FUNDAMENTAL DISHONESTY: SUPREME COURT INDICATES HARD LINE: VERSLOOT CONSIDERED
the Supreme Court has held that where an insured lies in support of a claim but those lies do not affect the right of the insured’s recovery under the insurance policy, then the insurance company must pay out.
This decision has been widely misunderstood in relation to its application to the concept of fundamental dishonesty in personal injury claims, presumably by people who have not got as far as reading paragraphs 94 to 96 of the 55 page judgment.
Far from indicating a lax approach to fundamental dishonesty the case strongly suggests a very tough line indeed, that is that any dishonest exaggeration for financial gain, however small, amounts to fraud and therefore fundamental dishonesty, and therefore brings Section 57 of the Criminal Justice and Courts Act 2015 into play to overturn the whole award.
At paragraph 95 the Supreme Court points out, but does not seek to define, the “substantial injustice” exception.
Here the Supreme Court termed lies which made no difference “collateral lies” and held, by a 4 – 1 majority, that the fraudulent devices rule, which allows insurers to reject fraudulent claims, does not apply to such collateral lies.
Thus such a claim is not a fraudulent claim entitling the insurer to avoid it.
In relation to contracts of insurance concluded after 12 August 2016 the rule has been restated, and its other consequences defined, in Section 12 of the Insurance Act 2015. This ruling applies to that Act as that Act does not attempt to define what makes a claim fraudulent.
Contracts between insurers and their insured are contracts of utmost good faith. That principle does not apply to negligence actions against another party which is indemnified by insurance.
Here the insurers were seeking to avoid the claim, not the contract, and therefore the Supreme Court was not considering the issue of utmost good faith in its entirety.
It was accepted that even where a party is claiming against its own insurer the utmost good faith condition is modified in relation to the bringing of a claim, as compared with the entering into of the contract in the first place.
This case involved a cargo ship which ran into difficulty after its engine room was flooded. The owners deliberately lied in saying that the crew did not investigate an alarm call as the ship was rolling in heavy seas.
In fact the accident was caused during the voyage by sea water entering the engine room and was thus covered by the insurance policy, which remained valid, and so the lie was irrelevant.
The insured had made this false statement in the belief that it would fortify the claim and accelerate payment, as he was frustrated by the insurer’s delay.
The false statement was made once in one email to the insurer’s solicitors and was not persisted in at the trial.
The High Court sitting at first instance found as a fact that the lie was irrelevant to the merits of the claim but that the insurers were nevertheless entitled to repudiate the claim.
The Court of Appeal agreed but the Supreme Court overturned that finding, with Lord Clarke saying:-
“The critical point is that, in the case of a collateral lie… the insured is trying to obtain no more than the law regards as his entitlement and the lie is irrelevant to the existence or amount of that entitlement. Such a lie is thus immaterial to the claim. As Lord Sumption puts it, the lie is dishonest but the claim is not.” (Paragraph 40).
Lord Sumption said that for a claim to be fraudulently exaggerated the insured’s dishonesty must be calculated to get him something to which he is not entitled.
The position is different where the insured is trying to obtain no more in law than his entitlement and the lie is irrelevant to that entitlement.
Here the lie was dishonest, but the claim was not. A policy of deterrence did not justify the application of the fraudulent claims rule in such a situation.
Note that if the lie had been a relevant one, for example a small exaggeration of the amount, then one email would have been enough to lose the whole claim. Personal injury lawyers take very careful note.
The obiter comments of Lord Mance in the Court of Appeal in
that insurers could reject a claim because of collateral lies were rejected.
In fact even exaggerated claims against another person’s insurance company have traditionally been allowed by the courts in circumstances where they would have failed against the person’s own insurance company.
On the face of it that remains the law; any exaggerated claim against one’s own insurer would still be disallowed as a material lie is not a collateral lie, but a claim against someone else’s insurance company would be allowed to the extent of the true validity of the claim.
In other words you can “try it on” against someone else’s insurer and still win, but not your own insurer.
The Supreme Court recognized this, saying at paragraph 9:-
“9. What matters for present purposes is the rationale of the rule, on which there is a broad consensus in the authorities. It is the deterrence of fraud. As Lord Hobhouse observed in
The “STAR SEA” [Manifest Shipping Co Ltd v Uni-Polari Insurance Company Ltd (The “STAR SEA”)  1 AC469] at paragraph 62,
“The logic is simple. The fraudulent insured must not be allowed to think: if the fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing.”
