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Versloot Dredging BV and another (Appellants) v HDI Gerling Industrie Versicherung AG and others (Respondents) [2016] UKSC 45
On appeal from [2014] EWCA Civ 1349
20 July 2016
JUSTICES: Lord Mance, Lord Clarke, Lord Sumption, Lord Hughes, Lord Toulson
BACKGROUND TO THE APPEAL
The issue on this appeal was whether the insurers of a ship were entitled to repudiate liability on the
ground that the insured had told a lie in presenting the claim, if the lie proved to be irrelevant to the
insurer’s liability. The vessel DC MERWESTONE was incapacitated by a flood in her engine room.
Her main engine was damaged beyond repair. The flood was caused by (i) the crew’s negligence in
failing to close the sea inlet valve in the emergency fire pumps, (ii) damage to the pumps, (iii) the
negligence of previous contractors who had failed to seal bulkheads and (iv) defects in the engine
room pumping system. The appellant owners presented an insurance claim to the respondent insurers
for €3,241,310.60. They told the insurer’s solicitors that the crew had informed them that the bilge
alarm had sounded at noon that day, but could not be investigated because the vessel was rolling in
heavy weather. This was a lie told by the owners to strengthen the claim, accelerate payment under the
policy, and take the focus off 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. But the judge held that the owners’ lie was a “fraudulent device”, which
meant the insurers did not have to pay out under the policy. The Court of Appeal agreed.
JUDGMENT
The Supreme Court allows Versloot Dredging’s appeal by a majority of 4 to 1, holding that the
‘fraudulent device’ rule does not apply to collateral lies, which are immaterial to the insured’s right to
recover. Lord Sumption gives the lead judgment. Lord Clarke, Lord Hughes and Lord Toulson give
concurring judgments. Lord Mance gives a dissenting judgment.
REASONS FOR THE JUDGMENT
The common law has long prohibited recovery from an insurer where the insured’s claim has been
fabricated or dishonestly exaggerated (“the fraudulent claims rule”). The purpose of the rule is to deter
fraud. This appeal concerns the more recent extension of that rule to “fraudulent devices”, i.e.
“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 [1,9].
The fraudulent claims rule does not apply to collateral lies. The dishonest lie 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 [23-26]. 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 [35-36]. The test is
not, as suggested by Mance LJ in The Aegeon [2003] QB 556 and the Court of Appeal and Lord Mance
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in this case, an attenuated test of materiality requiring that the prospects of the claim should apparently
be improved, given the facts known at the time of the lie [18-22, 31].
Lord Clarke concurs, adding that public policy requires that the collateral lie be irrelevant to the
insured’s claim, and that it would make little sense to support a rule that bars claims involving collateral
lies uttered before proceedings are begun, and not afterwards [39-49]. Lord Hughes agrees, pointing
out that this extension of the important fraudulent claims rule has been left open by the Insurance Act
2015. The forfeiture of the entire claim is not a proportionate sanction for the teller of a collateral lie,
who will suffer in other ways if his lie is discovered [65-104]. Lord Toulson, concurring, concludes that
this outcome is just and appropriate [105-110].
In a dissenting judgment, Lord Mance would have dismissed the appeal, upholding the principle set
out in The Aegeon, but modifying it so as to require a heightened threshold test of materiality of a
“significant improvement of the insured’s prospects” at the time of the lie (rather than retrospectively
at the time that the court determines the facts), in order to bar the insured’s claim [111-134].
References in square brackets are to paragraphs in the judgment
NOTE
This summary is provided to assist in understanding the Court’s decision. It does not form
part of the reasons for the decision. The full judgment of the Court is the only authoritative
document. Judgments are public documents and are available at:http://supremecourt.uk/decided-cases/index.html