When dishonesty falls short of fraud: Supreme Court decision in Versloot DredgingPrint publication
Important changes to insurance law in England and Wales have been introduced as of 12 August 2016. Walker Morris has reported previously on the key points  arising from the Insurance Act 2015 and the Third Parties (Rights Against Insurers) Act 2010, here is a review of the Supreme Court’s recent and hotly anticipated judgment in the Versloot Dredging litigation and explain its implications for today’s insurers and insureds.
‘Fraudulent claims’: crucial clarification
The Insurance Act 2015 (the Act) confirms the common law ‘fraudulent claims rule’ that where an insured makes a fraudulent claim, the insurer will not be liable to pay the claim. The Act specifies that, in those circumstances, an insurer can treat the insurance contract as terminated from the time of the fraudulent act, including refusing all liability without having to return the premium to the insured. However, the Act does not define ‘fraudulent claim’, which could alternatively mean a claim which is entirely fabricated; a claim which is genuine but dishonestly exaggerated; or a claim which is genuine but supported by false information (known as a ‘fraudulent device’ or a ‘collateral lie’). The Supreme Court’s decision in the Versloot Dredging litigation  has been eagerly anticipated by insurers and insured’s alike, for its clarity on this crucial question.
The background facts are, briefly, that a commercial vessel was damaged irreparably on a voyage from Lithuania to Spain. The owners made a claim under their insurance policy, which covered them against perils of the sea. The claim was genuine, in that a peril of the sea was found to be the cause of the vessel’s loss. However the claim was supported by a lie, told by the owners with the intention of strengthening the claim and accelerating payment. The Supreme Court had to consider whether the owners’ lie meant that this was a fraudulent claim which the common law (and, since 12 August 2016, the Act) would preclude.
Finding for the owners by a 4 – 1 majority, the Supreme Court confirmed that use of a fraudulent device does not amount to a fraudulent claim, and so a genuine claim which is supported by a collateral lie will not be forfeit.
The following key points arise:
- There is an important distinction between a fabricated or dishonestly exaggerated claim (in which an insured is trying to obtain something to which he is not entitled) and a claim which is supported by a lie which is actually irrelevant to the insured’s genuine entitlement. In the latter circumstances, the lie is dishonest, but the claim is not.
- Whether or not a lie is capable of forfeiting a claim depends upon its relevance to the court in deciding the claim. If the insurer loses nothing as a result of the telling of the lie, because the lie is irrelevant to the existence or amount of the insured’s entitlement and merely embellishes an already justified claim, then the lie is irrelevant and will not invalidate the claim.
- The Supreme Court majority rejected the minority view that there were public policy reasons for finding that the use of fraudulent devices/collateral lies should forfeit claims, because:
- An insurer’s obligation to pay is crystallised on the making of a valid claim. Collateral lies told to speed up payment are irrelevant.
- The fraudulent claims rule is not the same as, and is not as severe as, the contractual duty of utmost good faith. To forfeit an entire, genuine claim by reason of a merely collateral lie would be disproportionately harsh to the insured.
- Telling lies in support of a valid claim is not risk free. An insured using fraudulent devices in this way could potentially open itself up to civil liability in damages to insurers under the tort of deceit and/or to criminal prosecution. Telling lies could also have a detrimental effect on the insured’s credibility, on any legal costs award and, of course, on any future insurance premiums (or indeed the ability to obtain insurance at all).
- The Versloot Dredging case is in line with the spirit of the Act, in that it favours insureds and limits insurers’ right to reject claims.
- In the case of commercial insurance contracts, however, insurers can seek to improve their position by including warnings about the consequences of lying in support of a claim, as well as clear, express provisions which (subject to the requirement of reasonableness) exclude liability in respect of claims supported by fraudulent devices.
 See our earlier briefings on the key aspects of the Insurance Act 2015 and the Third Parties (Rights Against Insurers) Act 2010.
 Versloot Dredging BV & Anr v HDI Gerling Industrie Versicherung AG & Ors  UKSC 45