The Supreme Court also recognized that this rule did not apply where the contract was not one of insurance, for example a negligence action in personal injury.
“10. Fraudulent insurance claims are a serious problem, the cost of which ultimately falls on the general body of policyholders in the form of increased premiums. But it was submitted to us that a forfeiture rule was not the answer to that problem. There was, it was said, little empirical evidence that the common law rule was an effective deterrent to fraud, and no reason to think that the problem was peculiar to claims on insurers as opposed to, say, claims in tort for personal injuries, the cost of which also falls ultimately on insurers and policyholders without there being any equivalent common law rule. Informational asymmetry is not a peculiarity of insurance, and in modern conditions may not even be as true of insurance as it once was. These points have some force. But I doubt whether they are relevant. Courts are rarely in a position to assess empirically the wider behavioural consequences of legal rules. The formation of legal policy in this as in other areas depends mainly on the vindication of collective moral values and on judicial instincts about the motivation of rational beings, not on the scientific anthropology of fraud or underwriting. As applied to dishonestly exaggerated claims, the fraudulent claims rule is well established and, as I have said, will shortly become statutory.”
Curiously the law has always been that any duty of good faith in the presentation of a claim ended with the commencement of proceedings even as between an insured and its own insurer.
Returning to the difference between a fraudulently exaggerated claim and a justified claim supported by collateral lies the Supreme Court had this to say:-
“25. In this context, there is an obvious and important difference between a fraudulently exaggerated claim and a justified claim supported by collateral lies. Where a claim has been fraudulently exaggerated, the insured’s dishonesty is calculated to get him something to which he is not entitled. The reason why the insured cannot recover even the honest part of the claim is that the law declines to sever it from the invented part. The policy of deterring fraudulent claims goes to the honesty of the claim, and both are parts of a single claim: Galloway v Guardian Royal Exchange (UK) Ltd Lloyd’s Rep IR 209, 213-214 (CA); Direct Line Insurance v Khan 1 Lloyd’s Rep IR 364; AXA General Insurance Ltd v Gottlieb  1 All ER (Comm) 445 (CA), para 31. The principle is the same as that which applies in the law of illegality. The courts will not sever an agreement affected by illegality into its legal and illegal parts unless it accords with public policy to do so, even if each part is capable of standing on its own: Kuenigl v Donnersmarck  1 QB 515, 537 (McNair J); Royal Boskalis Westminster NV v Mountain  QB 674, 693 (Stuart-Smith LJ), 704 (Pill LJ).
- The position is different where the insured is trying to obtain no more than the law regards as his entitlement and the lie is irrelevant to the existence or amount of that entitlement. In this case the lie is dishonest, but the claim is not. The immateriality of the lie to the claim makes it not just possible but appropriate to distinguish between them. I do not accept that a policy of deterrence justifies the application of the fraudulent claim rule in this situation. The law deprecates fraud in all circumstances, but the fraudulent claim rule is peculiar to contracts of insurance. It reflects, as I have pointed out, the law’s traditional concern with the informational asymmetry of the contractual relationship, and the consequent vulnerability of insurers. It is therefore right to ask in a case of collateral lies uttered in support of a valid claim, against what should the insurer be protected by the application of the fraudulent claims rule? It would, as it seems to me, serve only to protect him from the obligation to pay, or to pay earlier, an indemnity for which he has been liable in law ever since the loss was suffered. It is not an answer to this to say, as Christopher Clarke LJ did in the Court of Appeal, that the insurer may have been “put off relevant inquiries or … driven to irrelevant ones”. Wasted effort of this kind is no part of the mischief against which the fraudulent claims rule is directed, and even if it were the avoidance of the claim would be a wholly disproportionate response. The rule, moreover, applies irrespective of whether or not the lie set a hare running in the insurer’s claims department. Nor is it an answer to say, as the courts have often said of fraudulently inflated claims, that the insured should not be allowed a one-way bet: he makes an illegitimate gain if the lie persuades, and loses nothing if it does not. This observation, which is true of fraudulently inflated claims, cannot readily be transposed to a situation in which the claim is wholly justified. In that case, the insured gains nothing from the lie which he was not entitled to have anyway. Conversely, the underwriter loses nothing if he meets a liability that he had anyway.”
Although the Supreme Court recognized the difference between claims against one’s own insurance company and claims against another party who is insured it said that “the two species of fraud clearly exhibit shared features” and “an unacceptably high level of fictitious and dishonestly inflated claims thus formed part of the background against which the proper ambit of the fraudulent claims rule falls to be considered.” (Paragraph 56).
