Versloot Dredging v HDI Gerling Versicherung Industrie AG

[2016] UKSC 45

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 rampart 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.  (I went to an utterly incomprehensible talk about it by a clever young lad from Fountain Court back in the spring, but still feel unprepared for this glorious day.) The Marine Insurance Act 1906 is amended, but has been given a makeover for the cuddly exigencies of the new millennium.

What the fresh-minted 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, if I set out to do a naughty thing, but do not succeed, should I suffer adverse consequences?  Let’s look at this in the insurance claim context, on a sliding scale.

I set fire to my factory, because it’s making a loss and I need the money from the insurance policy?  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 genuinely 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 the readers of this blog probably wouldn’t exaggerate their claim.  Nor would I.  It’s just rather tacky.  And anyway how many Hermes scarves does a girl need?

Now 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  hot new personal trainer, Danny.

 I’m telling a porkie, not to bolster my claim, but so as not to upset the matrimonial apple cart.  Fraudulent? Something we’d all do? Enough to let the Insurers wriggle out of their contractual obligations?

Of course, gentle reader, you are not the sort of moral reprobate that would go home with a person to whom you were not married for carnal purposes.  So this wouldn’t apply to you.  But if you were?  Wouldn’t that little white lie be practically a moral imperative?

In this case, the DC Merwestone, an old workhorse of a ship, was wending its way back to the Netherlands from Lithuania.   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 perhaps 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 ship was seaworthy too, but they weren’t giving the Insurers a chance to delay a badly needed payout.

 The term of art for this kind of postmodern view of the truth is “a fraudulent device”.  At first instance, 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.

The result is that Gerling got to avoid a contract because the society has traditionally held insurance contracts to be “special”.  Like fiduciaries, a higher standard of probity is expected from policy holders in an insurance contract.  Traditionally insurance contracts have been uberrimae fides.   The “informational asymmetry” merits the law’s special protection.   

What level of protection is appropriate in these egalitarian, fair-minded days.  Should one half-hearted little fib entitle the insurer to a sin tax of potentially millions of pounds?

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.  His is a fine, rigorous and historically grounded judgment, where policy is modestly clothed in precedent to give a tailored finish. 

 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 imagine him saying to himself “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.  Any tolerance of dissimulation fosters an environment where fraud can flourish.  It is artificial to draw a distinction between a lie’s intention and its consequences.  The judgment is couched in utilitarian terms, but there is a ring of genuninely held belief.  A lie is a lie.  And that’s all there is to it.

 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.  Does that feel right?  I think that’s probably a matter of personal taste.

 This  judgment is bad news for the industry, but then so is the new Act. I’m guessing there’s going to be a lot of litigation as insurers work out where they are. 

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.

Bailii judgment

Post script:  the DC Merwestone was repaired and continues to plough her weary furrow.