In Versloot Dredging BV & anor v HDI Gerling Industrie Versicherung AG & ors  UKSC 45 the Supreme Court considered whether the use of ‘fraudulent devices’ (or ‘collateral lies’ to use the Court’s preferred terminology) should operate to forfeit an otherwise perfectly legitimate claim under an insurance policy. The Supreme Court found by majority (Lord Mance dissenting) that it should not.
A collateral lie is essentially an embellishment: a lie told in the course of an otherwise legitimate insurance claim (i.e., a valid claim that is not exaggerated), most commonly to hasten the time in which a claim will be paid. The conundrum surrounding collateral lies is that, on the one hand, it is a lie and lies told to an insurer should be discouraged as a matter of public policy, particularly in light of the relationship of utmost good faith underpinning the insurer/insured relationship. On the other hand, the lie really goes nowhere (other than perhaps to push the insurer down a certain line of enquiry or to ignore a line of enquiry); the claim is otherwise valid and should be paid. Therefore, the repudiation of a claim might seem disproportionate. Nonetheless, until Versloot it was the law that a fraudulent device should be punished in the same way as any other fraud committed in pursuit of a claim. The insurer was entitled to avoid the claim.
The Supreme Court determined that such an outcome was too harsh. If the lie is simply to speed up payment (or gain some other collateral benefit), the insured in real terms gains nothing of substance and the underwriting loses nothing in return. The Supreme Court was at pains to point out that the insured runs other risks by lying such as criminal prosecution, a serious impact on credibility in litigation and/or the effect on future insurability.
Now that the initial furore has died down, the decision seems, on balance, a just outcome and consistent with the broad aims of the Insurance Act 2015.
That said, it does appear to be a body blow to insurers’ attempts to clamp down on fraud. The long term response of insurers remains uncertain. Lord Mance, in his dissenting judgment, pointed out that it would be a matter for insurers whether they wish to expressly reserve the right to repudiate in the event of collateral lies as a term of the insurance contract. Such clauses may well appear in time.
In practical terms, a lie uncovered in the course of investigating a claim is likely to backfire on an insured. An insurer may, quite legitimately, think the lie is more than merely ‘collateral’ and designed to hide matters that go to the root of the claim. An insurer may investigate longer than it might otherwise do or seek to repudiate on what it considers to be good grounds. In those circumstances, an insured may need lengthy and costly litigation to realise a legitimate claim.
That said, an insured should not lose hope as the law is ultimately on its side. If an insured finds itself in the situation where a collateral lie has been told and discovered, the situation is redeemable, particularly at an early stage. The advice is likely to be to give a frank early admission coupled with an explanation as to why the lie goes nowhere and the claim should be paid. A contrite but firm message will give the best chance of rescuing the situation. But that message needs to be delivered with care.
We are here to help with, or simply to discuss, any of the issues in the case that may impact on a policyholder or their broker.