This morning, for the majority of the Supreme Court, there definitely is. The Justices have decided 4:1, in Versloot Dredging v HDI Gerling & Others, that an insured may tell lies in the presentation of a claim and that the law will allow full recovery from its insurer. The qualifications are that such lies would need to be immaterial or collateral ones and that the claim is otherwise genuine as to liability and amount. Although this is said to serve to distinguish between the Versloot claim and cases of fraudulent exaggeration, it has to be said that distinction seems to be an extraordinarily fine one.
Quite what sort of message the majority decision sends to the insurance community at a time when there is significant political and business focus on the prevention, detection and prosecution of claims fraud across all lines of business will be worth further serious reflection over the short to medium term.
At first sight, the majority’s decision is a difficult one. The idea of a collateral or immaterial lie might be straightforward in theory, and there may be a superficial attraction to the idea as being the obverse of the concept of “fundamental dishonesty” that brings about the mandatory dismissal of personal injury claims under section 57 of the Criminal Justice and Courts Act 2015.
The lead majority judgment of Lord Sumption dismisses the proposition of forfeiture of claims for collateral lies, arguing that to do so would protect an insurer from the obligation to pay, or to pay earlier, that for which it has been liable since the loss: “the insured gains nothing from the lie which he was not entitled to have anyway. Conversely, the underwriter loses nothing if he meets a liability that he had anyway.”
While that may be so, it seems incontestable that the majority decision does admit (to say ‘encourage’ here would be to use too strong language) the prospect of lying by one party, without a sanction weighing in favour of the other, within a contractual relationship which is recognised as being based on “utmost good faith”. Even allowing for the changes made to that duty by the Insurance Act 2015, the majority finds (according to Lord Hughes) that: “the Act deliberately leaves open the scope of the fraudulent claims rule, and in particular leaves open the present issue as to whether it extends to fraudulent devices. It was clearly contemplated by Parliament that the courts would in due course resolve this question.”
The sole dissenting speech given by Lord Mance notes that the majority’s decision in favour of “Abolishing the fraudulent devices rule means that claimants pursuing a bad, exaggerated or questionable claim can tell lies with virtual impunity.” He states bluntly – and fairly attractively, in my view – that “it makes little sense in my view to say, as Lord Sumption does … with Lord Toulson’s support … that ‘the lie is dishonest, but the claim is not’“.
What is of particular interest is the practical suggestion Lord Mance offers (perhaps by way of a crumb of comfort to insurers who might have anticipated a different outcome in this case?) in the last paragraph of the 55 page judgment:
“In the light of the majority judgment, insurers will no doubt be advised about whatever may be the potential merits of making express in future whatever understanding they have, or action they may wish to take, regarding the effect of fraudulent devices, as and when such are discovered to have been used by an insured during the claims process.”
Whether following his advice and inserting new clauses in policies is realistic across the market and/or would amount contracting out of the Insurance Act 2015 are questions for another time, and of course it should be borne in mind that the outcome of any particular claim will always fact-specific. What does seem clear, however, is that the decision today by of the majority does not necessarily mark the legal or contractual end point of the complex debate about the effects of fraudulent devices and so-called collateral lies on insurance claims.
About the Author
Alistair Kinley is BLM’s Director of Policy & Government Affairs.
Alistair is responsible for BLM’s engagement with government departments and regulators on policy and public affairs issues and consultations affecting the firm and its customers. He coordinated BLM’s market-facing activities in connection with the Insurance Act 2015 and the consultations which preceded its publication and introduction in Parliament.
He is a member of the Civil Justice Council (CJC), a regular speaker and experienced commentator on legal and procedural reforms and was a contributing editor to the Law Society’s Litigation Funding Handbook (September 2014).