Versloot Dredging v HDI Gerling Industrie Versicherung - the DC Merwestone
Versloot Dredging BV & Anor v HDI Gerling Industrie Versicherung AG & Ors, the “DC MERWESTONE”
Supreme Court; Lords Mance, Clarke, Sumption, Hughes, Toulson;  UKSC 45; 20 July 2016
Richard Lord QC, Tom Bird and Victoria Wakefield (instructed by Holman Fenwick Willan LLP) for Versloot Dredging BV, Insured/Appellant
Colin Edelman QC and Ben Gardner (instructed by Ince & Co) for HDI Gerling Industrie Versicherung AG, Insurers/Respondent
INSURANCE: FRAUDULENT CLAIMS RULE; “COLLATERAL LIE”/“FRAUDULENT DEVICE” DOES NOT DEFEAT OTHERWISE VALID INSURANCE CLAIM
The main engine of the “DC Merwestone” was damaged beyond repair while at sea. Her managers told a lie while presenting the insurance claim. Ultimately the lie was found to make no difference to the merits of the (valid) claim, but both the High Court [] and Court of Appeal []dismissed the claim as the lie meant the claim was forfeit.
The Supreme Court distinguished fabricated claims, inflated claims, and genuine claims supported by dishonestly embellished information. The last category would not cause the claim to be forfeit and so insurers remained liable despite the lie.
This note has been contributed by Justin Gan Boon Eng, Solicitor (Hong Kong), Advocate & Solicitor (Singapore, non-practising)
The “DC Merwestone” (“Vessel”) suffered water ingress into its engine room while en route to Bilbao. Its main engine was damaged beyond repair.
An insurance claim was presented. The Vessel’s managers told the insurers that the bilge alarm had sounded the afternoon before the incident, but the crew had failed to respond. This was a lie. The Vessel’s managers believed the lie would accelerate insurers’ handling of the claim.
The insured was ultimately found to have a good claim. However, the High Court and Court of Appeal rejected the insured’s claim because of the managers’ lie (a “fraudulent device”).
The Supreme Court (Lord Mance dissenting) reversed the High Court and Court of Appeal. With or without the lie, the claim would have been good. The lie was merely “collateral” and insurers remained liable.
Lord Sumption delivered the judgment of the majority. He opened by explaining that there are three categories of fraudulent insurance claims: fabricated claims, inflated claims, and genuine claims supported by dishonestly embellished information. Fabricated or inflated claims are entirely unrecoverable, including the un-inflated portion of the claim.
Genuine claims supported by dishonestly embellished information were said (by Mance LJ in The Aegeon, fn.1) also to be unrecoverable, if “directly related to and intended to promote the claim”. The majority of the Supreme Court did not agree:
1. An insurer is liable once an insured loss occurs, not when a claim is made. Barring an insured’s claim is therefore a forfeiture of an existing right, not a failure to establish liability.
2. Against that background, should an insured fabricate or inflate a claim, the dishonesty is to obtain something to which the insured was never entitled. That is rightly punished by forfeiting the entire claim.
3. However, where an insured supports with lies a claim that is justified anyway, the lies do not affect the fact that the insured is entitled to recover. In short, the insured gains nothing and the insurer (being already liable) loses nothing from the lie.
4. The focus should be on the merits of the claim, not the impact of the lie on the insurer’s state of mind. The insurer’s position when assessing a claim (assessment of the merits) is different from when deciding whether to underwrite a risk (complete discretion whether to insure or not). So the lie in question must go to the merits – and if the entire claim presented is ultimately found good with or without the lie, the lie should not bar recovery.
5. Lord Clarke highlighted that forfeiture of a justified claim simply because a lie is told in the course of the claims process is disproportionately harsh. It is also inconsistent with the (undisputed) law that fraud committed after litigation begins does not lead to the automatic forfeiture of the claim, as there is no reason to treat a lie during litigation any differently from a lie just before litigation. (The second point was also supported by Lord Hughes.)
6. Lord Hughes added that for “collateral lies”, the fraudulent claimant also faces consequences. First, a criminal offence and loss of credibility. Second, costs orders. Third, the insurers are likely to terminate the policy moving forward. Fourth, difficulty or increased cost in obtaining future insurance. (This point was also supported by Lord Toulson to some extent.)
Lord Mance dissented:
1. A fraudulent device (“collateral lie”) impacts on an insurer’s decision whether to settle the claim or not. It allows the insured to distort the claims process in the hope of preventing the insurer from identifying or investigating the weakness (identified by the insured) that led to the lie. Most claims never reach the stage of having their merits determined.
2. The consequences named by Lord Hughes do not explain why “collateral lies” should not be penalised by forfeiture. The same consequences exist for fabricated and inflated claims, which are forfeited.
3. Insurance is premised on good faith. Not penalising “collateral lies” means that the insured can think “if the fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing.”
4. “…if a lie could be disregarded as immaterial because it could be shown, years later, that it was irrelevant to the outcome of the claim, then logically a lie exaggerating the value of a claim ought also to be disregarded in relation to whatever was, years later, shown to be the valid claim.”
It was not necessary for the majority to consider ECHR-based arguments (fn.2). Lord Mance would have found the sanction of forfeiture proportionate.
For the reasons stated by Lord Mance, a great deal of discomfort is felt with the majority decision.
In any event insurers will doubtless amend their policy terms accordingly, as Lord Mance alluded to in his closing ().
Fn.1 Agapitos v Agnew (The "Aegeon")  EWCA Civ 247
Fn.2 Fn.2 The first paragraph of Protocol 1 to the European Convention on Human Rights gives a person a right not to be deprived of his or her proprietary rights. An insurance claim is taken for present purposes to be such a proprietary right. By section 6(1) of the Human Rights Act 1998, it is unlawful for a public authority, including a Court, to act in a way which is incompatible with a Convention right. The argument therefore ran that the Courts should develop the common law such that the insured cannot be deprived of an insurance claim in an disproportionate manner. The question would then become whether the deprivation of the insurance claim via the "fraudulent devices" rule was proportionate in relation to a legitimate aim (here presumably to discourage insurance fraud)."