The UK Supreme Court recently handed down a decision that has been met with varied reactions from the insurance industry. The ruling in Versloot v HDI Gerling means that ‘collateral lies’ or ‘fraudulent devices’ told by insureds whilst pursuing a claim are no longer grounds for insurers to decline a claim. Ian Brown, partner and specialist travel solicitor at Trowers and Hamlins, considers the decision and its possible implications for the travel insurance industry.
The context of the claim is important – a shipping claim worth €3.2 million, after a ship’s engine flooded in stormy seas. The ship’s owners made a claim to their insurers and in the course of making the claim, lied about the sounding of an alarm, the intention behind the lie being to facilitate prompt payment of the claim. Insurers declined the claim because the lie was uncovered and considered fraudulent. Court proceedings ensued.
The case proceeded through the courts and ended up in the Supreme Court, the highest appellate court in the country. By a majority of four to one, the Court decided that a fraudulent device, re-badged as a collateral lie in the case, was not a sufficient reason for an insurer to refuse to pay an otherwise valid claim. Based on the case in point, the fact that a lie was told about the alarm was irrelevant – because the ship’s engine was damaged, insurers were liable to pay the claim under the policy.
What is a fraudulent claim and what is the effect of the decision?
The Insurance Act 2015 (which came into force on 12 August 2016) gives statutory effect to the common law position that insurers are not liable to pay fraudulent claims, but unhelpfully, the Act itself does not define what a fraudulent claim actually is. The significance of the decision in Versloot v HDI Gerling is that the UK’s highest Court took the opportunity to give guidance which will lend assistance to interpretation of the new Act.
So what is a fraudulent claim? The Court confirmed that three possible situations may be relevant. First, the wholly fabricated claim, which is fraudulent, therefore there is no liability on insurers to pay the claim. Second, a genuine claim that has been dishonestly exaggerated in amount – again, there is no liability on insurers to pay the claim, even the part which was justified. Third, an entirely justified claim where information given in support has been dishonestly embellished.
This third type of dishonesty – long referred to as a ‘fraudulent device’, or as Lord Sumption relabelled it, a ‘collateral lie’ – has also previously sufficed to invalidate a claim, a position that the Court regarded as an unfair advantage. Such an advantage, they felt, was quite inappropriate for the modern insurance market.
Unsurprisingly the decision has not been greeted favourably within the industry. James Dalton, director of general insurance policy at the ABI, said: “Allowing ‘collateral lies’ in the course of an insurance claim flies in the face of the work that the insurance industry and Government have been doing to crack down on the cheats and fraudsters. This decision risks pushing up the cost of insurance and prolonging the pay-out process for the vast majority of people who are honest customers. As the dissenting judge, Lord Mance, said, allowing lies will ‘distort the claims process by the time and cost involved in unveiling the fraud and attempting to ascertain its true implications’. Lies are lies. Insurers will investigate all suspicious claims and we make no apology for doing so as it keeps premiums down for honest customers.”
Abolishing the fraudulent claims rule means that claimants pursuing a bad, exaggerated or questionable claim can tell lies with virtual impunity
So what then for the travel insurance industry?
Although the decision in Versloot v HDI Gerling was in the context of shipping insurance, the decision will have application across the whole of the UK insurance sector and will apply to consideration of all claims, no matter the value.
It remains to be seen what ramifications this decision will have on the high volume, typically low value, consumer travel claims market. The UK’s tabloid press has championed the decision, with a 20 July Daily Mirror article commenting: “Why does [the decision] matter? Because all of a sudden it might mean that small fibs told on your insurance form might not be grounds to reject your claim.”
The fear, then, must be the floodgates argument, and the concern that many travel claims may be ‘enhanced’ by insureds who, in the course of making a genuine claim, tell lies to try and smooth the process and get their claim paid more quickly. The judgment gives credence to telling lies – which did not sit well with the only dissenting judge, Lord Mance, who said: “Abolishing the fraudulent claims rule means that claimants pursuing a bad, exaggerated or questionable claim can tell lies with virtual impunity.”
The Versloot case seems to suggest that, for example, a claim for a genuinely lost or stolen iPad, supported by a fabricated purchase or replacement receipt, is not a fraudulent claim – the fact that the item was lost or stolen gives rise to a valid claim, and the fabricated receipt is not a ground to deny payment of the claim. But if someone is prepared to tell a lie to support a claim, where do they stop? Isn’t there a chance that the claim itself could be wholly fraudulent? Who knows? The upshot generally in claims settlement could be that (as Lord Mance envisaged) claims take longer to be paid whilst claims teams scrutinise them, ever alert to fraud, trying to discern genuine claims containing a collateral lie (which should be paid), from fraudulent claims (which of course should not).
And if claims processing takes longer, logically it will cost more – such cost potentially seeing premiums rise. So what is being touted by consumer champions as a pro-insured decision, may have a negative effect in the long term, in terms of increased cost and time spent dealing with claims processing. Scott Roberts, corporate and travel underwriting manager at Allianz Global Assistance UK, suggested that ‘a key issue to consider with the collateral lies ruling is how the judgment will be interpreted down the claims chain’. “Although the false representations given by the Dutch cargo ship owners were deemed irrelevant by the Supreme Court,” he said, “it is important to consider how this view will be weighted in the general insurance market when looking at smaller and more complex claims. The ruling could potentially lead to delays whilst legal teams try to understand how the collateral lies ruling should be applied, which in turn may lead to frustrating delays for the customer. Until a case on a lower general insurance level is seen in the courts, the industry looks set to face a difficult period of interpretation.”
But is it really all change? Those in the industry will know that this decision affirms the stance taken in Financial Ombudsman Service (FOS) guidance that genuine claims which are not affected by the lie should be settled. For those insurers who already settle claims in accordance with FOS guidance, the decision should make no material difference to claim settlement. Indeed, Julie Smith, travel claims manager at AmTrust Europe Ltd, commented: “For those who make honest claims it is good news. It means that insurers cannot rely on a technicality to decline valid claims. But those who are out to cheat insurers will find that they will still be investigated. I am sure there will be underwriters out there who will be concerned and we may even see changes to policy wordings.”
Collateral lies, fraudulent devices, ‘gilding the lily’, dishonest embellishment – call it what you will, the fact that lies can validly be told in pursuance of a claim will not sit well with insurers. Provided terms are consistent with the Insurance Act 2015, insurers may change policy wordings to combat collateral lies, a position envisaged by Lord Mance in summary: “Insurers will no doubt be advised about whatever may be the potential merits of making express in future whatever understanding they have, or action they may wish to take, regarding the effect of fraudulent devices, as and when such are discovered to have been used by an insured during the claims process. ⬛