Last week, the UK’s Supreme Court pronounced an important decision with significant implications for insurance law in Scotland.
The Court ruled that making a dishonest statement which does not alter the position of the insured under the policy will not automatically preclude the insured from recovering under the policy. The Court made a clear distinction between fraudulent claims and collateral lies, previously known as fraudulent devices.
The case concerned irreparable damage to the engine of the DC Merweston ship due to the entering of sea water. This had occurred due to a combination of the negligence of the crew and damage to the ship from flooding. In the insurers’ subsequent investigation, the insured party claimed that a particular alarm in the bilge had sounded but the crew had been unable to attend to it due to the position of the ship at the time. This statement was subsequently found to be untrue and unsupported by the crew of the ship. It was only made in an attempt to expedite payment on the claim.
The question before the Court was whether such a lie could render the insurance contract void, although it bore no relevance to the merits of the claim. The Court concluded that it would be unjust to deny the insured party’s right to recover merely on the basis of an untruthful statement, which, despite its immoral character, did not alter the insured’s rights under the policy. The main test which the Court employed was one of recoverability, or whether the telling of a lie would ultimately have any bearing on the insured party’s right to recover. Nevertheless, the test is not explained in great detail and it remains to be seen how it will be interpreted and applied in subsequent court rulings.
The Court seems to have altered a long-standing rule that any fraudulent statements made by the insured party to the insurer would release the insurer from liability under the policy. The Court commented that the law of insurance was more concerned with regulating the impact of breaches of good faith on risk than it was with punishing misconduct.
The decision seems to be in line with the Insurance Act 2015 which comes into force on 12 August 2016. The Act will protect the insured’s rights where the insurer terminates the contract due to a fraudulent claim made by the insured in respect of rights due and obligations owed prior to the fraudulent act.
The implications of the decision in Scotland will be more nuanced. The case was decided under English law and accordingly does not have a binding status on Scottish Courts but, as a judgment of the Supreme Court, will nevertheless be highly persuasive in Scotland. The case seems to bring the Scottish and English positions on the matter significantly closer. It should be borne in mind that the Scottish courts decide such matters on a case-by-case basis, but it appears that the legal principle in question is in the process of aligning in both jurisdictions.
The case alters the law materially for both insurers and insured. The Association of British Insurers (ABI) has already issued a strong response, warning that the decision could increase premiums and prolong the pay-out process. “Lies are lies” the ABI stated, and full investigations into suspicious claims would continue to be launched. On the other hand, some policy holders might have less to worry about, even if a ‘white lie’ has been told.
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