Thus the Supreme Court clearly had in mind application of its judgment to so-called third party claims, that is a claim by one party against another party, rather than its own insured.
Fundamental dishonesty, Section 57 and Qualified One-Way Costs Shifting
The Supreme Court set out three possible scenarios:-
- The whole claim is fabricated.
- There is a genuine claim, the amount of which has been dishonestly exaggerated.
- The entire claim is justified, but the information given in support of it has been dishonestly embellished, either because the insured was unaware of the strength of the case or with a view to obtaining payment faster and with less hassle.
Scenario 1: The whole claim is fabricated
In scenario 1 the insurer will win on liability and no special rules need apply.
Section 57 of the Criminal Justice and Courts Act 2015 will not apply as that only comes into effect if the claimant wins on liability.
Qualified One-Way Costs Shifting
The starting point is that a losing claimant pays costs.
In personal injury cases that rule is abrogated in certain circumstances by CPR 44.13 – 44.17 of the Civil Procedure Rules dealing with Qualified One-Way Costs Shifting whereby a winning personal injury claimant recovers costs, but a losing claimant does not pay them.
However QOCS does not apply to a fundamentally dishonest claim, which obviously a fabricated claim would be.
This disapplication of QOCS in a lost, fundamentally dishonest claim simply restores the normal, default position, that is that the losing claimant pays.
As scenario one is the only instance in which the case is lost it is the only one to which QOCS applies.
Thus this decision makes no difference whatsoever to the application of Qualified One-Way Costs Shifting.
Scenario 2: There is a genuine claim, the amount of which has been dishonestly exaggerated
Qualified One-Way Costs Shifting
The claim is genuine, but exaggerated and so is won and therefore QOCS does not apply.
This is a classic scenario for Section 57 to apply. The claim is won on liability but has been dishonestly exaggerated.
Thus the win is overturned in a personal injury case, as Section 57 only applies to personal injury claims.
Nothing in this decision softens that approach. On the contrary the Supreme Court reinforces the view that any dishonest exaggeration of the amount claimed, however small, allows the insurer to avoid the claim.
Although the law relating to insurer and insured does not apply directly to claims against someone else’s insurance company it is inconceivable that the court would apply a different principle in personal injury claims where Parliament has enacted that if the claimant has been fundamentally dishonest then the whole claim is lost.
The only issue in relation to fundamental dishonesty is how the courts will interpret Parliament’s use of the word “fundamental”.
Clearly the slightest exaggeration, even of a few pounds in a £1 million claim, is dishonest. It remains unclear as to whether in such circumstances a court could rule that such an exaggeration was dishonest, but nevertheless not fundamentally dishonest, or strictly, as the law requires, whether the claimant was fundamentally dishonest.
On the face of it even a collateral lie involves the claimant in being dishonest, but maybe the courts will hold that such an irrelevant lie does not satisfy the “fundamentally” dishonest test and that the significance or otherwise of the lie goes to its fundamental nature.
At the time of writing the Supreme Court’s decision in
is awaited. The Supreme Court hearing took place on 16 June 2016.
However here the Supreme Court appears to be anticipating its decision in that case.
The Court of Appeal in
held that any exaggeration for financial gain was fraudulent.
Here, in a different context, the Supreme Court held that any such exaggeration of the amount of a claim is indeed fraudulent.
It seems unlikely that “fundamentally dishonest” requires a higher threshold than “fraudulent”. Thus it is likely that the courts will take a hard line on any exaggeration of any kind, however small, if that exaggeration is for financial gain.
Section 57 is indeed likely to apply to an exaggeration of a very small part of the claim.
Scenario 3: Dishonesty which makes no difference to the claim.
Qualified One-Way Costs Shifting
QOCS does not apply as the case is won and QOCS only applies to cases that are lost or where there is a failure to beat a Part 36 offer.
The Supreme Court has held that such exaggeration which makes no difference to the claim is not fraudulent, even though it is dishonest. The court said that the lie is dishonest but the claim is not.
Given that the test in Section 57 is whether the claimant is fundamentally dishonest, rather than the claim, it could be argued that Section 57 still applies in such a scenario and therefore the win would be overturned.
This part of the decision is the most important as far as Section 57 is concerned.
It leaves open the ability of the court to find that such dishonesty, which does not affect the amount of claim, is indeed dishonest but not fundamentally dishonest, thus leaving the claim intact, valid and won.
