The “fraudulent claims rule” bars the whole of a policyholder’s claim where it is either wholly invented or fraudulently exaggerated.
This is the common law; and for insurance contracts concluded after 12 August 2016, section 12 of the Insurance Act 2015 says the same.
So far, so uncontentious. But what if a valid claim is bolstered by a “fraudulent device” - a collateral lie which turns out, when the facts are found, to have no relevance to the insured’s right to recover? Does that engage the rule? This question has recently been considered by the Supreme Court in Versloot Dredging v HDI Gerling  UKSC 45.
A ship took on water in heavy seas, damaging the engine. The insured had a valid claim, and did not exaggerate it. However, he recklessly said something to the underwriters that was not true, in the hope of achieving a prompt settlement.
The High Court reluctantly followed Court of Appeal authority, holding that the rule did indeed apply to fraudulent devices. The Court of Appeal upheld that decision, noting the broad rationale for the rule: “the fraudulent insured must not be allowed to think: if the fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing.” This was supported by the Law Commission work leading to the Insurance Act 2015; and, further, was not disproportionate to the aim of deterring fraud in insurance claims.
The Supreme Court (Lord Mance dissenting) disagreed. Lord Sumption noted that in these circumstances, the immateriality of the lie to the claim made it not just possible but appropriate to distinguish between fraudulent claims and collateral lies. The moral character of the insured’s lie was not mitigated by the fact that it turned out to have been unnecessary, but there were principled limits to the role which a claimant’s immorality could play in defeating his legitimate civil claims. The extension of the fraudulent claims rule to collateral lies was a step too far; it was disproportionately harsh to the insured and went further than any legitimate commercial interest of the insurer could justify.
It is, of course, still open to insurers to extend the fraudulent claims rule to collateral lies by express provision.
David Willink / 20th Oct 2016
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