Lies, damned lies, and collateral

In July 2016, the Supreme Court held by a four to one majority in Versloot Dredging BV and another v HDI Gerling Industrie Versicherung AG and Others [2016] UKSC 45 that an insurer was not entitled to avoid payment where lies told by an insured were collateral to an otherwise valid claim.

In January 2010, the engine room of the ship DC Merwestone was flooded, causing damage of approximately €3.24m. The vessel’s manager, at a time when the cause of the flooding was unclear, incorrectly told insurers’ solicitors that the bilge alarm had sounded, but the crew had been unable to investigate the problem as the ship was rolling in heavy weather. The manager believed that the lie would fortify the claim and accelerate claims payment. He was concerned that, if it was found the owners had failed to adequately maintain the ship, a policy exclusion might entitle insurers to refuse the claim.

Although it was held that the lie was irrelevant to the merits of the claim, because there was no exclusion that would have engaged, both the High Court and the Court of Appeal found the manager’s statement to be a reckless untruth that enabled insurers to refuse the claim. However, on appeal the Supreme Court decided that, where the cause of the claim was covered, the method of advancing the claim, even by making reckless untruths, was irrelevant.

This decision initially appears surprising, as it allows a claim in circumstances where the insured lied about the cause of loss. However, Lord Sumption, providing the leading judgment, made clear that the insured’s right to an indemnity arises once the loss is suffered. A collateral lie that did not affect this right should be disregarded, and it would be a step too far to suggest otherwise.

The court held that the appropriate time to view the merits of the claim was at the time the facts are found (i.e. at trial), and not at the time of the lie. This was because, at the claims stage, underwriters are anticipating what a court may find and looking at the application of facts to a contract to which they are already bound (which differs from potential materiality and inducement caused by lies at the pre–contract stage). Imposition of a materiality test to lies at the claims stage (as proposed by Lord Mance in his dissenting judgment) would be disproportionate and produce anomalies, as no impact on the mind of the prudent underwriter is required to make a claim.

Ultimately, this is a public policy decision that prevents insurers from relying on an absolute defence of fraud when an indemnity is owed following genuine loss. The timing of the decision is fitting with the commencement of the Insurance Act 2015, and reflects the political will to apply proportionate remedies to claims. The defence of fraud (section 12) will now only apply to fabricated and fraudulently exaggerated claims.

Charlotte Gregory is a member of Tomorrow’s FOIL and a solicitor at Browne Jacobson

@TomorrowsFOIL www.tomorrowsfoil.org.uk