It is possible, but in my view unlikely, that even in such circumstances, where a non-personal injury claim would succeed even against one’s own insurers, the courts could hold that the claimant him or herself was being fundamentally dishonest even though the claim was not.
If that is the view that the courts take then the win is overturned.
Those who take the view that requiring the claimant to be fundamentally dishonest, rather than the claim, involves a higher threshold of dishonesty before the claim can be overturned, are, to adapt a phrase, fundamentally wrong.
Qualified One-Way Costs Shifting
There is no doubt that as far as QOCS is concerned the decision is of no relevance whatsoever.
- An entirely fabricated claim is lost anyway and thus Section 57 does not apply.
- A claim exaggerated for financial gain is fraudulent and therefore is likely to be held to be made by the claimant being fundamentally dishonest and be disallowed in full under Section 57, however small the exaggerated amount is and however low a percentage it is of the genuine element of the claim.
- Exaggeration which does not affect the validity, nor the amount of the claim, while dishonest, is likely to be held not to mean that the claimant is fundamentally dishonest and therefore the claim will not be overturned under Section 57. However for the reasons set out above this is not certain.
Dishonest exaggerations that do not affect a claim.
Examples may include:-
- The speed of the other vehicle;
- an untrue statement that the other party had admitted liability;
- an untrue statement that the other driver’s breath smelled of alcohol or that the other driver was aggressive, or whatever;
- lying about who the driver was in the mistaken belief that the actual driver was not insured – see the Australian case of of
Tiep Thi Ho v Australian Associated Insurance Ltd  VSCA 48;
- causing further damage to an already damaged door before photographing it and sending it to the insurers in a claim for theft consequent upon a forcible entry – see the Australian case of
GRE Insurance Ltd v Ormsby  29SASR 498 ;
- a genuinely burgled householder unquestionably absent at the time lying about where he was to avoid domestic embarrassment (see paragraph 90 of the judgment);
- fabricating an invoice for the genuine value of a stolen item where the original had been lost.
Anything other than a hard, bright line where there has been dishonesty seeking financial advantage would be almost impossible to apply.
Would a £5,000.00 exaggeration be okay on a £1 million claim but not a £10,000.00 claim?
Is there to be a permissible fraudulent percentage, that is it is okay to lie to the extent of say 10% of the value of the claim, but nothing more?
One analysis of Section 57 is that effectively it applies the insurer/own insured test to claims between parties where the claimant is not seeking recovery from its own insurer, but rather the other party, normally the other party’s insurance company.
It is hard to argue with the logic of the rule being the same in both cases.
It may be that the rule is too severe under Section 57, but if that is the case it is strongly arguable that it is also too severe between an insured and its own insurance company but that argument has been comprehensively rejected by the Supreme Court here, and indeed by all courts over a very long period of time.
Specific reference to Section 57
At paragraphs 94 and 95 of the judgment here the Supreme Court refers to Section 57 in the context of a scenario 2 cliam, that is one where the claim is genuine but there is dishonest exaggeration for financial gain.
At paragraph 94 the court said:-
“94. There is no doubt that the purpose of the fraudulent claims rule is to discourage fraud, having regard to the particular vulnerability of insurers. This rationale has frequently been reiterated. In Galloway v Guardian Royal Exchange (UK) Ltd  Lloyd’s Rep IR 209, 214, it was expressed thus by Millett LJ at 214: “The making of dishonest insurance claims has become all too common. There seems to be a widespread belief that insurance companies are fair game, and that defrauding them is not morally reprehensible. The rule which we are asked to enforce today may appear to some to be harsh, but it is in my opinion a necessary and salutary rule which deserves to be better known by the public. I for my part would be most unwilling to dilute it in any way.” And in The Star Sea Lord Hobhouse said this at para 62: “The logic is simple. The fraudulent insured must not be allowed to think: if the fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing.” This latter formulation of the justification for the rule, which has often been repeated, gives rise to the commonly used shorthand that the fraudulent insured must not be allowed a “one-way bet”. It was the principal argument relied upon by the insurers in The Aegeon and in the present case for the inclusion of collateral lies within the rule.”
