26 May 2020

International Cases

Versloot Dredging BV and anr v. HDI Gerling Industrie Versicherung Ag and Ors.

United Kingdom



Fraudulent claims rule does not defeat a claim wholly good in law, even if a lie is told in support of it

Duty of utmost good faith applied not only in making of contract but in course of its performance. In facts of present case, insurance claim was relating to vessels’s loss as main engine was damaged beyond repair due to flood therein. Ingress of water was combined result of negligence of crew in failing to close sea inlet valve of the emergency fire pump and drain down the system, after they had used hoses to clear ice chips from hatch covers; (negligence of contractors employed on an earlier occasion, who failed to seal engine room bulkheads after passing cables through them, with result that they were not watertight; defects in engine room pumping system, which was unable to cope with rate of ingress. Judge, held that, loss was proximately caused by a peril of seas. It followed that the owners had a valid claim. However, Judge held that; claim was lost as a result of collateral lie about it. Issue involved is repudiation of insurer liability on ground that, insured had told a lie in presenting the claim, if lie proved to be irrelevant to insurer’s liability.

It was settled from an early stage of history of English insurance law that the duty of utmost good faith applied not only in the making of the contract but in the course of its performance. Where a claim has been fraudulently exaggerated, insured’s dishonesty is calculated to get him something to which he is not entitled. In this case the lie is dishonest, but the claim is not. The immateriality of the lie to the claim makes it not just possible but appropriate to distinguish between them. Law deprecates fraud in all circumstances, but fraudulent claim rule is peculiar to contracts of insurance. It reflects, law’s traditional concern with informational asymmetry of contractual relationship, and consequent vulnerability of insurers.

Lord Clarke concurred with Lord Sumption, observing that, public policy requires that, collateral lie be irrelevant to 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. A collateral lie should not be held to be relevant, save no doubt to the veracity of the insured, which may be relevant to the facts found at a trial. Mere telling of a lie to underwriters in connection with a claim cannot sensibly be treated as forfeiture of claim. Fraudulent claims rule does not defeat a claim which is wholly good in law, even if a lie is told in support of it.

Tags : Fraudulent claims rule Applicability Insurer’s Liability

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