Last week, the UK's Supreme Court pronounced an
important decision with significant implications for insurance law
The Court ruled that making a dishonest statement which does not
alter the position of the insured under the policy will not
automatically preclude the insured from recovering under the
policy. The Court made a clear distinction between fraudulent
claims and collateral lies, previously known as fraudulent
The case concerned irreparable damage to the engine
of the DC Merweston ship due to the entering of sea water.
This had occurred due to a combination of the negligence of the
crew and damage to the ship from flooding. In the insurers'
subsequent investigation, the insured party claimed that a
particular alarm in the bilge had sounded but the crew had been
unable to attend to it due to the position of the ship at the time.
This statement was subsequently found to be untrue and unsupported
by the crew of the ship. It was only made in an attempt to expedite
payment on the claim.
The question before the Court was whether such a lie could
render the insurance contract void, although it bore no relevance
to the merits of the claim. The Court concluded that it would be
unjust to deny the insured party's right to recover merely on
the basis of an untruthful statement, which, despite its immoral
character, did not alter the insured's rights under the policy.
The main test which the Court employed was one of recoverability,
or whether the telling of a lie would ultimately have any bearing
on the insured party's right to recover. Nevertheless, the test
is not explained in great detail and it remains to be seen how it
will be interpreted and applied in subsequent court rulings.
The Court seems to have altered a long-standing rule that any
fraudulent statements made by the insured party to the insurer
would release the insurer from liability under the policy. The
Court commented that the law of insurance was more concerned with
regulating the impact of breaches of good faith on risk than it was
with punishing misconduct.
The decision seems to be in line with the Insurance Act 2015
which comes into force on 12 August 2016. The Act will protect the
insured's rights where the insurer terminates the contract due
to a fraudulent claim made by the insured in respect of rights due
and obligations owed prior to the fraudulent act.
The implications of the decision in Scotland will be more
nuanced. The case was decided under English law and accordingly
does not have a binding status on Scottish Courts but, as a
judgment of the Supreme Court, will nevertheless be highly
persuasive in Scotland. The case seems to bring the Scottish and
English positions on the matter significantly closer. It should be
borne in mind that the Scottish courts decide such matters on a
case-by-case basis, but it appears that the legal principle in
question is in the process of aligning in both jurisdictions.
The case alters the law materially for both insurers and
insured. The Association of British Insurers (ABI) has already
issued a strong response, warning that the decision could increase
premiums and prolong the pay-out process. "Lies are lies"
the ABI stated, and full investigations into suspicious claims
would continue to be launched. On the other hand, some policy
holders might have less to worry about, even if a 'white
lie' has been told.
Contact MacRoberts' Commercial Dispute Resolution
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