The Supreme Court then links this “own insurer” rule, that is that any dishonesty of any kind which affects the value of the claim leads to the whole claim being forfeited, to Section 57:
“95. The need for such a rule, severe as it is, has in no sense diminished over the years. On the contrary, Parliament has only recently legislated to apply a version of it to the allied social problem of fraudulent third party personal injuries claims. Section 57 of the Criminal Justice and Courts Act 2015 provides that in a case where such a claim has been exaggerated by a “fundamentally dishonest” claimant, the court is to dismiss the claim altogether, including any unexaggerated part, unless satisfied that substantial injustice would thereby be done to him. Parliament has thus gone further than this court was able to do in Summers v Fairclough Homes.”
Thus the Supreme Court seems to leave open as the only possible difference being the “substantial injustice” exception.
In paragraph 96, which follows that link the Supreme Court said:-
“96. Severe as the rule is, these considerations demonstrate that there is no occasion to depart from its very long-established status in relation to fraudulent claims, properly so called. It is plain that it applies as explained by Mance LJ in The Aegeon at paras 15 – 18. In particular, it must encompass the case of the claimant insured who at the outset of the claim acts honestly, but who maintains the claim after he knows that it is fraudulent in whole or in part. The insured who originally thought he had lost valuable jewellery in a theft, but afterwards finds it in a drawer yet maintains the now fraudulent assertion that it was stolen, is plainly within the rule. Likewise, the rule plainly encompasses fraud going to a potential defence to the claim. Nor can there be any room for the rule being in some way limited by consideration of how dishonest the fraud was, if it was material in the sense explained above; that would leave the rule hopelessly vague.” (My emphasis)
The Supreme Court’s assertion that any consideration of the extent of the dishonesty would leave the rule “hopelessly vague” must also apply to any attempt to interpret Section 57 in that way.
Contrary to what many assume, this decision undoubtedly envisages a clear, bright, and some would say hard, line in relation to the interpretation of fundamental dishonesty, or rather a fundamentally dishonest claimant, under Section 57.
This book is updated on Kerry on QOCS: Book Update and Links and the links provide the full judgment of all cases, statutes, statutory instruments etc.
To see a trailer of the book, including all the contents etc click here.
Section 57 of the Criminal Justice and Courts Act 2015 reads:-
“57 Personal injury claims: cases of fundamental dishonesty
(1) This section applies where, in proceedings on a claim for damages in respect of personal injury (“the primary claim”)—
- the court finds that the claimant is entitled to damages in respect of the claim, but
- on an application by the defendant for the dismissal of the claim under this section, the court is satisfied on the balance of probabilities that the claimant has been fundamentally dishonest in relation to the primary claim or a related claim.
(2) The court must dismiss the primary claim, unless it is satisfied that the claimant would suffer substantial injustice if the claim were dismissed.
(3) The duty under subsection (2) includes the dismissal of any element of the primary claim in respect of which the claimant has not been dishonest.
(4) The court’s order dismissing the claim must record the amount of damages that the court would have awarded to the claimant in respect of the primary claim but for the dismissal of the claim.
(5) When assessing costs in the proceedings, a court which dismisses a claim under this section must deduct the amount recorded in accordance with subsection (4) from the amount which it would otherwise order the claimant to pay in respect of costs incurred by the defendant.
(6) If a claim is dismissed under this section, subsection (7) applies to—
(a) any subsequent criminal proceedings against the claimant in respect of the fundamental dishonesty mentioned in subsection (1)(b), and
- any subsequent proceedings for contempt of court against the claimant in respect of that dishonesty.
(7) If the court in those proceedings finds the claimant guilty of an offence or of contempt of court, it must have regard to the dismissal of the primary claim under this section when sentencing the claimant or otherwise disposing of the proceedings.
(8) In this section—
“claim” includes a counter-claim and, accordingly, “claimant” includes a counter-claimant and “defendant” includes a defendant to a counter-claim;
“personal injury” includes any disease and any other impairment of a person’s physical or mental condition;
“related claim” means a claim for damages in respect of personal injury which is made—
- in connection with the same incident or series of incidents in connection with which the primary claim is made, and
- by a person other than the person who made the primary claim.
(9) This section does not apply to proceedings started by the issue of a claim form before the day on which this section comes into force.”
Section 12 of the Insurance Act 2015 reads:-
“12. Remedies for fraudulent claims
- If the insured makes a fraudulent claim under a contract of insurance –
- the insurer is not liable to pay the claim,
- the insurer may recover from the insured any sums paid by the insurer to the insured in respect of the claim, and
- in addition, the insurer may by notice to the insured treat the contract as having been terminated with effect from the time of the fraudulent act.”
Please also see my related blogs:-