What lies do to claims – the Supreme Court

6 August 2016 by

Marine-ClydeCo-0658_800_450_90_s_c1_c_cHayward v. Zurich [2016] UKSC 48   27 July 2016 read judgment

and Versloot Dredging BV  v HDI Gerling Industrie Versicherung AG [2016] UKSC, 20 July 2016 read judgment

Twin doses of dishonesty in the Supreme Court, last month. Both raised dilemmas for the SC trying to steer a principled way (in different circumstances) towards determining the cost of lying.

In the first, Mr Hayward claimed over £400,000 from his employers for a back injury at work. The Zurich smelt a rat and alleged exaggeration in its defence but felt ultimately they could not sufficiently prove it in court. So in 2003 they settled the claim by paying Mr Hayward just under £135,000. In 2005, his neighbours told insurers that they thought he had been dishonest. So the Zurich started proceedings to set the compromise aside and to get its money back. Mr Hayward sought to strike it out, saying “a deal was a deal”, without success. So he then faced a trial of Zurich’s claim, at the end of which Zurich was successful. But the saga was not over. He now faced a retrial of his original claim, in which he repeated the lies he had come out previously.  The judge was thoroughly unconvinced, and gave him £14,700. It was that result which was eventually appealed to the Supreme Court.

The second claim concerned marine insurers of a ship who sought to repudiate a claim on the policy because the insured owners had told a lie in presenting the claim, even though the lie proved to be irrelevant to the insurer’s liability. Owners claimed over €3,200,000 for the loss of a vessel. They said  that the crew had informed them that the bilge alarm had sounded at noon that day, but could not be investigated because of heavy weather. This was a lie told by the owners to strengthen the claim. But it turned out to be irrelevant to the result, because of the judge’s  finding that the vessel’s loss had been caused by a peril of the seas.

Both lower courts found that this lie was a “fraudulent device”, which meant the insurers did not have to pay out under the policy.

So what did the Supreme Court do with these two claims about lying?

Hayward

The conundrum was that the Zurich smelt a rat before the settlement. So it might be said that they should have got on and fought the case, rather than settling it and wingeing late.

But the SC was firm in setting aside the settlement. The settlement was a contractual agreement, and all contracts can be set aside for fraud. But had the fraud induced the settlement? Insurers may not have believed that Mr Hayward was telling the truth but they were doing something slightly different when they decided how much originally to pay him – they were trying to predict what a court would make of his evidence. Without the neighbours’ damning evidence (and the surveillance which followed it), they thought he might be believed. They were thus induced to pay more than they would have done had his claim not been thoroughly dishonest.

The critical issue was whether the lies had caused the settlement, and the SC thought that they had done so. This followed a full review of the authorities on whether a claimant alleging deceit must have believed what he had been told – giving rise, as we have seen, to the answer – no, he does not as long as he was induced into the agreement by the making of the lies. Though similar issues had arisen in typical contractual cases, it had not done so in the context of litigation. The ordinary buyer who does not believe something told him by the seller can simply walk away from the deal. An insurer defendant cannot do that – it has to settle or fight the claim started against it.

Versloot 

The second case is perhaps more controversial, as one can see from the fact that a very eminent insurance lawyer (Lord Mance) dissented from the 4 Justices in the majority.

For centuries, contracts of insurance have been held to be contracts of the utmost good faith. This is that the insured typically knows far more about his property or his business than his insurer. The law has been strict about what the insured must say, but has also distinguished between pre-contractual and post-contractual statements.The onus is upon him to tell insurers everything which might be material pre-contractually.

The question then arises what duties lie upon him once a claim is being made.

For a long time, there has been a prohibition on recovery from an insurer where the insured’s claim has been fabricated or dishonestly exaggerated, a rule known as the fraudulent claims rule. So if Mr Hayward’s claim had been on his own personal health insurance policy, it would have failed completely.

But the Versloot appeal concerns the more recent extension of the fraudulent claims rule to “fraudulent devices”, i.e. collateral lies told by the insured to embellish their claim, but which turn out to be irrelevant because the claim is justified whether the statement was true or false. This was the first time that the particular problem had reached the SC, or the House of Lords before it.

The majority (leading judgment by Lord Sumption) held that the fraudulent claims rule does not apply to these 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. If a collateral lie is to preclude the claim, it must be material, i.e. must at least go to the recoverability of the claim on the true facts as found by the court.

Lord Sumption summarised the three sorts of lies which might arise in insurance claims:

First, the whole claim may have been fabricated. In principle the rule would apply in this situation but would add nothing to the insurer’s rights. He would not in any event be liable to pay the claim. Secondly, there may be a genuine claim, the amount of which has been dishonestly exaggerated. This is the paradigm case for the application of the rule. The insurer is not liable, even for that part of the claim which was justified. Third, the entire claim may be justified, but the information given in support of it may have been dishonestly embellished, either because the insured was unaware of the strength of his case or else with a view to obtaining payment faster and with less hassle.

Versloot gave rise to the last kind of lie.

Lord Clarke (who gave the main judgment in Hayward) concurred, 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.

Lord Hughes put it well: 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. He will commit a criminal offence. He may be held liable in damages to the insurers. If he is shown to have acted fraudulently, he will forfeit all or most of his credibility in any debate, in court or out of it, under the policy. He will probably be disbelieved even where he is telling the truth. He will be likely to be penalised by costs orders as a result of his fraud. The policy is likely to be terminated by the insurers. The history will be disclosable in any other insurance proposal which the claimant may make. He is likely to be refused insurance, or to have to pay a good deal more for it than others must. These are, cumulatively, significant sanctions.

In a powerful  dissent, Lord Mance would have dismissed the appeal (upholding insurers’ right to repudiate). He approved a previous decision of his own in The Aegeon, but would have modified 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.

Aficionados of this area of the law will derive interest, if not pleasure, from looking at the differing discussions of inducement and materiality arising in the different circumstances in each case.

Conclusion

These cases illustrate nicely the difference between a personal injury claim (say a motor accident or accident at work) and a claim on an insurance policy. As we have seen, a liar in the former (say a wild exaggerator) may still end with some money because the judge may accept some part of what he says. Mr Hayward could in theory recover his £14,000 (but for the very considerable legal costs which he will have been ordered to pay). But the owner who exaggerated his losses in his claim on, say, a fire claim against his insurers is likely to end up with nothing.

One little twist in Hayward. The insurers were able to adduce the fresh evidence from the neighbours (and that which followed from it) because it could not have been obtained by the exercise of due diligence by the time of the settlement – and they conceded the due diligence constraint on the admission of fresh evidence. But Lord Toulson at [73] said it should not be assumed that the concession was correct – cue another high-level argument in due course where a defendant could reasonably have obtained such evidence but in fact was misled by the claimant.

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1 comment;


  1. Geoffrey says:

    I have long believed that – in arbitration – one had a duty to weigh every proposition of a witness for its inherent credibility, even if some testimony demonstrably was false. There may always be a gem amongst the dross. One’s skill is to find it!

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