Collateral Lies in Insurance Claims
The Supreme Court has recently 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)  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 told the insurer that he had been told by the crew members 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 which had been told 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.
However, whether or not the crew members failed to react to the alarm was not relevant to the damage which had been caused to the engine 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 in Versloot, that the insurers were unable to rely on evidence of a "collateral lie" to repudiate relevant claims. 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”.
Firstly it has to be considered that this judgment recognises that the common law position in respect of fraudulent claims and exaggerated claims remains the same. This decision is only applicable to fraudulent devices and specifically collateral lies.
Secondly, this judgment does not state that insurers are unable to rely on a fraudulent device to defeat a claim but that there has to be a “significant improvement of the insured's prospects [of successfully obtaining a payment] before a claim is barred” because of the presentation of a fraudulent device.
The decision does, however, significantly tighten the common law in respect of fraudulent devices and the circumstances in which they can be relied upon to repudiate a claim and this will, no doubt, impact upon insurers’ abilities to repudiate claims for fraud.
In order to try to protect the ability to repudiate claims based on fraudulent devices, insurers will need to carefully consider the wording of their fraud clause and whether or not it states that insurers are entitled to repudiate a claim on the basis of a "collateral lie".
The decision in Versloot does not necessarily rule out insurer clients being entitled to rely on any such clause within their policies. In fact in his dissenting judgment LJ Mance raised the issue of the merits of insurers “making express in future whatever understanding they have, or action they may wish to take, regarding the effect of fraudulent devices”.
Consequently, if insurers intend to continue to be able to repudiate a claim on the basis of a collateral lie they will need to ensure that it is made clear within their policy wording 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.