"…claimants pursuing a bad, exaggerated or questionable claim can tell lies with virtual impunity" – Lord Mance
Despite not coming into force until 12 August 2016, we already have the first case on the substantive interpretation of the provisions of the new Insurance Act 2015. Lord Sumption has claimed the honour with his leading Supreme Court judgement in Versloot Dredging v HDI Gerling Industrie Versicherung AG  UKSC 45. The judgement redefines and reverses significant aspects of the law concerning fraudulent insurance claims. Specifically, it reverses the position that embellished insurance claims, supported by fraudulent devices or collateral lies, are treated as fraudulent.
The decision impacts not just the common law but also the Marine Insurance Act 1906 and the Insurance Act 2015. This article provides an overview of the law on fraudulent claims and the changes to the law in that regard following Versloot.
In the event of a fraudulent claim being presented, insurers have a choice of potential remedies open to them. For policies that incepted prior to 12 August 2016 the Marine Insurance Act 1906 (s17) allows for avoidance of the policy in its entirety. For policies which incept on or after 12 August 2016, the Insurance Act 2015 (Part 4) will allow insurers to terminate the policy from that point forward and to avoid liability only for the fraudulent claim itself (unless the parties have contracted out of this provision).
What is less talked about, although more often applied in court, is the common law remedy for fraudulent claims: known as the 'fraudulent claim' rule. The rule simply allows the insurer to avoid liability for the fraudulent claim. It does not in itself lead to termination of the policy, or allow for avoidance.
So how do the statutory and common law remedies work together in practice? The fraudulent claim rule exists independently of the provisions of the Marine Insurance Act 1906, and will continue to persist once the Insurance Act 2015 comes into effect. The common law rule is however relevant to the interpretation of both. It has developed through a long series of cases, starting in 1927 and culminating with the recent Supreme Court decision in Versloot. The significance of the common law rule is that beyond providing insurers with a remedy, it also determines what constitutes a fraudulent claim and hence, where the statutory remedies can and cannot be invoked.
What is and is not a 'Fraudulent Claim'?
As well as representing a U-turn in at least one significant respect, Versloot also provides a comprehensive review of the law in this area. The leading judgement by Lord Sumption (approved by Lords Clarke, Hughes and Toulson, with Lord Mance dissenting) specifically provides that the rules set out in Versloot will also apply to determining when the statutory remedies afforded by the Insurance Act 2015 will apply.
Lord Sumption identifies three types of potentially fraudulent claims which have emerged through case law:
- Fabricated claims
- Exaggerated claims, and
- Wholly valid claims which have been dishonestly embellished
Fabricated and exaggerated claims are both within the definition of fraudulent claims, and this remains the position. As such they are subject both to the fraudulent claim rule and to the relevant statutory remedies.
Unlike fabricated claims, exaggerated claims (the classic example being inflated quantum) have a good claim at their core. They still however fall squarely within the definition of a fraudulent claim because the "good" part of the claim is deemed inseparable from the fraudulent exaggerated part of the claim.
As a deterrent to bringing fraudulent claims, once it is established that an insured has dishonestly tried to claim for more than he is legally entitled, the insurer is released from liability for the claim as a whole, no matter how minor the exaggeration in relation to the overall claim.
Embellished claims are different again from fabricated and exaggerated claims; they have been subject to inconsistent treatment over a number of years. They are distinct from fabricated and exaggerated claims on the basis that an embellished claim is in fact valid in its entirety. The embellishment comes from what has been traditionally termed as a 'fraudulent device' (referred to by Lord Sumption in Versloot as a collateral lie).
A collateral lie is one which is told with the aim of ameliorating the position of the insured when presenting a claim, notwithstanding that once the full facts have been established it can be seen that the insurer would have been obliged to pay the claim regardless of the lie. As Lords Sumption and Toulson put it, unlike an exaggerated claim, in the case of a claim embellished by a collateral lie "the lie is dishonest but the claim is not".
In Versloot the lie was told in the hope that it would prevent the insurer from investigating potential grounds on which the insured believed the insurer might legitimately have been able to deny the claim/avoid liability. The lie was told in the hope of securing and expediting payment of what the insured believed at the time to be a dubious and potentially invalid claim. It transpired that the insured's belief that the insurer might have been able to avoid liability was in fact misplaced. It was established that the insurer would have been liable on the true facts, irrespective of whether the lie told to them had been true. The question was whether the fact that the insurer had been told a collateral lie by the insured meant that the otherwise valid claim should be treated as fraudulent, allowing the insurer to avoid liability by treating the claim in the same way as an exaggerated claim.
The Supreme Court's answer to this, reversing the earlier Court of Appeal decision and previously established law, was that unlike exaggerated claims, embellished claims are not fraudulent. Insurers cannot avoid liability for valid claims simply on the basis that an insured has told them a collateral lie (notwithstanding that the statement is dishonest and intended to deceive). Where the actual claim presented is one for which insurers are legally liable - the fact that the insured has lied to try to ensure the claim is paid more quickly, or to attempt to deceive the insurer because the insured wrongly believes that the claim may not be properly payable - does not allow the insurer to avoid liability.
Embellished claims (valid claims supported by collateral lies) are not fraudulent. They do not give insurers a right to avoid liability at common law, under the Marine Insurance Act 1906, or under the Insurance act 2015.
Analysis and Impact
Insurers will no doubt regard the decision as unfair; insurance after all is based on the principle of good faith. Lord Mance considers in his dissenting judgement that the decision means "claimants pursuing a bad, exaggerated or questionable claim can tell lies with virtual impunity". It is however not without risk for insureds to lie when presenting claims under their policies. Even where lies are purely collateral, there are still indirect consequences which may follow by way of potential cost penalties in court, damage to the insured's reputation and its ability to obtain future insurance cover.
Lord Mance, in his dissenting view, has encouraged insurers to consider introducing specific clauses into their policies to allow them to avoid claims associated with collateral lies. No doubt many insurers will seek to amend their wordings accordingly. Insureds, and the brokers advising them, should remain vigilant as to whether such specific clauses have been introduced at placement and renewal to be certain the insureds understand fully their obligations, and effects on non-compliance.
It will be interesting to see whether the decision impacts upon the length of time taken by insurers to investigate claims and whether that in turn has a knock-on effect on the entitlement of insureds to seek damages for late payment of claims by insurers under the Enterprise Act 2016, when it comes into effect next year in May 2017. What will constitute late payment remains unclear - but any reason which might make it reasonable for insurers to extend their investigation of claims could conceivably delay the point from which damages will apply.