The Supreme Court has ordered an insurer to pay out even though the claimant admitted lying. The decision overturns the assumption that insurers can decline an entire claim where the claimant has been dishonest. The Association of British Insurers has called the decision “a blow for honest customers”.
In reaching its decision, the Supreme Court has made a distinction between fabricated or exaggerated claims, where the insurer may decline the claim and genuine claims where a lie has been told which has no relevance to the claim. In the latter case, the insurer will be obliged to pay.
The case centres on a ship, the DC Merwestone, which was damaged beyond repair when its engine room flooded with sea water. The owners made a claim for €3.2m, which was accepted as legitimate by the insurers. The issue arose when one of the directors of the owner lied to insurers in an attempt to speed up payment and avoid an investigation into the condition of the ship. He falsely claimed that an alarm had sounded, but that the crew were unable to investigate due to rough seas.
The insurer initially declined the claim. The County Court and Court of Appeal backed the insurer’s decision, but in a hearing in the Supreme Court, the insurer was ordered to pay out. The Court decided that the ‘fraudulent device’ or ‘collateral lie’ used by the owners was immaterial to the case as “the insured gains nothing by telling it, and the insurer loses nothing if it meets a liability that it has always had.”
James Dalton, Director of General Insurance Policy at the Association of British Insurers (ABI), says that the decision could be a blow for honest customers. “Allowing “collateral lies” in the course of an insurance claim flies in the face of the work that the insurance industry and Government have been doing to crack down on the cheats and fraudsters. This decision risks pushing up the cost of insurance and prolonging the pay-out process for the vast majority of people.”
James Burgoyne, Director – Claims & Technical, Brunel Professional Risks says, “This isn’t a charter for people to lie about their claims. There is no doubt that a fraudulent or exaggerated claim will still be investigated and declined by insurers. The nuance here is the claim itself is genuine and the lie makes no difference to that claim. In reality the overwhelming majority of claims are genuine and insurers want to pay out as quickly as possible, so complete honesty is always the best policy.”