A Supreme Court ruling around collateral lies on insurance claims could have an impact on how protection insurance is sold.
A judgment in the case of Versloot Dredging v HDI Gerling handed down yesterday (20 July) overturns centuries of insurance practice, according to MoneySuperMarket’s content editor Kevin Pratt, meaning insurers will now not be able to throw out perfectly valid claims on little more than a technicality.
The issue 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 was incapacitated by a flood in her engine room caused by the crew and previous contractors’ negligence. Owners presented an insurance claim, telling the insurer’s solicitors that the crew had informed them an alarm had sounded, 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, but the higher Supreme Court held that the ‘fraudulent device’ rule does not apply to collateral lies, which are immaterial to the insured’s right to recover.
“Insurers can no longer use so-called ‘collateral lies’ to reject a valid claim,” he stated, noting that the one worry is if insurers are paying more claims as a result of this ruling, then they will increase premiums,” Mr Pratt said.
In terms of health and life insurance claims, it all comes down to full and honest disclosure of material facts, such as pre-existing medical conditions and statements on quote forms pertaining to health and lifestyle (e.g. smoking), stated Mr Pratt.
“If the policyholder gives accurate answers and doesn’t withhold information, then any claim should be honoured,” he pointed out.
“A possible ‘collateral lie’ might be for someone to say, on their application, that they were married when in fact they lived with their partner, without having married them. If they contract cancer, the claim should be honoured, and not rejected on the basis there is a discrepancy on their application.”
James Dalton, director of general insurance policy at the Association of British Insurers, said the Supreme Court decision could be a blow for honest customers.
“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. As the dissenting judge, Lord Mance said, allowing lies will ‘distort the claims process by the time and cost involved in unveiling the fraud and attempting to ascertain its true implications’.
“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,” he added.
Roy McLoughlin, a partner at Master Adviser, said the bottom line was that insurers should pay all valid claims.
“The industry has a bad enough reputation for paying claims, so I would hope this goes some way towards improving that.
“On the flipside of course, advisers have a responsibility to educate clients about when and why a claim might not be paid out; things like absolute honesty around smoking declarations for instance.”
peter.walker@ft.com
