The Great Fire of London was finally extinguished 350 years ago today. New insurance structures emerged in the aftermath of the Great Fire – which bear striking resemblance to some of ...05 September 2016
Storytelling: are Insureds permitted to embellish their narratives in support of claims?
Yes – to an extent. In the case of Versloot Dredging BV and another (Appellants) v HDI Gerling Industrie Versicherung AG and others (Respondents) UKSC 2014/0252 (The Merwestone), the Supreme Court held that lies made in respect of facts which are immaterial to the Insured's right to recover do not invalidate the claim that they relate to; irrelevant embellishments do not give rise to a fraudulent or exaggerated claim.
The Insured's vessel (the "Vessel") had suffered from the frozen conditions of a Baltic winter, her crew's negligence and the negligence of repair contractors. After using the Vessel's emergency fire pump to blast ice from the hatch covers, the crew had failed to close the sea inlet valve. Seawater filled the pump system and froze, cracking the pump's casing. The ice later melted and seawater rushed in, flooding the engine room and damaging the engine beyond repair. The bilge alarm had alerted the crew, who had unsuccessfully attempted to pump the water out. The Vessel had to be towed to port and a replacement engine and gearbox fitted at a cost of €3.2m. Quantum was not disputed.
The Shipowners had insured the vessel – and as the court of first instance held, the loss would have been covered under their policy (the "Policy") as a peril of the sea. However, the underwriters claimed that the Policy had been forfeited because of the use of a collateral lie, or "fraudulent device", namely an embellished narrative given by the Shipowners in their communications with the underwriters. The underwriters claimed that one of the directors of the Shipowners, Mr Kornet, had deliberately or recklessly made untrue assertions. Mr Kornet had lied about when the bilge alarm had sounded, had falsely claimed that the alarm had been ignored because it was thought attributable to the rolling of the Vessel in heavy seas and had falsely claimed that he had been told so by the crew.
The legal background:
The particular loss was covered and all other terms of the Policy had been complied with but, as the court of first instance held, Mr Kornet's untrue assertions amounted to a fraudulent device.
Fraud – whether making a fraudulent claim or fraudulently inflating the value of a claim – would clearly invalidate an affected claim under a policy. This is true whether or not the policy expressly states it, as it is implied as part of the duty of utmost good faith. Prior to the Supreme Court's judgment the situation was less clear when it came to fraudulent devices, such as Mr Kornet's, that do not mean that a claim that should not be paid would be paid or that mean that more would be paid than otherwise should be paid.
Mr Kornet had lied about his account of events simply out of frustration at the length of time it was taking the Underwriter to investigate the claim and pay out. In the Court of Appeal, the Shipowners unsuccessfully attempted to argue that it would be too harsh to treat a fraudulent device that did not otherwise invalidate a claim as a full-blown criminal fraud, contrary to the reasoning in Agapitos v Agnew (The Aegeon) (No. 1)  EWCA Civ 247 .
The Supreme Court's decision:
The Supreme Court were asked to settle once and for all "whether the rule by which a fraudulent insurance claim precludes recovery under the policy applies to fraudulent means or devices".
The Supreme Court ruled, by a majority of four to one (Lord Mance dissenting), in favour of the Shipowners, reversing the judgments of the court of first instance and the Court of Appeal.
Lord Sumption described the Shipowners' situation as one of "a justified claim supported by collateral lies". The court held that Mr Kornet's lies were collateral or "immaterial" to the otherwise honest and valid claim that the lies purported to support. The court broke from the reasoning in The Aegeon on the basis that the lies, if believed, would have made no difference to the claim and gained the Insured nothing and that the Underwriter would have lost nothing by believing the lies for he would have had to meet a liability that he had anyway.
The Supreme Court considered both English and Australian case law and the underlying principle that a fraud – in the form of a fraudulent claim or fraudulently exaggerated claim – would invalidate a claim. The objective of this rule is to encourage honesty in Insureds, but only – the Supreme Court held – to the extent that such honesty makes a difference to Underwriters. The court held that including fraudulent devices that are immaterial and merely collateral to an honest claim under this rule, such that an otherwise honest claim was invalidated, would lead to "anomalous consequences" that would "suggest that something has gone wrong with the underlying principle". Extending the underlying principle to all include all lies and fraudulent devices, no matter how immaterial, would be "a step too far" and "disproportionately harsh to the insured", beyond any commercial interest of the Insurer.
The law on fraudulent claims depends on whether the dishonesty goes to the recoverability of the claim:
- Wholly fabricated claims are invalidated, as before.
- Exaggerated claims are invalidated, as before.
- Genuine parts of exaggerated claims are invalidated on the basis that the whole is regarded as a single claim, as before.
- Lies in respect of facts which are immaterial to the Insured's right to recover do not invalidate the claim that they relate to.
The Versloot judgment represents a victory for Insureds, tilting the balance of the rule on fraud slightly away from Underwriters. Insureds will now not be penalised for embellishing a claim by telling lies that are immaterial to the recoverability of a claim. Of course, Insureds should continue to be careful to present their claims honestly and temptations to tell "white lies" and embellish narratives should still be avoided, lest they risk straying into an exaggeration of the claim. As before, an exaggerated claim will fall under the rule on fraudulent claims and so be invalidated.
Underwriters will no longer be able to rely on any fraudulent device as a justification to avoid paying out on an otherwise valid claim. If an Underwriter comes across a lie or other fraudulent device when investigating a claim, he should consider whether it is an irrelevant lie or a lie that goes to the recoverability of a claim, such as an exaggeration as to the extent of the loss, and decide whether to pay out or not accordingly.
Note that this case obviously concerned a policy underwritten and a loss suffered before the coming into force of the Insurance Act 2015 (the "Act") on 12 August 2016. Part 4 of the Act contains its own provisions concerning fraudulent claims. The Supreme Court has held that fraudulent devices do not fall under the umbrella of fraudulent claims. Unless the Act is contracted out of, the position under the Act in light of the Versloot judgment is that if an Insured tells a lie, then the Underwriter will only be entitled to the remedies in section 12 of the Act if the lie goes to the recoverability of the claim. If the lie does so, the Underwriter would not be liable to pay the claim, may recover any sums paid in respect of that claim and may by notice treat the policy as terminated from the date of the fraudulent device –and if the Underwriter does so treat the policy as terminated, refuse all claims after that date and retain the premium.
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