Non-material lies and insurance claims

20 July 2016

In a judgment likely to be of significance to the insurance industry the Supreme Court ruled today that a lie contained in an insurance claim will not entitle the insurer to avoid the claim entirely unless the lie is “material”. The court held that the “fraudulent claims” rule does not apply to collateral lies told by the insured to embellish their claim, but which are irrelevant because the claim is justified whether the statement was true or false.

In making a claim for €3,241,310.60 the appellant owners of a Dutch cargo ship incapacitated by flooding to the engine room told a lie to strengthen the claim, accelerate payment under the policy, and deflect the insurers’ focus from any defects in the vessel for which the owners might have been responsible. The lie was in fact irrelevant to the claim, since the vessel’s loss was found to have been caused by a peril of the seas. However, the judge held that the owners’ lie was a “fraudulent device”, which meant that the insurers did not have to pay out under the policy. The Court of Appeal agreed.

The dishonest lie, said Lord Sumption, is typically immaterial and irrelevant to the honest claim : the insured gains nothing by telling it, and the insurer loses nothing if it meets a liability that it has always had. If a collateral lie is to preclude the claim it must be material. The real test of materiality is that a collateral lie told in the course of making a claim must at least go to the recoverability of the claim on the true facts as found by the court.

While honesty when completing insurance proposals – and in making claims – must remain the best policy, no longer can motor insurers comb the documents for signs of any embellishment or non-disclosure in order to justify avoiding payment altogether. Thus a failure to declare the making of non-standard modifications to wheels and suspension since the insurer went on risk, or the existence of passengers in the vehicle at the time of an accident, will not entitle an insurer to avoid the claim entirely unless material to the cause of the insured loss, i.e possibly if the driver lost control of the vehicle but probably not in the case of an engine fire.

Versloot Dredging BV and anr (Appellants) v HDI Gerling Industrie Versicherung AG and ors (Respondents) [2016] UKSC 45

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