Supreme Court Rules Lies Are Not Always Fraud

The Supreme Court issued a surprising Judgment today, ruling that “collateral lies” told
by claimants in insurance claims should not constitute fraud if they do not affect the claim’s outcome.

What is a collateral lie?

A collateral lie is where in accurate information is provided in order to embellish a claim for compensation.

Background to this decision

This decision was made in the case of Versloot Dredging and Another v HDI Gerling Industrie Versicherung AG and Others.

The claimant’s vessel DC Merweston suffered irreparable damage to its engine in a flood. It was found that the flood was caused
by a number of factors, including crew negligence, existing damage and the negligence of contractors in a previous repair to the ship.

A claim of of 3.2 Million Euros was submitted to the insurers. During the claim, the ship’s owners told the insurer’s solicitors that the crew advised
them the bilge alarm sounded at noon on the day of the incident. It could not be investigated due to the weather.

This was a lie told in order to accelerate payment, and divert attention away from existing defects. It turned out the lie was
irrelevant. The loss was already found to be due to “perils of the seas”.

However, the judge held the owners’ lie was a “fraudulent device”, which voided the insurance policy. This was agreed by the Court of Appeal.

The case was referred to the Supreme Court. Common law does indeed prohibit recovery from insurers when a claim is fabricated
in order to deter fraud. However this appeal concerned an embellishment to the claim which proved irrelevant. Their claim was justified
with or without the lie.

The Supreme Court’s decision

In light of this, the Supreme Court ruled that fraudulent claim rules do not apply in circumstances such as this.

The claimant’s lie was immaterial to the honest component of the claim, which was valid. The claimant lost nothing
by telling it, and the insurers lost nothing. To invalidate a claim, a collateral lie must be material – i.e. it would affect the overall outcome
of the claim, such as the insurer’s decision on liability, or the value of the claim.

This decision could have wide-reaching implications for insurers and their customers, and we will follow with interest any commentary from the insurers.

Shelley Whyman – Chartered Legal Executive – Litigation and Employment Law