What is a fraudulent claim?
Gilding the Lily (Versloot Dredging BV and another v HDI Gerling Industrie Versicherung AG and others) [20.07.15]
The Supreme Court has held that a valid insurance claim supported by fraudulent evidence is no longer to be treated as a fraudulent claim.
In a decision which has implications across all sectors of the insurance industry, insurers must now pay such claims unless there is an express fraudulent conduct exclusion in the policy.
A policyholder claims under his insurance policy. The claim is valid and the amount has not been exaggerated. The insured, however, embellishes the claim with some fraudulent evidence. What is the impact of gilding the lily in this manner? Does the use of fraudulent evidence turn what would otherwise be a good claim into a fraudulent claim?
The “one-way bet”
In the case of a wholly invented claim or a fraudulently exaggerated claim, the position is uncontroversial. Underwriters are entitled to avoid the policy retrospectively so that the insured recovers nothing - not even any genuine element of the claim. This is known as the ‘fraudulent claims rule’, the purpose of which is to deter fraud. The fraudulent insured must not be allowed to think that if the fraud is successful, he will gain and if it is unsuccessful, he will lose nothing - often referred to as “the one-way bet”.
Since 2003, the fraudulent claims rule has been extended to include cases where the underlying claim is 100% genuine but fraudulent evidence has been relied upon to promote the claim. The problem with a fraud which is collateral to a genuine claim is lack of materiality. Such frauds do not assist the insured or put him in a better position if the fraud succeeds; the claim is genuine anyway. Should any lie, however irrelevant or however minor result in the insured forfeiting his genuine claim? The Court of Appeal addressed that question by suggesting the fraudulent claims rule should apply only to cases where the insured himself believed his fraudulent evidence was likely to yield some improvement in the insured’s prospects of obtaining a better settlement or winning at trial (Agapitos v Agnew (The Aegeon) ).
In the Versloot case the lower courts followed The Aegeon and found in favour of insurers. However, by a majority of four to one, the Supreme Court allowed the insured’s appeal.
The key points in the Supreme Court judgment are:
- It distinguishes between the insured who deals fraudulently with his insurer in an attempt to gain something to which he is not entitled and the insured who dishonestly gilds the lily with a lie but stands to gain only his legal entitlement and no more. In the latter instance, the lie is dishonest but the claim is not.
- The Court considered that applying the fraudulent claim rule to a collateral lie is “too large a sledgehammer for the nut involved”. It gives insurers a windfall and is disproportionately harsh to the insured, going beyond any legitimate commercial interest that the insurer can justify.
- The Court noted that the common law duty of good faith as between insurer and insured ends on commencement of litigation as per the House of Lords’ decision in “Star Sea” . Applying that rule to the fraudulent claims rule would mean that fraudulent evidence submitted by an insured after the commencement of legal proceedings would not result in the forfeiture of the insured’s claim, whereas submission of exactly the same fraudulent evidence immediately prior to the commencement of proceedings would result in forfeiture. The Supreme Court in the Versloot case said such an outcome would make no sense.
Charter for fraudsters?
Is the Versloot case a charter for fraudsters? The Supreme Court considered the issue of deterring insurance fraud very carefully. It concluded there are already sufficient protections and/or sanctions in place to deter fraudsters from submitting fraudulent evidence in connection with genuine claims. This includes contempt of court punishable by a custodial sentence for submitting fraudulent evidence in legal proceedings (as illustrated by the cases involving Jeffery Archer, Chris Huhne, Jonathan Aitken and Lord Brocket). At the pre-litigation stage, insurers are entitled to terminate insurance cover prospectively. More importantly is the effect on the insured’s credibility: once fraudulent evidence is discovered, the insured will probably be disbelieved, even where he is telling the truth and risks being exposed to significant cost sanctions. Any finding of prior fraud will remain disclosable in any future insurance proposals the fraudster may make, thereby exposing him to increased insurance premiums, or indeed, a refusal of insurance all together.
Going forward, insurers can no longer rely on the common law for protection where the insured relies upon fraudulent evidence in support of an otherwise valid claim, at least where the statement is irrelevant to recoverability of the claim.
If insurers wish to be able to have a remedy of forfeiture where the insured uses a fraudulent device or tells a ‘collateral lie’, they will need to include policy terms to that effect.
Arguably, all this decision does is reset the common law back to where it was before 2003, so underwriters might conclude wordings issued prior to that date and indeed some newer wordings may not need to be altered.
At first glance, this decision could be seen as a ‘charter for fraudsters’. However, we wonder whether that really will be the case as there remain several other very important adverse consequences for any insured who utilises fraudulent evidence.
Related item: Fraudulent device defence confirmed