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Friday, 23 September 16
"COLLATERAL LIES" DO NOT NECESSARILY UNDERMINE AN INSURANCE CLAIM
 KNOWLEDGE TO ELEVATE
An insured was not precluded from recovering under an insurance policy even though it had made a false statement during the claims process with a view to strengthening its claim. The Supreme Court in Versloot Dredging BV & anr v HDI Gerling Industrie Versicherung AG [2016] UKSC 45 considered the extent of the fraudulent claims rule which applies to insurance contracts and prevents an insured recovering under an insurance policy where the claim is fabricated or exaggerated. The Supreme Court held (Lord Mance dissenting) that this rule does not apply to false statements that are immaterial to an insured’s right to recovery under the policy. Insurers have expressed their concern at the decision.
The claimant ship owners suffered irreparable damage of a vessel’s engine after the engine room was flooded, causing a loss of EUR 3,241 million, which they sought to recover from the defendant insurers. The ship owners had falsely stated, in response to inquiries made by the insurers, that an alarm had sounded but that no action had been taken by the crew as the alarm was attributed to the ship rolling in heavy seas. In actual fact no alarm had sounded. The ship owners had been frustrated by the insurers’ delay in recognising the claim and this statement was intended to reassure the insurers that the ship was seaworthy with fully operational alarm systems. They believed that this statement would fortify the claim and accelerate payment.
The alarm statement was later discovered to be false, but was irrelevant to the validity of the claim. Although the alarm had not sounded, it was tested shortly after the incident and found to be working. Even if it had not been working, Popplewell J at first instance held that this would not assist the insurers as the alarm’s failure to sound would not have been the proximate cause of the loss. Popplewell J concluded that the loss was caused by a peril of the seas covered by the insurance policy. Nevertheless, Popplewell J held that the insurers were entitled to repudiate the entire claim under the ship owners’ insurance policy as a result of this false statement. The ship owners appealed, with the Court of Appeal upholding the decision.
Fraudulent and exaggerated claims
At common law it is well established that if an insured makes a fraudulent or exaggerated claim on its insurer, the insured loses the right to recover the entirety of that claim, including any genuine losses it would have obtained. The law refuses to sever the honest part of the claim from the invented part.1 This is commonly referred to as the “fraudulent claims rule”.
Section 12 of the Insurance Act 2015 (which came into force on 12 August 2016) has preserved this rule. It does not, however, define what constitutes a fraudulent claim and does not refer to a situation where a valid claim is supported by a false statement.
Collateral lies and fraudulent devices
The extension of the common law rule to justified claims supported by false statements is more recent and controversial. Lord Sumption referred to Agapitos v Agnew (The Aegeon) [2003] QB 556, where Lord Mance had considered, obiter, whether the fraudulent claims rule could apply to a lie made in the presentation of a claim which does not affect the merits of, or the amount of, the claim. This has been generally termed a “fraudulent device” (or, adopting Lord Sumption’s expression, a “collateral lie”). Lord Mance considered that such collateral lies were also subject to the fraudulent claims rule.
The majority of the Supreme Court, with Lord Sumption giving the lead judgment, disagreed with this approach. Lord Sumption distinguished between a fraudulent exaggerated claim, which is designed to enable the insured to gain something which it is not entitled to, and a justified claim supported by a collateral lie. Where the lie is irrelevant to the existence or the amount the insured is entitled to, the insured gains nothing from the lie which he was not already entitled to by law and the insurer loses nothing from meeting a liability it already had (having crystallised at the moment of loss). The lie is therefore dishonest but the claim is not.
Lord Sumption concluded that it was disproportionately harsh to the insured and would go further than any legitimate commercial interest for the fraudulent claim rule to extend to collateral lies. The policy of deterrence did not justify such an extension of the rule.
COMMENT
The historic justification for the fraudulent claim rule was as a clear deterrent to fraudulent claims, recognising that insurers can be dependant on the insured for information, both at the formation of the contract and in the processing of claims. Honest policyholders would otherwise bear the financial burden of costs incurred by the insurers due to fraudulent or exaggerated claims, through increased premiums. As the judges recognised, fraudulent insurance claims are a serious issue, with insurance fraud widely perceived as victimless (a perception the judges emphasised was quite false).
