Insurance Act 2015: Supreme Court rewrites Fraudulent Devices Rule

Published 21 julio 2016

The Supreme Court yesterday overturned the Court of Appeal and ruled that a fraudulent device (renamed in the judgment as a "collateral lie") will not defeat an otherwise legitimate insurance claim unless it is material to the recoverability of the claim on the true facts. The appeal was allowed by a majority of 4 to 1 (Lord Mance dissenting) in Versloot Dredging BV & Anor v. HDI Gerling Industrie Versicherung AG & Ors.

The issue has arisen due to the lack of authority as to whether fraudulent devices fall within the fraudulent claims rule. Obiter comments by Lord Mance in the 2002 Court of Appeal decision in Agapitos v Agnew (the Aegeon) previously suggested that a false device prohibited recovery provided it directly related to the claim, was intended to improve the insured’s prospects and was capable of yielding a not insignificant improvement in the insured’s prospects.

On the facts, Versloot concerned a vessel that suffered a flood in its engine room. There were concerns that a lack of diligence by the crew might defeat the claim. In the event, the High Court held that the cause of the loss was perils of the sea, rendering those concerns irrelevant. However the insured wrote to its insurers explaining away an apparent failure on the part of the crew. Despite the point being irrelevant, the High Court held that it was bound to consider the evidence as the owners had put it forward. The High Court at first instance held that the evidence was false and constructed to distance the owners from any fault. It was held to be a fraudulent device and defeated the entire claim. The Court of Appeal upheld this decision.

The Supreme Court held that the mere presence of dishonesty does not justify allowing insurers to avoid their liability to pay a claim, where the dishonesty had no relevance to the validity of the claim on the true facts. There is no need to protect insurers where the insured is trying to obtain no more than the law regards as his entitlement under the policy. Where the insured gains nothing from its lie, and the insurer loses nothing by meeting an existing obligation, the mere existence of a fraudulent device should not defeat the entire claim. The lie is dishonest, but the claim is not.

Nick Young, partner commented: "The Supreme Court has finally had the opportunity to consider whether the comments in The Aegeon were right. This was an issue clearly left out of the Insurance Act 2015, which separates the duty of good faith from the law relating to fraudulent claims. Despite a strong dissenting judgment from Lord Mance, the Supreme Court has come to a clear decision that the ‘fraudulent device’ rule does not apply to "collateral lies" which are, as a matter of fact, immaterial to the insured’s actual right to recover under the policy. Insurers will now need to consider any action they may wish to take to clarify the effect of fraudulent devices in their policies. Any express contractual terms will need to be very clear in their intended effect following Lord Sumption's judgment."

Catherine Burt, partner, added: "The well established fraudulent claims rule has been robustly confirmed throughout the decision, barring the whole claim where it is either wholly invented or fraudulently exaggerated. Where there is a potentially fraudulent aspect to a claim, insurers may expend time and cost in unveiling its extent but will now also need carefully to consider its implications."