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The Supreme Court removes one deterrent to fraudulent insurance claims

News / 18-10-2016 / London

Versloot Dredging v. HDI-Gerling Industrie Versicherung AG and others (DC Merwestone) [2016] UKSC 45

In a landmark decision, the Supreme Court (by a majority of 4-1, Lords Sumption, Toulson, Clarke and Hughes, with Lord Mance dissenting) has abolished the ‘fraudulent device doctrine’.

In doing so, it overturned the Court of Appeal’s judgment in the present case and decided that Lord Justice Mance (as he then was) had been wrong in the seminal Court of Appeal case, The Aegeon, in expressing the opinion that the public policy objective of deterring  fraud in the insurance claims context warranted the forfeiture of a claim that had been promoted by fraudulent means, even though the claim was, in all other respects, valid.

The decision upset settled expectations and assumptions as to the state of the law: The Aegeon had been applied twice by the Privy Council, recognised by the Supreme Court (in Summers v. Fairclough) and applied in numerous first instance cases.  

The issue

We have previously reported on the facts of the case and the decisions at first instance and in the Court of Appeal. For the sake of brevity, these are not repeated here (but see link to previous article below).

The issue that arose for decision in the Supreme Court was whether the fraudulent claim rule (whereby an assured who fraudulently exaggerates his claim under an insurance policy forfeits any lesser claim which it could otherwise properly make) should extend to fraudulent devices. If so, an assured who deploys a fraudulent device in the pursuit of its claim will forfeit that claim even if it is later determined at trial that the claim is in all other respects sound, such that – with hindsight – the fraudulent conduct had been unnecessary. 

A fraudulent device in this context means a lie or false evidence that is deployed by an assured to gain an advantage in the claims process, whether to throw the insurers off a line of enquiry that might lead to a potential defence or to expedite the claim payment or settlement, or otherwise to influence the insurers’ response to the claim. 

The Supreme Court decision

Whilst upholding the fraudulent claim rule in respect of fraudulently exaggerated claims (as now given statutory effect in the Insurance Act 2015), the majority considered it to be “a step too far” and “disproportionately harsh” to deprive a claimant of his claim by reason of his fraudulent conduct if, at trial years later, it turns out that the fraud had been unnecessary because the claim was in fact always recoverable (and not fraudulently exaggerated).

In reaching that decision, the majority considered there to be an important difference between a fraudulently exaggerated claim and a legitimate claim supported by a fraudulent statement or evidence. It was held that forfeiture is appropriate in the former case because the assured will have been seeking to obtain something to which it was not entitled; but not in the latter case because (albeit with the benefit of hindsight) the fraud deployed would have involved no attempt to obtain anything more than the assured’s actual legal entitlement.

In light of the decision of the majority, the upshot is that there is now no legal sanction or remedy for the fraudulent presentation of an insurance claim if, at trial years later, it is shown that the fraud was unnecessary because the claim was in fact always recoverable (although the majority recognised that the assured would be likely to face serious costs consequences).  

In a strong dissenting judgment, Lord Mance expressed the opinion that there is no distinction to be drawn between the deployment of a fraudulent device and the pursuit of a fraudulently exaggerated claim. In his judgement, forfeiture is proportionate in both cases, and justified by the public policy objective of deterring fraud in the insurance claims context.

Lord Mance states that the proposition that a lie told to promote a claim “is immaterial to the parties’ rights and obligations”  [per Lord Toulson] simply because, perhaps years later it can be seen that the lie was unnecessary and the claim good without it, appears to be a “charter for untruth”. He states that this proposition overlooks both the “obvious imperative of integrity on both sides in the claims process” and “the obvious reality that lies are told for a purpose, almost invariably as here to obtain an uncovenanted advantage of having the claim considered and hopefully met on a false premise”.

Implications

The implications of this judgment are significant for insurers. We cannot put it more succinctly than Lord Mance:

“Abolishing the fraudulent devices rule means that claimants pursuing a bad, exaggerated or questionable claim can tell lies with virtual impunity.” 

Insurers in all classes of business will doubtless be dismayed that a significant deterrent to fraud in the insurance claims context has been removed. 

In those classes of business where fraud clauses are not commonplace (for example, in the marine and energy class), insurers will be well advised – as suggested by Lord Mance - to consider including in their contracts express provisions as to the action they will take regarding the effect of fraudulent devices as and when such are discovered to have been used by an assured during the claims process.

Joe O’Keeffe and Elle Young represented the Underwriters in this litigation.

Elle Young

Elle Young Partner

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