Fraudulent means and devices

Insurance Update

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In New Zealand, an insured's claim is fraudulent if the insured tells a lie to an insurer that is of significance when considering the nature, extent or investigation of the insured's claim under the policy. It makes no difference if, with hindsight, the insured had an entitlement at law to the amount claimed.1 This is a category of claim fraud known as 'fraudulent means or devices'.

Recently, the United Kingdom Supreme Court ruled by a 4:1 majority that it is disproportionate for the law in England and Wales to forfeit an otherwise valid claim because of a non-material lie, commonly known as a 'Fraudulent means or device', or as the Supreme Court characterised it a 'collateral lie'. 

In Versloot Dredging BV v HDI Gerling Industrie Versicherung the insured vessel suffered damage to its engines following an ingress of water on 28-29 January 2010.2 The trial judge found the flooding had four contributory causes, one of which was the negligence of the crew in failing to close the sea inlet valve of the emergency fire pumps after they had been cleaned. 

The insurers' solicitors asked for an explanation of the loss. An employee of the owner's managers sent the solicitors an email in April 2010 stating that he had been told by the crew that the bilge alarm had sounded on 28 January 2010, but the crew had been unable to investigate or deal with the leak because of the rolling of the ship in heavy weather. The trial judge found that to be a lie. The reason it had been made was that the employee believed the insurance claim would be made under the crew negligence provision, under which there is no recovery if the insured has failed to act with due diligence. 

In fact, the lie was unnecessary - Justice Popplewell held that the claim could be made for perils of the seas, which does not allow the insurers a due diligence defence. However, both Justice Popplewell and the Court of Appeal recognised a category of fraudulent claim - fraudulent means and devices - whereby a lie told in order to secure payment of a genuine claim operated to defeat the claim. 

On appeal, the Supreme Court reversed the lower courts and ruled that the concept did not exist. The majority reasoning was as follows. 

  • First, it was settled law that if the insured exaggerated the amount of any loss, the entire claim was forfeit and it was not severable. Honest parts of the claim were irrecoverable even if those parts were capable of standing alone. The purpose of the rule was to deter fraudulent claims, so that an insured who gambled by putting in a partly fraudulent claim was to be punished by losing the entire claim. 
  • Secondly, the law relating to fraudulent claims and the insured's continuing duty of utmost good faith were separate concepts. Matters occurring post-contract had to be dealt with by ordinary contractual principles rather than by the duty of utmost good faith. The fraudulent claims rule was to be regarded as a term implied or inferred by law, or at any rate an incident of the contract. 
  • Thirdly, a distinction was to be drawn between a claim that was fraudulent and a claim that was valid but was followed by a lie. The right of indemnity arose as soon as the loss occurred, so that the insured had a right of recovery at that point. If there was no valid claim, then there was no recoverable loss. However, if there was a valid claim from the outset, it would be disproportionate for the law to impose forfeiture of that claim for a subsequent lie of that nature. It was no answer for the insurer to show that it may have been put off relevant inquiries or driven to irrelevant ones. Wasted effort was not the mischief aimed at by the fraudulent claims rule. The civil law did not avoid a transaction on account of fraud that had no impact on its intended target. 
In New Zealand, fraudulent claims are still regarded as a breach of the insured's continuing duty of good faith. English cases reject this view and therefore do not provide avoidance as a remedy. Instead, the remedies in England are non-payment of the claim and, seemingly, termination of the policy for repudiation from the date of breach. 

Versloot is now the law in England and Wales. The law in New Zealand is unaffected, and the courts are still bound by the New Zealand Privy Council decision in Stemson, unless on an appeal the New Zealand Supreme Court decides to follow Versloot. This will likely turn on whether it also considers that, as a matter of policy, forfeiture of a valid claim is a disproportionate penalty for 'collateral lies'. If the New Zealand Supreme Court was to reach that view there may need to be some rethinking not just of the law relating to fraudulent claims but also of the scope and effect of the continuing acts of utmost good faith. There is much to be debated here on both sides in a New Zealand context. 

If you have any questions, or require further information regarding any aspect of this update, please contact us.  

1 See Stemson v AMP General Insurance (NZ) Ltd [2007] NZLR 289; Gate v Sun Alliance Insurance Limited HC Auckland CP1218/92, 19 January 1994; Sampson v Gold Star Insurance Co Ltd [1980] 2 NZLR 742.

2 AG [2016] UKSC 45