Collateral Lies: The Court's Recent Take on "Fraudulent Devices"

The recent decision by the Court in Versloot Dredging gives an indication as to how "collateral lies" will be decided in the future.

This article was first published in Marine & Maritime Gazette and the original article can be found on page 16 here.

The case of Versloot Dredging v HDI Gerling Industrie Versicherung AG [2016] UKSC 45, decided by the Supreme Court back in July, caused quite a stir within the insurance industry when the judgment was handed down.

The case involved the cargo ship "DC MERWESTONE", which was carrying a haul of scrap iron from Lithuania, when an ingress of water into the engine room caused it to cease operations. This was caused by a combination of equipment defects and crew negligence. During the investigation by the insurers, the vessel's manager claimed in a witness statement that the bilge alarm had in fact gone off, but the crew had been unable to deal with the leak due to the rolling of the ship in heavy weather. The manager lied and said he had been told about the alarm activation by members of the crew.

At first instance it was found that, although the lie was irrelevant to the merits of the claim, the Court upheld the common law position that an entire claim should fail if it was found to contain an element of fraud. This was reinforced by section 17 of the former Marine Insurance Act 1906, which stated that those bringing a claim to a duty of utmost good faith. This decision was then upheld by the Court of Appeal, in spite of the first instance Judge describing his own ruling as "disproportionately harsh".

The Supreme Court, however, held that there are circumstances where a fraud could occur yet there still could be doubt as to whether an insurer should be able to repudiate the entire claim. Their lordships in fact identified three kinds of dishonesty that can arise in the course of an insurance claim, being ones where:

  1. The whole of the claim has been fabricated; or
  2. There is a genuine claim where the amount has been exaggerated; or
  3. The entire claim may be justified, but the information given in support may have been dishonestly embellished.

The way in which a Court could tell whether a lie may affect an insured's right of recovery would be to apply a test of materiality to it. In this case, the claim was supported by a false statement, but the statement was irrelevant, in that the claim would have been equally recoverable whether it was true or false. Therefore the appeal was allowed and the insured was entitled to make the claim in spite of the collateral lie having been made during the investigation.

In case any insurers have interpreted this decision to mean their coffers will now be emptied by fraudulent claimants, it is as well to remember this case did not in fact change the law regarding fraudulent claims per se. Insurers are still not liable to pay out on claims that are fraudulent, a position reinforced by section 12 of the Insurance Act 2015, which came into force in August. It is also worth noting that another Supreme Court decision from July, Hayward -v- Zurich Insurance Company plc, held unanimously that an insurer was entitled to set aside a settlement where it already had evidence that the insured was committing fraud. This decision would appear to put further powers back into the hands of insurers.

The case of Versloot Dredging may have wide implications for insurers in the future, where there is uncertainty over whether a "fraudulent device" has had any material effect on their ability to claim. We will need to wait and see what further decisions are made in this area in order to see how these will affect the insurance industry as a whole. 

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