it can be established that they go to the very substance of the claim (i.e. whether it occurred as alleged) or the amount to be paid.
However, following the decision in Versloot, if a false document is submitted which is not material to a claim’s potential failure in terms of being covered by the policy and the amount to be paid, the insurer will no longer be entitled to repudiate the claim pursuant to the common law.
Despite this, the court has recognised that there may still be some adverse consequences for policyholders who submit collateral lies in presenting an insurance claim.
These include the potential for the policyholder to be prosecuted for a criminal offence, although it is unlikely that any such prosecution will either take place or be successful if the policyholder did not stand to gain anything to which they were not entitled.
There is also the possibility that the insurer can pursue a claim in the tort of deceit and that the policyholder may be liable to the insurer in damages for the wasted time and costs which they have incurred as a result of the collateral lie.
Moreover, there is the suggestion that a collateral lie would need to be disclosed to future insurers and that it may affect a policyholder’s premium in the future or, if not disclosed, could result in the avoidance of cover. In practice, however, it is difficult to see how a collateral lie told in the presentation of a claim to one insurer would be discovered by another insurer in the absence of this information being readily shared.
It appears, therefore, that the only adverse consequence of a collateral lie will be if an insurer’s policy terms entitle it to repudiate the claim on the basis of a collateral lie.
If insurers still want to rely on collateral lies, they will need to carefully consider and, if appropriate, amend the wording of their fraud clause, thus enabling them to repudiate a claim on this basis.
The decision in Versloot does not necessarily rule out insurer clients being entitled to rely on any such clauses within their policies. In fact in his dissenting judgment LJ Mance raised the issue of the merits of “making express in future whatever understanding they have, or action they may wish to take, regarding the effect of fraudulent devices”.
Consequently, if an insurer intends to continue repudiating claims on the basis of a collateral lie, they will need to ensure that their policy wording very clearly states that a claim will be repudiated if a ‘collateral lie’ is used to support a genuine claim, even if that lie is not material to the claim which has been presented.
Louise Cruise
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