Supreme Court rules that the use of fraudulent devices does not amount to a fraudulent claim and so the claim is not forfeit
In a keenly anticipated judgment, the Supreme Court has held that the use of a fraudulent device does not amount to a fraudulent claim and so the claim is not forfeit.
Section 12 of the Insurance Act 2015 will clarify the remedy available to insurers for a fraudulent claim. However, the Act does not define what a fraudulent claim is. Three categories are possible: (1) the entire claim is fabricated; (2) there is a genuine claim but it has been dishonestly exaggerated; and (3) there is a genuine claim but the insured supplies false information to support it (either because he doubts the strength of the claim, or he wants to speed up payment). The last category, known as fraudulent devices, was the subject of this case.
A vessel was incapacitated by a flood in the engine room. The insureds claimed against the defendant insurer, stating that the bilge alarm had been sounded on the day the ship was incapacitated. The judge at first instance found this statement to be a reckless mistruth, and found that the insured had a valid claim but that the entire claim was forfeited because the insured had used fraudulent devices (having recklessly misrepresented to insurers that an alarm had been heard by the Master of the ship). The Court of Appeal rejected the appeal from that decision, approving the judgment of Mance LJ in Agapitos v Agnew "The Aegeon"  that a fraudulent device is a sub-species of a fraudulent claim. The Court of Appeal found that there was a public policy justification for the rule, namely to protect insurers from fraud.
The Supreme Court, by a majority of 4:1 (Lord Mance dissenting) has now allowed the appeal from that decision, finding that the use of a fraudulent device does not amount to a fraudulent claim and so the claim is not forfeit.
Lord Sumption said that "the position is different where 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…. I do not accept that a policy of deterrence justifies the application of the fraudulent claim rule in this situation". It was held that the lie used in a fraudulent devices claim is always immaterial to the claim, which is payable as soon as the loss arises. Lord Sumption added that the fraudulent devices rule therefore only protects the insurer "from the obligation to pay, or to pay earlier, an indemnity for which he has been liable in law ever since the loss was suffered". The Supreme Court also rejected the argument that the fraudulent claims rule is merely a manifestation of the duty of utmost good faith.
A distinction may be made, though, where a lie is told regarding a genuine claim for reasons other than claims presentation (e.g. to avoid liability to pay a higher premium). The decision also confirmed that where a claim is fraudulently exaggerated, the entire claim is forfeit, not just the dishonest element.
The Supreme Court's finding that 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 insurance policies, but is clearly intended to apply equally to large, complex commercial claims (the case itself involved a €3m claim under a marine policy).
The Supreme Court did suggest that the insured that uses fraudulent devices may face some adverse consequences, for example:
- prosecution for a criminal offence: although as Lord Hughes admitted "the risk of prosecution is relatively slight, even after some well publicised recent trials, especially if he stood to gain nothing to which he was not entitled, and it may not operate as a significant sanction in many cases"; or
- liability in damages to insurers: Lord Hughes accepted that the prospects of establishing such liability were "comparatively remote" Whilst the issue was not considered, it is possible that insurers might be able to claim in the tort of deceit for the wasted costs of having to investigate the lie; or
- adverse impact on his credibility in any trial regarding the claim (assuming the case goes to trial); or
- the requirement to disclose his lie to future insurers: resulting in a likely higher premium or even the inability to insure. Although a lie to a prior insurer is a material fact which should be disclosed (see e.g. Aviva v Fielding ), it is to be queried how readily this information will be shared amongst insurers in practice.
Accordingly, the chance that some sanction may be available for insurers where a fraudulent device has been used may be somewhat slight. Lord Toulson's response was that "I am sceptical about the idea that knowledge of this judgment will incentivise people with valid insurance claims to lie in support of their claims. Those who are honest will not do so because it would not be in their nature, while some who are dishonest may do so if they think that they will get away with it, despite the risk of it having a boomerang effect on whether the court believes anything that they say".
The decision brings the rule into line with the US and Australia and now 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 an 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. If the insured lies, but the lie is not relevant to the existence or the amount of a right to an indemnity, then the insured has not dishonestly sought to recover more than it is entitled to. But an assessment of the existence and the amount of the right to indemnity may in practice depend to a great extent on the evidence produced by the insured, and an insured that lies may end up with his claim being paid without having genuinely produced that evidence.
The Supreme Court's reasoning parallels the Law Commissions' reasons for the introduction of section 11 of the Insurance Act 2015. This provision provides that where there is non-compliance with a term that is designed to reduce the risk, insurers will not be able to rely on that non-compliance as a defence if the insured can demonstrate that such non-compliance could not potentially have increased the risk of the loss that actually occurred in the circumstances in which it occurred. Again, the law is concerned with what the insured is actually entitled to and seeks to remove an insurer's ability to decline a genuine claim by reason of something that is collateral to the claim.
We set out below further comments from our marine, property and personal injury teams regarding the Versloot decision.