In Versloot Dredging BV and another v HDI Gerling Industrie
Versicherung AG and others (the DC Merwestone), the vessel suffered
catastrophic engine damage due to crew negligence in failing to
close the sea suction valve and drain a pump. Owners claimed over
€3.2m for a new engine under their hull and machinery policy.
Their claim was supported by what was later found to be a
fraudulent representation from their general manager that the crew
had reported hearing a bilge alarm (which would have alerted the
crew to the flooding) at noon on the day of the casualty but had
failed to investigate the alarm on the basis that its sounding had
been attributed to the rolling of the vessel.
At first instance, the statement was found to be irrelevant to
the claim since the damage to the engine was found to have been
caused by a peril of the seas. Popplewell J nonetheless held that
the manager's lie was a "fraudulent device" entitling
the insurers to reject the claim. The Court of Appeal agreed.
In short, the issue before the Supreme Court was whether
insurers were entitled to avoid paying on the ground that the
insured had told a lie in presenting the claim, if the lie later
proved to be irrelevant to the insurer's liability. Deeming the
expression "fraudulent device" to be archaic, Lord
Sumption preferred to refer to "collateral lies". However
the doctrine was renamed only to be immediately abolished. The
Court allowed the owners' appeal by a majority of 4 to 1,
holding that the "fraudulent claim" rule does not apply
to collateral lies which are immaterial to the insured's right
to recover. In other words, the answer to the question of whether
the fraudulent claims rule applies to justified claims supported by
collateral lies is – no. In so holding the Supreme Court
overruled the (obiter) decision of the Court of Appeal in
Agapitos v Agnew  2 Lloyd's Rep.42, which had
been the leading authority on the point – and no doubt the
foundation of numerous settlements.
The fraudulent claim rule is not wholly abolished. It still
applies to entitle the underwriter to reject a fraudulently
exaggerated claim in full. That is, if the assured presents a claim
which is in principle justified, but deliberately exaggerates the
quantum, then the whole claim is forfeit, not merely the
In a dissenting judgment, Lord Mance (who, as Mance L.J. had
given the leading judgment in Agapitos v Agnew) recognised
that in relatively rare cases, like the present, where the insured
pursues a claim to trial having told a lie in presenting the claim
and is found after the event to have had a sound claim, it may seem
harsh that the insured loses everything. However, the Judge went on
to remind the Court that public policy must by definition look at
the position overall, as the core fraudulent claim rule does. In
his own words, abolishing the fraudulent devices rule "is
a charter for untruth", which overlooks the imperative
for integrity in an insurance relationship and the reality that
lies are almost always told to obtain an unmerited advantage.
This judgment has significant implications for insurers, not
least for the reasons given by Lord Mance. Insurance policy
wordings may need to be reviewed to ensure provision is made for
the effect of collateral lies by the assured on the claims handling
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