It has been remarked that “Computers have enabled people to make more mistakes faster than almost any invention in history, with the possible exception of tequila and handguns”. Whether or not one agrees with such a statement it is inevitably true that the automation of many areas of the insurance claim process can lead to an increased risk of mistaken or incorrect payments being made to insureds. This risk was heightened following catastrophic events resulting in high volumes of similar property damage claims. Indeed last year we were instructed to recover multi-claim payments made in error under household insurance policies following the UK floods in 2014.
So, must the recipient of monies paid by mistake repay what was not due to them under their contract of insurance?
Under the English law of unjust enrichment, underwriters can pursue a recovery for mistaken payments as long as they can demonstrate that:
- The payment/overpayment was made by mistake
- The mistake was one of fact, not law
- The mistake was "essential"
- The mistake was "excusable"
In reality the above hurdles are not particularly onerousbut where the difficulties arise with the court’s application of the defence of change of position. This can be raised where the defendant has materially changed his position as a result of the receipt of the money or benefit.
Lord Goff in the case of Lipkin Gorman v Karpnale Limited (1988) described such a defence as being “available to a person whose position has so changed that it would be inequitable in all circumstances to require him to make restitution, or alternatively to make restitution in full.”
Inevitably, the fact that such a defence is an equitable one leads to uncertainty with each case being decided on its own facts.
In a recent interesting High Court decision in Australia, where the defence of change of position also forms part of its common law, we can see how the court applied the principles of equity to preclude the recipient from having to return monies paid to it in error due to a third party fraud.
The facts in Australian Financial Services and Leasing v Hills Industries (2014) were as follows. The appellant was a financier specialising in business leases. One of its customers was Total Concept Projects Group. The director of that company created false invoices which pretended that the company had purchased equipment from Hills Industries and from Bosch. The director presented those false invoices to the appellant financier and, on the strength of those false invoices, the appellant agreed to purchase the equipment and to lease it back to Total Concept Projects.
The financier never actually saw the equipment, which did not exist anyway. It simply made electronic transfers, on the strength of the false invoices to Hills and to Bosch. Hills and Bosch were unaware of the fraud. They applied the monies transferred to them in reduction of existing debts owed to them by Total Concept.
The fraud went undetected for about six months. During that period the appellant financier entered into further lease agreements with Total Concept. It also took security in the form of guarantees from the director and his associates and a mortgage over the director’s home. Also during that period Hills and Bosch continued to trade with Total Concept.
Total Concept was subsequently put into liquidation and the director was made bankrupt. The companies had liabilities totaling over $A11 million, but no assets. The sale of the director’s home netted only about $A500,000.
The appellant demanded that Hills and Bosch repay the monies which it had paid to them by mistake.
The nature of such a claim is an action for "money had and received". Recovery depends largely on the question whether it is equitable for the recipient to retain the benefit.
A defence to the action is that the defendant has acted to his or her detriment on the faith of the receipt. Such detriment need not be monetary or capable of monetary calculation. The legal doctrine concerning detriment is concerned with the disadvantage to a person who has been induced to change his or her position on the strength of the payment.
The judge noted that if the payments to Hills and Bosch were reversed, then they would become unpaid creditors of the company in liquidation.
Neither Hills nor Bosch would be able to reverse the consequences of their decisions to continue trading with the company. They were also disadvantaged because they had not pursued payment of the debts from the company. Those consequences were irreversible ‘as a practical matter of business.’
The judge concluded that the disadvantages to Hills and Bosch if they were required to repay the monies received from the appellant were such that it would be inequitable to require them to do so.
Applying such equitable principles to a potential insurance situation, one can see how underwriters could find themselves considerably “out of pocket”: Underwriters mistakenly pay a plant claim following a fire at an insured’s business premises and the insured uses the monies as a down payment to upgrade his production line. With the insurance monies spent and the insured tied into a contract to purchase new up-to-date plant it is likely that a court would find it equitable for the insured to retain the insurance payment.
With that in mind how best can underwriters protect themselves?
On the basis that computers will always be part of business life the simple and most pragmatic answer is for underwriters to incorporate into their policy wordings a provision for repayment of mistaken payment of monies under the contract of insurance. This contractual provision will render otiose any argument by an insured that they have been prejudiced.