(as long as it does not affect the overall validity of the claim)
Thomas Spring reports on one of the first policy coverage Supreme Court cases, following the Insurance Act 2015.
It has long been trite law that insurers have no liability to meet claims from their policyholders that were fabricated or dishonestly exaggerated.
However, applying the principles which underpin the Insurance Act 2015, on 20 July 2016, the Supreme Court of England and Wales ruled that insurers could not avoid a policyholder’s claim where that policyholder had lied during the course of investigations, as long as the claim is itself justified.
Lord Sumption (supported by Lords Clarke, Hughes and Toulson), sitting at the Supreme Court, after hearing the latest appeal in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG DC Merwestone gave the lead judgment which ruled that “collateral lies” are immaterial and irrelevant to the honest claim. The insured will gain nothing by telling them, and the insurer will lose nothing by meeting a liability that it always had. Per Lord Sumption, if a collateral lie is to prevent recovery, the lie must materially affect whether the insured is entitled to successfully recover from its insurer.
Versloot concerned a Dutch cargo ship whose engine room flooded following the pumping of seawater using an emergency fire hose by its crew, to remove ice from the deck. The crew did not empty the fire hose properly, or close the sea cocks, causing the seawater to freeze and expand. Once the vessel sailed, the ice melted causing water to flood the engine room and cause irreparable damage to the tune of some €3.2m.
Originally the High Court found that a “fraudulent device” supported the claim, and the defendant insurer was entitled to resist the claim accordingly. That “fraudulent device” was the false explanation of the quantity of water in the engine room - that the bilge alarms had sounded previously but were unheeded by the crew because they were attributed to the ship rolling in heavy weather.
The Court of Appeal found that the trial judge was entitled to reach the verdict that the insured were at least reckless as to whether the explanation for the events was supported by the crew’s recollection. The High Court correctly determined that the insured had not wanted a lack of confirmation from the crew to get in the way of an explanation which absolved the insured from any fault. That in itself was an untruth told to back the claim in the hope of swift settlement.
The Court of Appeal found that once it was accepted that deterring false accounts being given during insurers’ investigations was a legitimate aim, forfeiture, whilst being harsh, was not necessarily disproportionate. However, the rule was only applicable in the case of fraud, so the careless or forgetful insured was not affected.
In fact, the accident had been caused by the perils of the seas, so the lie was irrelevant as the insured was entitled to recover under the policy in any event, according to the Supreme Court.
What Versloot certainly shows, as one of the first major rulings since the Insurance Act 2015, is the reiteration by the judicial system that an insurer must have a keen eye on the need to treat its consumers fairly. Langleys will keep you updated as to the implementation of such precedent on further similar cases in future publications.