The owner of an insured iPhone has the device stolen and, out of caution and to facilitate the insurance claim, they fabricate a receipt and submit that to insurers. The claim is genuine and is no more than the owner is entitled to. Should the consequences of this dishonesty be rejection of the whole claim? Can an insured lie to insurers with impunity, if the lie is not material to the insurers’ contractual liability?
The Insurance Council New Zealand’s Fair Insurance Code (FIC) requires that an insured act honestly when making a claim, but it does not set out the implications of not doing so. The duty not to make a fraudulent claim is seen in New Zealand as a branch of the continuing duty of good faith. This gives rise to the somewhat blunt remedy for insurers of avoiding the policy from inception.
The UK has recently reformed its insurance legislation and the Insurance Act 2015 now codifies remedies for fraudulent claims – the insurer is not liable to pay the claim and may treat the insurance contract as having been terminated. The Act also abolishes the ability of insurers to avoid the policy for failure to observe utmost good faith.
A claim is clearly fraudulent if the insured deliberately causes the loss, or wholly fabricates it. A genuine claim will also be fraudulent if the insured dishonestly exaggerates the amount of the loss. However, where the entire claim is justified, but the insured provides supporting information that is dishonestly embellished, the question of fraud is more controversial.
Where the insurer has liability on the occurrence of an event, should the insured forfeit the right to cover because of subsequent statements that are ultimately irrelevant to its entitlement? People often lie to bolster a just cause, and while that may affect their credibility, in most contexts it does not alter their underlying legal rights.
The New Zealand position on collateral lies in insurance claims follows Stemson v AMP General Insurance (NZ) Ltd [2006] UKPC 30, [2007] 1 NZLR 289. Mr Stemson set fire to his own house, making it look like arson by throwing a molotov cocktail through a window. This clearly was a fraudulent claim, for which AMP was not liable. AMP also argued that Mr Stemson had made a false statement in the course of the arson investigation, which separately entitled it to avoid the claim.
Mr Stemson told AMP’s investigator he had never attempted to sell the house nor even considered putting it on the market. However, he had enquired with a real estate agent about listing the property surreptitiously, to thwart the possibility that his former partner might reclaim it. This was significant in the context of the investigation, where financial pressure on Mr Stemson, and his acrimonious relationship with his ex-partner, were relevant to the motive.
The Privy Council confirmed that, independently of the arson, AMP was entitled to reject the claim because Mr Stemson sought to promote it by lying about his attempts to sell the property. This rigorous approach to truth in claims presentation is consistent with the FIC requirement that an insured act honestly at the claim stage. The rationale for such drastic consequences is the need to discourage fraud. Insurance is based upon good faith and moral hazard is a real concern.
In the UK, however, insureds who “gild the lily” with a collateral lie are not now prevented from recovery, following the Supreme Court’s decision in Versloot Dredging BV v HD Gerling Industrie Versicherung AG [2016] UKSC 45. There, the owner of a ship which suffered water ingress, lied to insurers about when the bilge alarm had sounded. The owner was frustrated with the insurance investigation and thought that the lie would fortify the claim and accelerate payment. The lie was irrelevant to the insurers’ liability, but they rejected the claim on the basis that it was supported by a false statement.
The Supreme Court held that for a collateral lie to render a claim fraudulent, it must go to the ultimate recoverability of the claim on the true facts. The fraudulent claim rule will not apply if the lie turns out to be immaterial to the insured’s right to recover. While accepting that such lies are immoral, the Supreme Court’s overwhelming view was that it is disproportionately harsh for them to defeat an otherwise legitimate insurance claim. Lord Mance dissented, noting that the majority’s views seemed “a charter for untruth”.
Versloot does not change New Zealand law. Here an insurer can refuse to pay a claim supported by a false statement: (i) directly related to the claim; (ii) intended to improve the insured’s prospects of obtaining a settlement; and (iii) objectively capable of improving the insured’s settlement prospects prior to final determination of the parties rights. There are good arguments to retain that stringent approach, which encourages good faith and honesty by policy holders, and integrity of the claims process.
Rebecca Scott is a partner at specialist insurance firm DAC Beachcroft. Her practice encompasses insurance, employment and professional liability.