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Truth suffers collateral damage

Insurer must pay up despite lies in the claim


Legal experts are divided over the impact of a ruling by the United Kingdom's highest court that insurers must pay a claim despite a policyholder's false statement supporting that claim.

While they agree that the U.K. Supreme Court's 4-1 ruling in Versloot Dredging BV et al. v HDI Gerling Industrie Versicherung A.G. et al. came as a surprise and is good news for policyholders, there's disagreement over how widely it will be applied. The decision is, however, another step in liberalizing English law on handling claims.

The case addressed the question of what constitutes a fraudulent claim and how what the court described as “collateral lies” affect a justified claim. The court found that the lie by the policyholder was irrelevant “in the sense that the claim would have been equally recoverable whether it was true or false.”

The case involved damage to a ship, the DC Merwestone, when its engine room flooded in January 2010 as it left the Klaipeda, Lithuanian, bound for Bilbao, Spain. According to the ruling, the engine room was damaged beyond repair.

During an investigation, a company official “developed a theory” that a bilge alarm had gone off but weather conditions kept the crew from investigating. However, the story turned out to be false.

The official's reason for the lie “was that he was frustrated by the insurers' delay” in paying the claim and “he believed that it would fortify the claim and accelerate payment if the casualty could be blamed on the crew's failure to respond to the activation of the bilge alarm,” according to the ruling.

While a lower court held the ship's owners had a valid €3.24 million ($3.6 million) claim, it also held that the “claim was lost as a result of the collateral lie about it.” The U.K. Court of Appeals agreed.

However, the high court reversed the lower courts. It noted that the Insurance Act of 2015, which takes effect this month, does not resolve what constitutes a fraudulent claim. The whole claim could have been fabricated or a genuine claim might have been dishonestly exaggerated. Either way, the insurer would not be liable to pay the claim, the high court ruled.

In the third case, the entire claim may be justified, but the information given to support it may have been “dishonestly embellished, either because the insured was unaware of the strength of his case or else with a view to obtaining payment faster and with less hassle,” Lord Jonathan Sumption wrote for the court. “The present appeal is concerned with embellishments of this kind.”

“Although a lie uttered in support of a claim need not have any adverse impact on the insurer, I consider that it must at least go to the recoverability of the claim on the true facts,” Lord Sumption wrote. “It does not apply to a lie which the true facts, once admitted or ascertained, show to have been immaterial to the insured's right to recover.”

In his dissent, Lord Jonathan Mance said “insurers will no doubt be advised” about “making express” in the future their understanding of and actions taken as a result of “fraudulent devices” used by policyholders during the claims process.

“It's good news for corporate risk managers, and it's good news for insureds,” said Nick Atkins, a partner in the London office of Hogan Lovells International L.L.P.

“The Supreme Court rather surprised us in coming down the way that it did. I think most people expected the court would follow the line of the dissenting opinion, which says if you effectively tell stories in putting forward your claim that you know to be untrue, then you can expect and should expect that your claim won't be paid.”

“I think it's a big deal and I think it's a surprise to most insurance professionals in the market,” said Nicholas Bradley, a partner and head of insurance at Pinsent Masons L.L.P. in London.

“Potentially it encourages fraudulent behavior by insureds,” said Mr. Bradley.

“It's obviously contrary to how the insurance industry expects its customers to behave. If the lie is designed to induce the insurer to pay their claim or to pay an exaggerated claim, that's not the sort of customer the insurer wants to do business with,” Mr. Bradley said.

Mr. Atkins sees the ruling's effect as more limited.

“I don't see it really having a higher impact on day-to-day mainstream claims,” Mr. Atkins said. “It's very much the exception rather than the rule but it does happen from time to time.”

A U.S. lawyer who represents policyholders said the decision could bring more balance into English insurance law.

Peter Halprin, an attorney with Anderson Kill P.C. in New York, noted that the high court rendered the decision just before the Insurance Act takes effect Aug. 1, which makes it harder for insurers to deny claims.

“England, which is traditionally considered a pretty harsh environment for policyholders, including U.S. policyholders, is moving in a more favorable direction,” he said. “English law which has kind of a draconian reputation is trying to move away from that and inject some proportionality into insurance disputes.”

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