Sinking ship
The case relates to an insurance claim for a ship that was incapacitated by a flood in her engine room.
The owners of the ship falsely stated that the crew had intentionally ignored a warning alarm and were at fault. The lie was told to strengthen the case of the owners, accelerate payment, and take the focus away from any defects in the vessel.
The insurers, however, had already deemed the vessel’s loss to have been caused by a “peril of the seas” but used the owners’ lie as a means to deny payment.
A judge held that the owners’ lie was a ‘fraudulent device’ and ruled that the insurer did not have to pay out the policy.
"It is hugely irresponsible to lie on an insurance application form, especially when the person lying does not have to deal with the consequences of their actions."
The court of appeal agreed but the supreme court ruled four against one on Wednesday that the lie was “collateral” in nature and therefore immaterial to the case.
Industry impact
Current rules allow companies to invalidate insurance policies where the claimant has lied, omitted information, or exaggerated their loss or entitlement.
James Dalton, director of general insurance policy at the Association of British Insurers (ABI) has called the ruling “a blow for honest customers”.
He said: “Allowing ‘collateral lies’ in the course of an insurance claim flies in the face of the work that the insurance industry and government have been doing to crack down on the cheats and fraudsters.
“This decision risks pushing up the cost of insurance and prolonging the pay-out process for the vast majority of people who are honest customers. As the dissenting judge, Lord Mance said, allowing lies will ‘distort the claims process by the time and cost involved in unveiling the fraud and attempting to ascertain its true implications’.
“Lies are lies. Insurers will investigate all suspicious claims and we make no apology for doing so as it keeps premiums down for honest customers.”
Welcome development
Stephen Conway, managing director of UniLife, however, has welcomed the development.
“The philosophy that guides our business is treating clients fairly. We understand that people buy insurance to protect their loved ones, so if an insurance company accepts the risk of insuring that life, they should pay out on the death.
“Of course, we guard ourselves against fraud and misstatement of material facts in our terms and conditions, but we have specified what the exact treatment will be in certain circumstances where an applicant has lied.
“For example, if it is proved that a client who claimed to be a non-smoker at application was actually a smoker, rather than declining the claim altogether, the benefits would be adjusted to reflect what they would have been for a smoker at the same premium.
He added: “All of that said, it is hugely irresponsible to lie on an insurance application form, especially when the person lying does not have to deal with the consequences of their actions – their family does. We recognise this, and therefore try ensure the fairest possible treatment is applied.”