However, this judgment prevents any extension of this rule and limits an insurer’s right to reject a claim. Although the decision has raised concerns within the insurance industry, it is far from being an invitation for an insured to embellish an insurance claim without fear of any consequences. Any attempt to enhance a claim which would result in increasing the amount recoverable will lead to forfeiture of the entirety of the claim if discovered. Even where a false statement is wholly collateral to a justified claim, an insured may be penalised for that statement if exposed. In the context of a contested claim, any settlement agreement induced by the false statement could be set aside. Moreover, there could be cost orders in any proceedings, increased premiums and difficulty in obtaining future insurance policies after the requirement to disclose the insured’s claims history in any insurance proposal is met. Insureds will also want to avoid litigation concerning whether a false statement is collateral or not to a justified claim.
Finally, insurers can consider including clauses in insurance contracts precluding the recovery of any claims supported by collateral lies. It is likely that going forward insurers will seek legal advice as to the merits of doing so.
Source: Allen & Overy
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Wednesday, 05 October 16
SHIPPING MARKET INSIGHT
On September 27th the OPEC petroleum and energy ministers arrived in Algeria to attend the International Energy Forum, which brought together produ ...
Monday, 03 October 16
THERMAL COAL PRICE SHOOTS UP AND MADE THEIR VERTICAL MOVE IN 5 YEARS; PRICE RALLY CONTINUES
COALspot.com: A rally in thermal coal prices over the past few months, after years of decline, is still continuing and it is expected to rally at l ...
Monday, 03 October 16
DRY-BULK SHIPPING FREIGHTS SLIDE IN SOFTENING SPOT MARKET
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities decline slightly and ending in a negative note this past ...
Friday, 30 September 16
U.S. WEEKLY COAL OUTPUT FELL 2.3% - EIA
COALspot.com – U.S., the world’s second largest coal producers have produced approximately totalled an estimated 15.7 million short ton ...
Friday, 30 September 16
OPEC CUT SUPPORTS SLOW OIL RECOVERY, NOT STRONG REBOUND - FITCH
OPEC's oil production target announced this week signals the potential for greater co-ordination among its members, but the target itself is la ...
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- Globalindo Alam Lestari - Indonesia
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- Edison Trading Spa - Italy
- Economic Council, Georgia
- White Energy Company Limited
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- Trasteel International SA, Italy
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- Electricity Authority, New Zealand
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- Indogreen Group - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Meenaskhi Energy Private Limited - India
- Central Electricity Authority - India
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- Makarim & Taira - Indonesia
- Energy Link Ltd, New Zealand
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- Binh Thuan Hamico - Vietnam
- Latin American Coal - Colombia
- Wood Mackenzie - Singapore
- Sojitz Corporation - Japan
- Tamil Nadu electricity Board
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- Independent Power Producers Association of India
- Mercator Lines Limited - India
- Posco Energy - South Korea
- New Zealand Coal & Carbon
- Bhushan Steel Limited - India
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- Offshore Bulk Terminal Pte Ltd, Singapore
- Neyveli Lignite Corporation Ltd, - India
- Indonesian Coal Mining Association
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- The University of Queensland
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- Bahari Cakrawala Sebuku - Indonesia
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- Jorong Barutama Greston.PT - Indonesia
- Petron Corporation, Philippines
- IEA Clean Coal Centre - UK
- Chettinad Cement Corporation Ltd - India
- Africa Commodities Group - South Africa
- Eastern Coal Council - USA
- Star Paper Mills Limited - India
- Ministry of Finance - Indonesia
- Price Waterhouse Coopers - Russia
- Asia Pacific Energy Resources Ventures Inc, Philippines
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- Madhucon Powers Ltd - India
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- India Bulls Power Limited - India
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- Grasim Industreis Ltd - India
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- The Treasury - Australian Government
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- Indian Energy Exchange, India
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- Bank of Tokyo Mitsubishi UFJ Ltd
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- Jaiprakash Power Ventures ltd
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- Australian Coal Association
- VISA Power Limited - India
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- GN Power Mariveles Coal Plant, Philippines
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