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

The common law fraudulent claims rule defeats a wholly fabricated or fraudulently exaggerated insurance claim. It also defeats the genuine part of a single exaggerated claim.

The rule does not defeat an otherwise valid claim merely because the insured supports it with a dishonest statement which, on the facts ultimately established, is irrelevant to the existence or amount of the insurer’s liability. Such a collateral lie is dishonest, but the claim itself is not fraudulent. Whether the lie appeared capable of influencing the insurer when made does not alter that conclusion.

Forfeiture of a valid claim for an immaterial lie would be disproportionate and would exceed the insurer’s legitimate commercial protection.

The owners of the vessel “DC Merwestone” claimed under a marine insurance policy after seawater flooded the engine room and destroyed the main engine. Popplewell J found that the loss was insured and that the owners had a valid claim for €3,241,310.60. During the insurers’ investigation, however, a director of the vessel’s managers recklessly gave a false account of an earlier bilge-alarm activation to strengthen the claim and accelerate payment.

The lie proved irrelevant to coverage. Nevertheless, Popplewell J held that the claim was forfeited under the common law rule concerning fraudulent devices: [2013] 2 All ER (Comm) 465. The Court of Appeal upheld that conclusion: [2014] EWCA Civ 1349.

The central issue was whether the fraudulent claims rule defeats a wholly justified insurance claim supported by a dishonest statement which ultimately has no relevance to the insured’s entitlement.

1. Appeal allowed by a majority of four to one. Lord Sumption, with whom Lord Clarke, Lord Hughes and Lord Toulson agreed, held that the fraudulent claims rule does not apply to a justified claim supported by a collateral lie. Judgment was to be entered against the insurers for €3,241,310.60 and interest, subject to submissions on the form of order.

2. The insured’s right to indemnity arises when the insured loss occurs. The fraudulent claims rule therefore operates as a forfeiture which retrospectively bars an existing cause of action. It is established that a wholly fabricated claim fails. A fraudulently exaggerated claim also fails in its entirety because the law refuses to sever its genuine and invented parts.

3. A materially different position arises where the insured seeks no more than the legal entitlement and the lie is irrelevant to the existence or amount of that entitlement. The lie is dishonest, but the claim is not. The necessary connection between dishonesty and the claim depends on whether the lie goes to recoverability on the true facts, as ultimately admitted or ascertained. A lie does not become material merely because, when told, it appeared capable of improving the prospect of settlement or payment.

4. Deterrence does not justify forfeiting a valid claim because of a collateral lie. The insurer is already obliged to indemnify the loss. Avoiding that obligation would protect no legitimate commercial interest and would impose a disproportionate sanction. A collateral lie may still damage the insured’s credibility, affect costs, expose the insured to other legal consequences and lead to prospective termination of the policy.

5. The common law fraudulent claims rule is distinct from avoidance for breach of utmost good faith under section 17 of the Marine Insurance Act 1906. The scope of the rule was not resolved by section 12 of the Insurance Act 2015. The majority therefore resolved the issue at common law and found it unnecessary to determine the argument under article 1 of the First Protocol to the European Convention on Human Rights.

6. Lord Mance dissented. He would have upheld forfeiture where a fraudulent device, assessed when deployed, was capable of producing a significant improvement in the insured’s prospects. In his view, integrity and deterrence in the claims process justified that rule.

1. United Kingdom Supreme Court: By a majority of four to one, allowed the appeal from [2014] EWCA Civ 1349 and held that the valid claim was not forfeited by the collateral lie.

2. Court of Appeal: In [2014] EWCA Civ 1349, upheld the conclusion that the fraudulent device defeated the claim.

3. High Court: Popplewell J held that the insured loss was covered and quantified the valid claim at €3,241,310.60, but held it forfeited because of the collateral lie: [2013] 2 All ER (Comm) 465.