What constitutes a fraudulent insurance claim under the Insurance Act 2015?
The UK Supreme Court re-dredges Versloot's claim
In Versloot Dredging the Supreme Court recently clarified what constitutes a fraudulent claim for the purpose of the Insurance Act 2015. The court was concerned with considering whether a reckless untruth, proffered by the insured's employer to support a valid claim, was a fraudulent device (a "collateral lie" as Lord Sumption has now sought to re-categorise the device).
The reckless untruth turned out to be irrelevant to the merits of the claim (which the court held was proximately caused by a peril of the sea) but the first instance court and court of appeal both agreed that insurers were entitled to deny the claim in full because of the insured's fraudulent conduct.
A majority of the Supreme Court disagreed. Lord Sumption held that the fraudulent claim rule applies to wholly fabricated claims and exaggerated claims but it does not apply to a valid claim where the lie is shown to be immaterial to the insured's right to recover.
Following the views of Lord Hobhouse in The Star Sea Lord Sumption noted that while the duty of utmost good faith governed the conduct of the parties' pre-placement of the contract, "once the contract is made the content of the duty … and the consequences of its breach must be accommodated within the general principles of the law of contract". As such, the fraudulent device rule must be viewed as implied or inferred by law and the effect of a breach would depend on the principles governing repudiation of contract.
The rational of the rule against fraud is accepted – it is the deterrence of fraud. So where there is a claim for a loss known to be non-existent then the fraud is material and avoids the claim.
However, when looking at a valid claim in respect of which there has been a reckless untruth or lie told to support the claim, then the fraud is only relevant if it is material to the claim; i.e. would the truth have afforded insurers a defence? In this context it is important to make the distinction between a fraudulently exaggerated claim, where the insured's intention is to get something to which he is not entitled, and the use of a 'collateral lie' to support a valid claim where no amount of the claim is exaggerated and the lie is irrelevant to the existent of the claim or the amount.
To allow insurers to avoid the claim in the latter example would be wrong as a matter of law:
- The insured's right to an indemnity arises as soon it suffers a loss;
- The insurer's liability exists at the time of the loss and it is not a precondition to such liability that a claim must be made on the insurer;
- The test of materiality is not relevant at the time of assessing a claim because (i) there is no issue of inducement and (ii) the insurer's assessment of the claim is done in accordance with its existing liability.
In essence, the Supreme Court has adopted a public policy decision that insurers should have no defence where the collateral lie is irrelevant to the amount or existence of the insured's entitlement to the indemnity. This decision will have important ramifications on how certain claims are dealt with under the proportional remedies regime of the Insurance Act 2015.