When is it OK to lie to your insurer?

Small fibs won’t necessarily invalidate a claim but they represent a big problem for the industry

Is it ever OK to lie? In my household, it is part of everyday life. I have gone to ridiculous lengths to persuade my four-year-old daughter that a fat man in a red suit squeezes down the chimney to bring her presents every Christmas. And over the past few weeks I have lied repeatedly to my wife while organising her surprise 40th birthday party.

Thankfully, everyone I know thinks this kind of lie is acceptable. But what about lying to your employer – by calling in sick when you’re fit and healthy? One in five people apparently do that each year.

Or how about lying to your insurer? If you are looking for someone with more authority than a newspaper columnist to give you the verdict on whether this is OK, you will be pleased to know that a court of law tackled the question. The answer was a “yes” but on the premise of a technicality.

Back in 2010, a Dutch shipping company made a 3m insurance claim to their insurance firm after one of its vessels ran into heavy seas and its engine flooded. The crew had cleared the hatches of ice using the emergency fire pump but forgot to close the sea inlet valve when they finished. That, along with damage caused by freezing water in pipes, meant the ship took in water when it hit bad weather.

It is exactly the kind of incident the cargo company had bought cover for. Yet the insurer dragged its feet on the payout, initially because the cause of the flood wasn’t clear.

In an effort to get things moving, the shipping company’s manager told the insurer the reason for the flood was that the crew hadn’t responded quickly enough to an alarm that went off during the storm. He even managed to get one of the crew to back up this version of events.

In due course, however, the insurer found out the real reason for the flood. And when it discovered the company had lied, it immediately rejected the claim.

From the insurer’s perspective, this was an open-and-shut case. Once its customer had lied, it had broken the good faith on which all insurance contracts rest. Yet the lie was, in effect, irrelevant.

It would have been better if the manager had told the truth, but his lie did not inflate the amount of the payment, or serve to get a claim paid that otherwise would not have been. It was, – as the Supreme Court it was put it to ruled as – a “collateral lie”.

Before you grab your laptop to email a claim to the provider of your online insurance in Thailand, let’s get one thing straight: this single ruling does not change the rules around fraud. That is still illegal – and can land you in jail for up to 10 years.

It is not OK to fabricate a claim entirely, nor to exaggerate a genuine claim to make your claim more valid. Insurance fraud costs the industry hundreds of millions of pounds a year – and that cost is ultimately passed on to us, the policyholders.

What the court ruling makes clear, though, is that lying, in itself, is not a good enough reason to reject a claim that is otherwise valid.

To move away from the rather abstract world of cargo ships, imagine your home has been burgled by someone who kicked in your front door and broke the lock. When you get home you realise you had left the kitchen window at the back of the house open.

You call your insurer to make a claim, and when you are asked if all the doors and windows had been secured in the house, you say yes. It is a lie, but it is born out of paranoia that your insurer will be looking for some reason to wriggle out of paying your valid claim.

In the old world, if the insurer discovered you had left the back window open, and had lied about doing so, it might have tried to reject your claim. However, the Supreme Court ruling makes it clear that, as the burglar came in through the front door, the lie is neither here nor there.

What is most interesting is the way the insurance industry reacted to the case. The Association of British Insurers (ABI) angrily tweeted: “Lies are lies. Insurers will investigate suspicious claims & we make no apology for doing so as it keeps premiums down for honest customers.”

It was a silly response, and quite revealing. The insurance industry has a massive reputation problem. According to one poll, insurers are less trusted than banks, journalists and politicians.

What the industry missed was that the court case was yet another manifestation of these troubles. People expect insurers to try to avoid paying claims. Everyone knows someone who has been denied money by an insurance company. So, whenever we submit a claim, we hold our breath and hope for the best while expecting the worst.

Insurers are incredulous about their ill repute and believe the way to restore their reputation is to issue press releases about how much they have paid out. Yet the small number of claims rejected for spurious reasons do more damage than they can imagine. The shipping case is a perfect example. The claim was valid but the insurer was quick to try to avoid payment by claiming that a lie – even a collateral lie – had poisoned the whole contract.

I have worked closely with a number of large insurance companies and I know there is no conspiracy. These companies and all the people who work for them genuinely believe they are in the business of paying claims. However, they have an odd way of looking at what is valid and what is not, and it is this disconnect between their view and that of consumers that perpetuates their poor reputation.

Customers buy insurance to protect them from the unexpected, but policies are riddled with increasing numbers of exclusions. One home insurance contract I looked at recently said it covered hard tennis courts but not clay ones. It covered remote-controlled toys but not ones that went over 8mph. It covered dentures but not if they are damaged while eating.

There is no way a customer can absorb all this before they buy a policy. That’s why they cross their fingers when they make a claim, expecting the insurer to produce some excuse for why it won’t pay. In most cases, the claims are paid. Yet for the minority of policyholders who get turned down, their views against the industry are hardened, and they tell anyone who will listen about their hard-luck story.

If insurers want people to stop lying, they need to be more willing to give customers the benefit of the doubt. It’s not easy. There are commercial pressures to keep prices low – and they would go bust pretty quickly if they footed the bill for every claim. But much more could be done to ensure customers have realistic expectations when they buy cover. Insurers should look at how some of the exclusions appear in the eyes of customers, for example.

If further proof were needed of how far we are from harmony in this industry, you need only look at the Financial Ombudsman Service’s complaints statistics. Policyholders contact the ombudsman once a claim has been rejected by an insurer – and the ombudsman overturns about a third of the refusals. That means insurers are getting it wrong on an average of one in every three claims. For some companies, the stats are much worse.

The Supreme Court ruling should be another wake-up call for the insurance industry. Sadly, the response from the ABI suggests we are still a long way from a world where there is mutual trust between insurers and their customers.