In a landmark ruling, the UK’s Supreme Court has recently pronounced a decision that could have major implications for insurance law, claims and potentially the cost of premiums across the UK.
Supreme Court Judges, who voted by a majority of four to one, have ruled that when a claimant makes a dishonest statement (also referred to as a collateral lie or fraudulent device) which does not change the position of the insured under the terms of the policy, they will no longer be automatically excluded from recovering under their insurance cover.
The case in question involved a Dutch cargo ship, the DC Merweston, which ran into difficulty when it was discovered the engine room was flooded. The cause of the damage was investigated by the insurer who found a combination of crew negligence and bad weather were the primary cause of the damage.
In an attempt to speed the claim process and payment, the owners of the ship deliberately lied, by saying the crew were unable to investigate a flooding alarm because the ship was rolling in heavy seas. The owner’s statement was subsequently found to be unsupported by the crew of the ship.
In summarising, the Court also went to great lengths to reiterate a clear distinction between fraudulent claims and collateral lies, however concluded that it would be unjust to deny the insured party’s right to successfully claim based purely on an untruthful statement, which, despite its immoral character, should not result in the insured’s right to be compensated under the policy being made invalid.
Perhaps by no coincidence, the new Insurance Act 2015 which is due to be introduced on 12th August 2016, makes it very clear that an insurer will not be liable to pay fraudulent claims, can elect to terminate the contract and refuse to pay claims relating to losses suffered after the fraud however, will continue to remain liable for legitimate losses suffered before the fraudulent act took place.
Lord Mance, who was one of the 5 Supreme Court judges on the case stated: “The critical point is that, in the case of a collateral lie, the insured is trying to obtain no more than the law regards as his entitlement, and the lie is irrelevant to the existence of that entitlement. Such a lie is immaterial to the claim”.
The Court decision seems to have fundamentally altered a long-standing rule that any fraudulent statements made by a claimant to the insurer would enable the insurer to remove itself from any responsibility to act under the policy.
‘A mixed reaction’
Unsurprisingly, there has been a mixed reaction to the outcome of the Supreme Court decision.
Some consumer groups have stated the ruling is great news for the honest consumer and that contrary to some opinions, will not in fact be a ‘blank cheque for fraudsters’ but it will prevent some insurers from declining a claim on a ‘technicality’.
The insurance industry has taken a very different view by calling it a "blow for honest customers", and warned that the price of policies could rise.
The Association of British Insurers (ABI) said it was looking carefully at the judgement and warned that insurance premiums could become more expensive as a result of the ruling.
James Dalton, the ABI’s director of general insurance policy said "This decision risks pushing up the cost of insurance and prolonging the pay-out process for the vast majority of people who are honest customers," He added; "Lies are lies. Insurers will investigate all suspicious claims and we make no apology for doing so as it keeps premiums down for honest customers".
Carl Edwards, Director at Griffiths & Armour Insurance Brokers commented “Whatever your opinion on the ruling and its implications, the court judgement concerning ‘collateral lies’ seems to be very much in line with some elements contained within the forthcoming Insurance Act 2015, which will see changes to the rights of the insured party being introduced”.
He added, “Griffiths & Armour take great pride in our established, trusted and collaborative relationships with both clients and insurers which has been achieved, in part, through our industry recognised in-house claims management team. Taking ownership of our client’s claims has enabled us to provide industry leading levels of guidance and advice through incidents that threaten their business continuity whilst also satisfying the full requirements of the insurance industry. More often than not the result is a speedy and efficient resolution to a claim with a satisfactory conclusion for all parties involved. Our claims service is an integral part of our client focused approach and is at the heart of what our clients expect from us. So our position at Griffiths & Armour is very clear, irrespective of the Supreme Court ruling, its business as usual”.
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