In Versloot Dredging v HDI Gerling Industrie Versicherung AG [2016] UKSC 45, the Supreme Court held that a claim which is supported by a fraudulent narrative will not be subject to forfeiture under the fraudulent claims rule provided that the claim itself was valid and that the lie had no bearing on the validity of the claim.

Briefly, the facts of the case were that the ship-owner’s claim resulting from flooding of the engine room of its ship, the DC Merwestone, had been supported by a false narrative to the effect that the crew of the ship had ignored the bilge alarm due to the rolling of the ship in heavy weather. At first instance and in the Court of Appeal, it was held that this lie constituted a fraudulent device and that, as a result, the claim was forfeit in its entirety.

However, the Supreme Court (Lord Mance dissenting) disagreed. Lord Sumption drew a distinction between the situation where there was a genuine claim, but the amount was fraudulently exaggerated (where the doctrine would apply, and the whole claim would be forfeit) and the situation in the present case, where the lie which was told had no effect on what was otherwise a valid claim and was told in order to attempt to expedite the payment of a claim. Lord Sumption referred to this latter form of falsehoods as “collateral lies”. According to the majority, the doctrine of fraudulent claims did not apply to collateral lies as in telling such lies “the insured is trying to obtain no more than the law regards as his entitlement and the lie is irrelevant to the existence or amount of that entitlement”. Lord Sumption went on to state that for a collateral lie to give rise to the right on the part of the insurer to forfeit the claim, that lie must be shown to have been material to the merits of the claim “on the true facts”, ie, on the facts as they are found be at trial or once admitted. The Court rejected the contrary test (propounded by Lord Mance) that the materiality of the lie ought to be tested at the time the lie was told.

In allowing the ship-owner’s appeal, Lord Sumption concluded: “[T]he extension of the fraudulent claims rule to lies which are found be irrelevant to the recoverability of the claim is a step too far. It is disproportionately harsh to the insured and goes further than any legitimate commercial interest the of insurer can justify”.

Posted by Sam Tacey