UK decision prompts policy wording changes

A UK court decision is likely to prompt insurers to revise policy wordings on fraud, Karen Welsford, a senior associate with Young Hunter, told the NZILA conference.

While the decision was not binding on NZ courts, Ms Welsford said it created uncertainty.

On 20 July, UK Supreme Court Lord Justices Anthony Clarke, Jonathan Sumption, Anthony Hughes and Roger Toulson had ruled maritime insurers could not use policyholders’ false statements to deny claims if the statements were "a collateral lie or falsehood that has no bearing on the claim’s value". Lord Justice Jonathan Mance dissented.

The cargo ship DC Merwestone was incapacitated by a flood in the engine room and the main engine was damaged beyond repair after it left Lithuania on 27 January 2010. The flood was caused by the crew’s negligence in failing to close the sea inlet valve in the emergency fire pumps; damage to the pumps; previous contractors’ negligence in failing to seal bulkheads; and defects in the engine room pumping system.

Vessel owner Versloot Dredging BV told the insurer’s solicitors the crew had told them the bilge alarm had sounded at noon on 28 January, but could not be investigated because the vessel was rolling in heavy weather. That was a lie told by the owners to strengthen the claim, accelerate payment under the policy, and take the focus off defects in the vessel for which the owners might have been responsible.

The lie was irrelevant to the claim, because the vessel’s loss was found to have been caused by a peril of the seas. But the trial judge found the owners’ lie was a "fraudulent device", which meant the insurers did not have to pay under the policy. The Court of Appeal agreed.

But the Supreme Court found although the statement was a lie to enhance the claim’s approval it had no bearing on the outcome. "The critical point is that, in the case of a collateral lie, 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 Clarke said.

 "Such a lie is immaterial to the claim. The lie is dishonest but the claim is not."

He said collateral lies were not relevant to the question of whether the underwriters were liable under the insurance contract or not. Whether collateral lies should "entitle underwriters to refuse to discharge their liability under a contract is essentially a policy question".

Ms Welsford said the court found the owner’s statement "reckless, but not a carefully planned deceit" and to deprive the vessel owner of a €3.2 million claim was "disproportionally harsh".

Despite the dishonesty, the insured was not trying to get anything to which it was not entitled. Ms Welsford said the court found "the lie must be material to recoverability of the claim based on the true facts and collateral lies were not".

She said there were other consequences, for example, the insured’s subsequent lack of credibility and difficulty in finding future insurance.

Lord Mance’s dissenting judgement said the deterrent effect justified the rule used in Agapitos, a judgement he had delivered. Lord Mance’s view was that "abolishing the fraudulent devices rule means claimants pursuing a bad, exaggerated or questionable claim can tell lies with virtual impunity".

He said: "Insurance fraud is commonplace, often being regarded as a victimless crime [for] which insurers are fair game. Of course, insurers do not always pay claims as speedily as would be desired, but that is not an excuse for fraud."

Lord Mance said Lords Sumption and Toulson’s analyses examined fraud and the use of a fraudulent device "with hindsight, rather than by reference to the state of mind with which a fraudulent device is usually deployed. That is precisely because the assured does not believe or is not confident he has a good claim."

The British Insurers’ Association (ABI) has described the ruling as "a blow to honest customers". ABI general insurance policy director James Dalton said the UK Supreme Court had damaged efforts to stop fraudulent claims.

"This decision flies in the face of industry and government [efforts] to crack down on cheats and fraudsters," he said. "It risks pushing up the cost of insurance and prolonging the pay-out process for the vast majority of people who are honest customers."

Mr Dalton said ABI was concerned about long-term ramifications. "Lies are lies," he said. "Insurers will [continue to] investigate all suspicious claims and we make no apology for [trying to] keep premiums down for honest customers."

Mr Dalton said ABI agreed with Lord Mance who said the ruling would "distort the claims process [through] the time and cost in unveiling fraud and attempting to ascertain its true implications".

Commercial Risk Europe has reported the Lloyd's Market Association (LMA) and the International Underwriting Association (IUA) have published updated editions of their Guide to the Insurance Act 2015 and Quick Reference Guide for Underwriters to include late payment of claims provisions enacted as part of the UK Enterprise Act 2016 and commentary on sections of the Insurance Act on fraudulent claims, in the wake of the Supreme Court's Versloot decision.

Insurance law firm Clyde & Co issued a note after the decision that said s12 of the Insurance Act 2015 would clarify the remedy available to insurers for a fraudulent claim. But, it said the Act did not define what a fraudulent claim is.

Clyde & Co said "the Supreme Court's finding an insured can submit false or forged documentation and information in support of its valid claim with apparent impunity is likely to come as a surprise to the insurance industry, especially since the position is not confined to consumer policies, but is clearly intended to apply equally to large, complex commercial claims".

It said the decision brought UK law into line with the US and Australia and "draws a sharp distinction between a fraudulent claim (which leads to complete forfeiture) and a fraudulent device (for which there is no remedy at all). But is the distinction between the two always clear? The basis for the distinction is that the insured's right to indemnity arises as soon as the loss is suffered, and there is a ‘correct’ amount payable, which can be objectively assessed and does not depend on how the insured puts its claim".

The revised LMA and IUA guides can be downloaded from www.lmalloyds.com/act or www.iua.co.uk/insuranceact.

Versloot Dredging BV and anr v HDI Gerling Industrie Versicherung AG and ors [2016], UKSC 45, 20/07/2016