“Fraudulent claims rule” does not extend to “fraudulent devices”

Supreme Court hands down judgment in Verloot Dredging [2016] UKSC

If one makes a fabricated claim on an insurance policy, or dishonestly exaggerates one’s claim, the common law prohibits recovery. This is so as regards the totality of one’s claim because the law declines to sever the dishonest from the honest part of the claim. This is the “Fraudulent Claims Rule” and is based on public policy. What if, however, one has a perfectly good claim and one tells a lie (a “collateral lie”) to ease or speed the claims process along, without exaggerating in any way one’s entitlement? Should the Fraudulent Claims Rule extend to preclude indemnity in such a scenario?

In Verloot Dredging the first instance judge, Popplewell J, and Court of Appeal answered that question to preclude the insured from recovering by extension of the Fraudulent Claims Rule to “fraudulent devices”. The case concerned a claim for circa Euro 3 mil on a policy of marine insurance arising from a flood to the engine room of the vessel DC Merwestone.

The insured had falsely told the insurer that a bilge alarm had sounded but that the crew had been unable to investigate because of heavy seas and the rolling of the vessel. The lie was told to strengthen the claim, accelerate payment and deflect from any defects in the vessel for which the owners might have been responsible. As it happened, however, the lie was wholly irrelevant to the claim as the loss was found to have been caused by a peril of the sea to which the policy responded in any event.

Allowing the insured’s appeal Lord Sumption (giving the leading judgment) held that the Fraudulent Claims Rule did not extend to fraudulent devices/collateral lies. Although contracts of insurance are uberrimae fidei where the utmost good faith is required, Lord Sumption considered there to be a distinction between pre-contractual misrepresentations, where one is dealing with whether the insurer will take on the risk at all, and post contractual untruths where one is dealing with whether the insurer is liable on the policy on a certain set of facts.

So long as a post contractual untruth was immaterial to the claim on the true facts, in the sense that it did not set up a false claim or exaggerate the sums claimed, it would not affect the insurer’s liability. In policy terms the Supreme Court considered that extending the Fraudulent Claims Rule to immaterial fraudulent devices to defeat a claim that the insurer was otherwise liable to meet on the facts would be wholly disproportionate response to a collateral lie.

Those prone to “gild the lilly” should by no means not get ahead of themselves, however.

An appropriately drafted express term might well avail an insurer in relation to collateral lies (as discussed by Lord Mance in his dissenting judgment) and it would be surprising if the insurance industry did not adapt and respond accordingly.


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