The Supreme Court has determined that the ‘fraudulent claim rule’ – which dictates that an insured is prevented from recovering under a contract of insurance where their claim is fabricated or exaggerated – does not extend to claims where ‘collateral lies’ or ‘fraudulent devices’ exist, provided the claim is justified and the lie has no bearing on the insurer’s liability.
Versloot involved a shipowner who appealed a decision that insurers should be allowed to avoid a claim made under a policy of marine insurance. The claim related to the flooding of a ship’s engine room, which caused damage in excess of €3 million. The shipowner originally stated that the flooding had occurred because the crew had been unable to deal with a leak due to the rolling of the ship in heavy weather. It transpired that this account was false and that the flooding was caused by the crew’s negligent failure to close a sea inlet valve, the earlier negligence of contractors in failing to seal bulkheads appropriately and faults in the engine room pumping system. It followed that the shipowner’s falsehood was irrelevant to the merits of its claim, given that the cause of the flood was a peril of the seas, which was covered by the insurance policy. Despite this, the High Court and Court of Appeal determined that the shipowner’s initial account constituted a ‘fraudulent device’ and thereby entitled the insurer to avoid the claim.
On appeal, the majority of the Supreme Court (Lord Mance dissenting) determined that:
This was the first occasion on which the House of Lords or Supreme Court has had the opportunity to resolve the question of whether the fraudulent claim rule applies to justified claims supported by collateral lies. The decision has set down principled limits on the role that a claimant’s immorality can play in defeating his legitimate civil claims. It has been confirmed that the law of insurance is more concerned with controlling the impact of breach of good faith on the risk rather than punishing misconduct.
This decision raises significant questions as to the relevance of good faith and fair information in the formation and operation of insurance contracts. Whilst a collateral lie may ultimately be immaterial to the claim, many would assume that public policy would demand that an insurer should have a defence in such instances. The business of insurance has at its core the assessment of risk and settlement of claims. Notwithstanding this, Versloot confirms that a collateral lie is immaterial, even if its is deployed in order to influence the underwriter’s assessment of a court’s future decision – thereby potentially inducing settlement of the claim.