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'Collateral' lies need not spoil insurance claims, rules Supreme Court

crashed car Image copyright Thinkstock
Image caption The judgement is likely to affect motor and household insurance policies

Lying on an insurance claim should not necessarily invalidate it, the Supreme Court has said, in a judgement likely to affect all household policies.

It said collateral lies - which are untrue, but do not affect the validity of the claim - can be acceptable.

The judges voted by four to one to change one of the important principles behind current insurance law.

The insurance industry called it a "blow for honest customers", and warned that the price of policies could rise.

The precise case involved a Dutch cargo ship, which ran into difficulty after its engine room was flooded.

The owners deliberately lied, by saying the crew couldn't investigate an alarm, because the ship was rolling in heavy seas.

In fact the accident was caused by bad weather, so the lie was irrelevant, the court ruled.

The judge in the original court case said the lie amounted to a "fraudulent device", which invalidated the claim.

The Court of Appeal upheld that judgement, but the Supreme Court has now overturned it.

'Increased premiums'

One of the judges, Lord Clarke, said: "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 of that entitlement. Such a lie is immaterial to the claim."

The judgement suggests that someone who puts in an insurance claim for a stolen computer worth £1,000 - but who fabricates a receipt for that amount - would still have a valid claim.

The Association of British Insurers (ABI) said it was looking at the judgement carefully, and warned that policies could become more expensive as a result.

"This decision risks pushing up the cost of insurance and prolonging the pay-out process for the vast majority of people who are honest customers," said James Dalton, the ABI's director of general insurance policy.

"Lies are lies. Insurers will investigate all suspicious claims and we make no apology for doing so as it keeps premiums down for honest customers."

It is thought that the principle will apply to millions of household, travel and motor policies.

Kevin Pratt, consumer affairs expert at MoneySuperMarket, said the change would not amount to a blank cheque for fraudsters.

"It will still be a fraud if you fabricate a claim, and it will still be a fraud if you exaggerate a claim," he said.

"But insurers can no longer use so-called 'collateral lies' to reject a valid claim. The one worry is that, if insurers are paying more claims as a result of this ruling, then they will increase premiums."

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