Court of Appeal awards exemplary damages following fraud against an insurer

The appellant insurer appealed against a judge's decision not to award it exemplary damages against the three respondents in this case.

The three respondents had carried out a "sophisticated, well-planned and brazen" fraud: two alleged road traffic accidents were faked, false documentation (such as hire agreements and medical records) were created and the claimants themselves may not have existed. The first respondent (which was operated by the second and third respondents) conducted proceedings on the basis that it was authorised to do so as a firm of solicitors (which it was not) and it misused the court process (by falsely representing that court documents had been served) in order to obtain default judgments for a sum in the region of £85,000. It was only through the diligence of the insurer that the fraud was exposed and enforcement prevented.

The judge below awarded the insurer compensatory damages of just under £25,000, comprising the value of time spent by the insurer's staff, plus investigators and solicitors, in unravelling the fraud and setting aside judgments against the insurer. However, he refused to order exemplary damages and the insurer has now succeeded in the appeal from that decision.

The Court of Appeal noted that exemplary damages are an exception to the general rule that damages should be compensatory and held that "It would therefore be inappropriate to extend the circumstances in which they can be awarded beyond the three categories of case identified by Lord Devlin" (which was a reference to the earlier decision of Rookes v Barnard [1964], in which one of the categories identified by Lord Devlin was where " the defendant's conduct has been calculated by him to make a profit for himself which may well exceed the compensation payable to the plaintiff").

The Court of Appeal held that the judge had erred in finding that the profit sought to be gained (the £85,000) was entirely by means of abstracting money from the insurer and the profit and the compensation would be identical. The Court of Appeal said that that approach was wrong and imposed an "unjustified limitation on the second category of case". The court should instead "analyse the position prospectively when the tort is committed, at which time the tortfeasor may or may not ultimately achieve the profit it seeks to achieve". Here, had the wrongdoers succeeded, and enforced the judgments in their favour, there was little doubt that the insurer would have been unable to recover that money.

Furthermore, it was nothing to the point that criminal proceedings could also have been brought.

Having found that this was a "paradigm" case for exemplary damages, the Court of Appeal awarded exemplary damages of £20,000 against each of the respondents (so £60,000 in total).