Collateral lies cannot sink genuine insurance claims: HC

An insurance claim cannot be repudiated automatically following the submission of fake supporting documents, if the underlying claim is otherwise genuine. The assertion came as the Punjab and Haryana High Court drew a clear line between a “fraudulent claim” and a “collateral lie”.

Justice Pankaj Jain observed that contracts of insurance were founded on the principle of “uberrima fides” – or utmost good faith – requiring disclosure of all material facts. While the principle was central to the relationship between the insurer and the insured, the effect of a false statement was required to be judged in the context of the overall claim.

Justice Jain asserted disputes in such matters generally fell into three categories: cases where the entire claim was fabricated; where a genuine loss was exaggerated to secure a higher payout; and cases where the claim was otherwise justified but false or dishonest information was furnished in support. The last of these, the court clarified, fell within the realm of a “collateral lie.”

Justice Jain pointed out that the real difficulty was in distinguishing between exaggerated fraudulent claims and collateral lies. “Quite often these two situations seem to be overlapping and similar, which are hard to distinguish. Answer lies in understanding the clear difference between fraudulent claim and collateral lie,” the court observed.

Justice Jain quoted Lord Sumption – British author, barrister and former senior judge – as saying: “There is an obvious and important difference between 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.”

Justice Jain added that the operative test was whether the insurer would still have been liable even without the false document. “In case the answer to the question is in affirmative, the fake invoice would fall within the ambit of collateral lie and not fraudulent claim,” the Bench held.

Applying the principle to the case before it, Justice Jain observed that the insured company had taken out a policy covering its plant, machinery, stocks and building, and premium had been accepted after officials inspected and assessed the premises. A fire broke out on June 7, 2000, causing damage. The insurer repudiated the claim, alleging that the invoices produced to establish purchase of machinery were fake.

The court found that the insurer was liable to indemnify the insured for loss of machinery even without the disputed invoices since the risk had been assessed and premium accepted at the time of contract. “It may be a case of collateral lies and embellishment of the claim at the hands of the claimant, but cannot be said to be a case of fraudulent claim,” Justice Jain observed.

The court added the law of insurance was not designed to punish misconduct but to balance the impact of breaches of good faith on the insured risk. “The law of insurance being concerned more with controlling the impact of the breach of good faith on the risk rather than the punishment of misconduct, the repudiation of claim at the hands of insured cannot be sustained,” Justice Jain ruled, while dismissing the insurer’s appeals.