Versloot Dredging BV and another v HDI Gerling Industrie Versicherung AG and others

The Supreme Court considered whether the common law fraudulent-claims rule permits an insurer to forfeit a wholly justified claim where the insured has told a collateral lie (a false statement irrelevant to the insured’s right to indemnity). The court held that the rule does not apply to such collateral lies. The majority reasoned that the rule is intended to deter dishonest attempts to obtain more than the insured’s legal entitlement and that it is disproportionate to defeat a valid claim where the lie, on the true facts, made no difference to recoverability. The decision explains that materiality for this purpose must be tested by reference to the claim as it actually is (the true facts), not merely by how it appeared when the lie was told. The appeal was allowed and judgment was entered for the owners for the sum Popplewell J had found would have been due but for the forfeiture.

Background and facts. The owners of the cargo ship DC MERWESTONE sustained loss to the main engine as a result of seawater ingress during a voyage. Insurers investigated and the owners’ manager, Mr Kornet, sent an explanation asserting that a bilge alarm had sounded at about noon and had not been acted on; the judge found that this was a reckless untruth. Popplewell J held that, although the loss was recoverable on its true facts (caused by perils of the sea and not excluded by the Inchmaree clause), the claim was forfeited because it had been supported by a collateral lie.

Nature of the claim and procedural posture. The claimants sought payment under their marine insurance policy for €3,241,310.60. Insurers relied on the fraudulent-claims rule/fraudulent-device defence. The case came to the Supreme Court on appeal from the Court of Appeal: [2014] EWCA Civ 1349; the first-instance judgment is reported at [2013] 2 All ER (Comm) 465.

Issues framed.

• Whether the common law fraudulent-claims rule applies to a claim which is wholly justified on the true facts but supported by a collateral lie (a fraudulent device).
• If so, what is the correct test of materiality or causal connection between the lie and the insurer’s liability?
• What are the proper policy considerations (including the deterrent purpose of the rule) and their limits?

Reasoning and conclusions. The majority (Lord Sumption, Lord Clarke, Lord Hughes and Lord Toulson) concluded that the fraudulent-claims rule should not be extended to forfeiture of a valid claim supported only by an irrelevant lie. They emphasised that the insured’s right to indemnity arises when the loss occurs and that forfeiture in relation to a collateral lie would be disproportionate and would protect the insurer from payment of an indemnity to which he was already liable in law. Materiality for these purposes must be assessed by reference to whether the lie, on the true facts, was relevant to recoverability; if it was irrelevant the rule does not apply. The majority noted related authorities and the statutory context (the Insurance Act 2015 preserves the fraudulent-claims rule but leaves its scope to the courts). Lord Mance dissented, considering that the fraudulent-claims rule should extend to fraudulent devices and advocating a high threshold of materiality (eg a significant improvement in prospects if the lie had been believed).

Remedy. The Supreme Court allowed the appeal and ordered judgment for the amount the judge found would have been due but for the forfeiture, with interest.

Appeal allowed. The Supreme Court held by a majority that the fraudulent-claims rule does not apply to a claim that is wholly justified on the true facts but supported by a collateral lie. Materiality for the rule must be tested by reference to the claim as it actually is (the true facts): a lie which, when the true facts are known, is irrelevant to the right to recover does not justify forfeiture of the claim. The majority entered judgment for the insureds for the sum the trial judge found would have been due but for the earlier forfeiture.

On appeal from the Court of Appeal [2014] EWCA Civ 1349. First instance decision by Popplewell J reported at [2013] 2 All ER (Comm) 465. The Supreme Court allowed the appeal and entered judgment for the insureds for the amount the trial judge had found would have been due but for the forfeiture.