A judgement issued by the Supreme Court of the United Kingdom last week has confirmed that, in relation to insurance claims at least, there really are two kinds of lies.
The question before the court was whether an insurance company could refuse to pay out on a claim because the insured had told a lie in the claim form.
The insured, a marine cargo company, had made the claim after one of their cargo ships had hit problems in open water leaving it beyond repair. In their claim form they had claimed that they had been told by the crew that an alarm had sounded when the leak developed but the crew had been unable to investigate or deal with the leak because of the rolling of the ship in heavy weather. In fact the crew had not mentioned an alarm.
At the time, the company believed that the claim would be paid out more quickly if the damage could be blamed on human error rather than defects in the ship itself.
In fact it was later decided by a judge that the loss was a natural result of being out on the sea and that the owners had a valid claim whether or not the alarm had sounded.
The insurers then refused to pay out on the basis that information given in the claim form was a lie so the insured appealed.
The Supreme Court decided (by a majority of 4 to 1) that the lie told in the claim form was irrelevant as it had neither created a claim where there was none nor had it been told to increase the value of the claim – they called it a ‘collateral lie’ – and that therefore the insurers should pay out on the claim.
The impact of this decision on future insurance claims remains to be seen but what this case does do is create a distinction between a lie which results in a fabricated claim or improved pay-out and a lie which has absolutely no bearing on the validity or amount of the claim. The former will still invalidate the claim, the latter now no longer will.