The Supreme Court has ruled that a ‘collateral lie’ – a lie told to embellish a claim – which is irrelevant to the insured person’s claim does not give the insurer the right to reject it.

The Association of British Insurers (ABI) said this ruling could be a blow for honest motorists and could push up premiums.

Below we explain more about the ruling and what this means for your insurance policy.

How did the judgment come about?

The original case (Versloot Dredging v HDI Gerling) centres on whether the insurers of a ship which had its engine room flooded were able to reject a claim because the insured person had lied that the issue couldn’t be investigated because the vessel was rolling in heavy weather.

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However, in reality the flood was caused by the crew’s negligence, damage to pumps and defects in the engine room pumping system and the lie was told to strengthen the claim and increase the payment from the policy.

The claim was for €3.2m and it was taken to the Court of Appeal where the judge held that the lie was a ‘fraudulent device’ which meant they didn’t have to pay out for the claim.

The case was then taken to the Supreme Court where the majority of judges (4-1) held that the ‘fraudulent device’ rule doesn’t apply to ‘collateral lies’ which are “immaterial to the insured’s right to recover”.

In common law, it’s well established that where an insurance claim has been fabricated or dishonestly exaggerated, insurers have the right to refuse it. This is to prevent fraud.

But when it comes to irrelevant lies made in an honest claim, the Supreme Court ruled that the “dishonest lie is typically immaterial and irrelevant to the honest claim: the insured gains nothing by telling it, and the insurer loses nothing if it meets a liability that it has always had”.

What does this mean for insurance holders?

While the Supreme Court judgment was in relation to a ship case, it impacts the insurance industry as a whole.

James Dalton, director of general insurance policy, at ABI, said: “This judgment makes clear that inflating the value of an otherwise genuine claim still remains fraud. Anyone in any doubt if information is relevant to their claim should always play safe and tell their insurer.”

“The Supreme Court decision could be a blow for honest customers. Allowing ‘collateral lies’ in the course of an insurance claim flies in the face of the work that the insurance industry and government have been doing to crack down on the cheats and fraudsters.

“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. As the dissenting judge, Lord Mance said, allowing lies will ‘distort the claims process by the time and cost involved in unveiling the fraud and attempting to ascertain its true implications’.

“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.”

Kevin Pratt, consumer affairs expert at MoneySuperMarket, added that the ruling is not a cheat charter or a blank cheque for would-be fraudsters. But it does mean that insurers will not be able to throw out perfectly valid claims on little more than a technicality.

“The one worry is that, if insurers are paying more claims as a result of this ruling, then they will increase premiums. That will make it more important than ever for people to shop around every time their car, home or travel policy comes up for renewal, to ensure they get the best price.”