In this guest post, Gillian Palmer examines two recent decisions of the Supreme Court on the question of lies and exaggerations made by a party in the course of making claims for losses covered by insurance.
Sweet Little Lies: Insurance
Versloot Dredging v HDI Gerling  UKSC 45;  3 WLR 543;  WLR (D) 403, SC (20 July 2016)
Should an action be sanctioned according to its actual consequences or is dishonesty itself worth of adverse sanction? Should we punish dishonesty pour encourager les autres, especially where fraud is rampant and difficult to detect?
Those of you who were fortunate enough to have done jurisprudence will be familiar with the debate, and no doubt this case brought back happy memories of sunlit tutorials to the Supremes.
This is an important case. On the glorious 12th, not only will we be able to shoot grouse, the fresh-faced Insurance Act 2015 will come into force. The Marine Insurance Act 1906 is amended, but has been given a makeover for the cuddly exigencies of the new millennium. What the Insurance Act 2015 doesn’t tell us, though, is what a “fraudulent claim” actually is. How rotten is rotten. This case tells us what “fraudulent claim” isn’t. So back to my introductory question.
I set fire to my factory? Fraudulent/Not Fraudulent? I think we are all clear on that one. Getting the matches out is way more culpable than falsehoods.
I pretend that I had ten Hermes scarves in my lost luggage, when all I had was a few bits and bobs from Primark; fraudulent/not fraudulent? Ten’s probably taking the p***. How about one or two, though? It’s only an insurance company after all. I suspect most of my readers probably wouldn’t. Nor would I. It’s just rather tacky. And how many Hermes scarves does a girl need?
What about when my house is broken into. In my insurance claim, I say I returned home on the last train, but I didn’t notice anything until next day, when I surfaced with my hangover? The truth is that I didn’t go home at all that night, but I don’t want my husband (who’s on holiday with the kids) to find out that actually I went home with my new personal trainer, Danny. I’m telling a porkie, not to bolster my claim, but so as not to upset the proverbial apple cart. Fraudulent? Something we’d all do? Enough to let the insurers wriggle out of their contractual obligations?
In this case, the DC Merwestone was wending its way back to the Netherlands from Lithuania, when one of the crew left the wrong tap open and the cruel sea flooded into the engine room causing €3.2m worth of damage. The Owners didn’t want tedious and lengthy investigations about the ship’s seaworthiness, and suggested to the Insurers that it was a faulty bilge alarm, or a stray albatross had caused the mishap. It wasn’t a very enthusiastic porkie, nor one that they persisted in. As it happened, they were insured for the loss anyway, and but for their porkie, the Insurer would have had to pay out.
The term of art for this kind of postmodern view of the truth is “a fraudulent device”. At first instance  EWHC 1666 (Comm), Popplewell J held that the Owners were hoist on their own petard and the Insurers had acted lawfully. He clearly felt unhappy with his decision, though, but was bound by the very firm 2002 judgment of Mance LJ in The Aegeon (Agapitos v Agnew  EWCA Civ 247;  QB 556). The result is that Gerling get to avoid a contract because the executive has traditionally held insurance contracts to be “special”.
No, said Lord Sumption, giving the leading judgment. He rebadged “fraudulent device” as “collateral lies”, and came to the conclusion that this mollycoddling of the insurance industry was out of date. Perhaps such preferential treatment was justified by social context in 1906 when McKenzie Chambers put pen to parchment, but it was wholly inappropriate now. Dishonesty without consequences should not be so severely punished.
Lords Clarke and Toulson had a brief assenting chunter, but it was criminal/family judge, Lord Hughes really got his teeth into it. It would be sneery of me to say “Finally, ‘dishonesty’. I know what that means!” His judgment is more nuanced than Sumption’s, but essentially comes to the same conclusion. The court has no business sanctioning mere lack of moral hygiene.
So it was left to Lord Mance to defend the moral high ground, and his position in The Aegeon. Any lie is bad, he said. The informational asymmetry between insurer and insured merits the greatest solicitude.
So back to our examples. The arsonist is not let off the hook, nor the embellisher of genuine claims. A policy holder with a genuine claim, who tells lies in order to facilitate their claim or save their marriage does not however suffer forfeiture.
This is bad news for the industry, but then so is the new Act. Note that this judgment deals with the common law position. If Insurers want to put in anti-fraudulent device wording in their policies, they can, providing that they comply with the transparency requirements of the legislation.
Hayward v Zurich Insurance  UKSC 48;  WLR (D) 423, SC (27 July 2016)
Another insurance case, one which perhaps will rejoice the hearts of insurers, and give a warm feeling of just deserts to our readers.
If A (the policyholder) tells porkies to B (the Insurer), and B doesn’t believe A, but nevertheless compromises the litigation because it doesn’t want to be exposed to litigation risk, can B then reopen the settlement agreement when fresh and damning evidence shows A for the shyster it is?
Fraud unravels all, we learn in law school. Except sometimes not, but sometimes chickens do come home to roost.
Here, Mr Hayward had an industrial accident. He embellished the extent of his infirmity, and the Zurich, his employer’s insurers, not fancying a trial, but not believing him for one minute, paid out £135k in full and final.
Subsequently, they were supplied with videos of the supposedly crippled Mr Hayward dancing the can-can and playing footie. They therefore applied for the settlement to be set aside and the damages assessed anew.
Could they though? There was a narrow point for the Supremes. If Zurich hadn’t believed the lies, but had settled for essentially tactical reasons, could they then set the settlement aside? Did they really have to show they had been taken in, or was it enough to show that the fraudulent behaviour had “influenced” their agreement to settle?
We’re inching close to an estoppel argument here. Detriment had been suffered by the Zurich, but did it matter that there had been no been reliance?
The court’s response – with only Lord Clarke and Lord Toulson giving judgments – was that the defrauded representee did not have to show that they had believed the representations to be true. A tactical reaction to fraud did not preclude a settlement being set aside.
This is surely right. Fraud is very different from an estoppel type of situation. A fraudster cannot be allowed to benefit from the pragmatism that must inform the insurance industry.
You might be wondering where the videos of the all singing, all dancing Mr Hayward came from? From his neighbours. Isn’t envy such a positive force for good?
Gillian Palmer is Professional Support Lawyer (Dispute Resolution, Housing and Regeneration, Real Estate) at Trowers & Hamlins LLP.
Isobel Williams made the drawing during the hearing of the appeal in the Supreme Court.
We reviewed her recent show at Senate House, which included this image, in Weekly Notes, 1 July 2016.