The claimants presented a marine insurance claim to the defendant underwriters in respect of damage to the engine of their vessel which had occurred when the engine room had been flooded during a voyage. During communications with the underwriters a director of the manager of the vessel, acting on behalf of the claimants, falsely claimed that the vessel master had told him that the crew had ignored a bilge alarm which had gone off some nine hours before it had been noticed that anything was wrong. The underwriters declined the claim on the basis, inter alia, that the claim was forfeited since the claimants had deployed misrepresentations in its support. The judge dismissed the claimants’ claim for an indemnity under the policy, finding that the claimants had recklessly told the underwriters an untruth during their communications in order to assist their claim by minimising any fault attributable to themselves, and holding that, as a result, the otherwise valid claim was forfeited by reason of the claimants’ use of a fraudulent device in its support. The Court of Appeal dismissed the claimant’s appeal and held that where an insured knowingly or recklessly made an untrue statement which was directly related to a claim which he honestly believed was good as to both liability and amount, with the intention of promoting his prospects of success in the claim, the whole claim would be forfeited notwithstanding that it was otherwise valid.
Held, appeal allowed (Lord Mance JSC dissenting). The common law rule in contracts of insurance was that where an insured had made a fraudulent claim by fabricating or dishonestly exaggerating the claim the insurer was not liable and the insured forfeited the whole of the claim However there was an important difference between fraudulently exaggerated claims, where the insured’s dishonesty was calculated to get something to which he was not entitled, and collateral lies used to embellish a justified claim and which were irrelevant to the validity of the claim. The the common law rule did not apply to a lie which the true facts, once admitted or ascertained, showed was immaterial to the insured’s right to recover. The rational test of the materiality of a lie was based on its relevance to a court which was in a position to find the relevant facts. The extension of the common law rule to lies which were found to be irrelevant to the recoverability of the claim was disproportionately harsh to the insured and went further than any commercial interest of the insurer could justify. Since the claimants’ lie was irrelevant to the merits of the claim they were entitled to the sum which the judge found would have been due but for the forfeiture of the claim.
Per Lord Hughes and Lord Toulson JJSC. The fraudulent claims rule is of considerable importance and must be preserved, but its extension to collateral lies is not based on sound authority and would result in a remedy disproportionate to the breach of the duty involved.
Decision of the Court of Appeal [2014] EWCA Civ 1349; [2015] QB 608 reversed.
Richard Lord QC, Tom Bird and Victoria Wakefield (instructed by Holman Fenwick Willan LLP) for the claimants.
Colin Edelman QC and Ben Gardner (instructed by Ince & Co) for the defendants.