You couldn’t come up with a more confusing legal tangle if you tried than that concerning claims tainted by fraud. The main source of confusion is that we have different rules for liability claims - usually but not always claims for personal injury where an insurer is picking up the defendant’s bill - from those for contractual claims by insureds against their insurers under an insurance policy, but the picture is much more complex than that. We attempt to untangle the web in the light of recent developments.

Claims against non-insurer defendants

Where a liability claim is fraudulently exaggerated, the court may strike it out as an abuse of process but only in very exceptional circumstances and where it is proportionate to do so. The Supreme Court refused to strike out a dishonestly exaggerated injury claim in Fairclough Homes Ltd v Summers where the claimant recovered only £88,000 of a claim for £838,000.

Liability insurers were understandably frustrated by the court’s refusal to kick out such a claim in its entirety, but the Supreme Court said it would require “a massive attempt to deceive the court” before it would be right to deprive a claimant of recovery of the valid part of his claim. There have been a few instances where the court has struck out  a grossly exaggerated injury claim in its entirety (for example, Fari v Homes for Haringey and Plana v First Capital East Ltd) but most exaggerated claims do not involve “a massive attempt to deceive the court”.

Recent legislative developments

The Law Commission has recently published its latest reform programme. It had intended to include the law on fraud by personal injury victims but said that lack of support from the Ministry of Justice was behind its decision not to do so. Disappointment on the part of some insurers was tempered by the announcement by Chris Grayling that the Government would tackle this issue by including a clause in the Criminal Justice and Courts Bill dismissing personal injury claims where there is a finding of fundamental dishonesty. However, many insurers are unhappy with the term “fundamentally dishonest”, arguing that it is too broad and will lead to satellite litigation.

Clause 49 (previously 45) of the Bill states that when a court finds both that (1) the claimant is entitled to damages and (2) the claimant has been fundamentally dishonest in relation to the primary claim or a related claim, then on application by the defendant, the court must dismiss the primary claim unless it is satisfied that the claimant would suffer substantial injustice. The Bill was agreed by the House of Lords at the end of July and now proceeds to the report stage. 

When is a claim fundamentally dishonest?

The term “fundamentally dishonest” also appears in CPR 44.16 in the rules concerning qualified one-way costs shifting (QOCS), presently available only in personal injury claims. Orders for costs against a claimant may be enforced without the permission of the court but only to the extent of the aggregate amount in money terms of any order for damages and interest made in favour of the claimant.  However, where the court finds the claim to be fundamentally dishonest, the full extent of any costs order can be enforced against the defendant.

CPR 44.16 was considered earlier this year by HHJ Moloney QC in Cambridge County Court in Gosling v Screwfix Direct Ltd. He held that a claimant can be found to be fundamentally dishonest where he has suffered the alleged injury but then exaggerates his symptoms, as long as the dishonesty affects a substantial part of his claim. In that case the judge found that dishonesty that reduced the value of the claim by half was substantial and accordingly sufficient for him to make a finding of fundamental dishonesty.

Claims against insurers

The Insurance Contracts Bill was published in July and includes provisions codifying case law and attempting to resolve the present unsatisfactory position regarding fraudulent claims. These state that:

  • If the insured makes a fraudulent claim, the insurer is not obliged to pay the claim.
  • The insurer may refuse all liability to the insured in respect of all liability under the policy arising after the fraudulent act but the insured retains its rights before the fraudulent conduct.

Using the example given in the consultation paper on this topic, if a policyholder suffers £18,000 of legitimate loss, but then adds a fictitious claim of £2,000 for an item which never existed, the policyholder loses the whole £20,000 claim. This position – to be contrasted with that described above applying to dishonestly exaggerated third party claims – will remain the same once the Bill is enacted. This legislation may come into force in 2015, although April 2016 is rumoured as more likely, but note that it is possible to contract out of these provisions (subject to the “transparency provisions” of the Bill) and to construct a contractual regime for dealing with fraud. See below for a link to our briefing on the Bill.

Fraudulent devices in insurance claims

The issue of fraudulent devices, such as forged invoices, used by an insured to bolster a valid claim is not dealt with in the Insurance Contracts Bill even though the case law on this topic can be confusing. The Court of Appeal in Agapitos v Agnew said “a fraudulent device is used if the insured believes he has suffered the loss claimed but seeks to improve or embellish the facts surrounding the claim by some lie”. Where the insured has used a fraudulent device relevant to the claim, the insurer is entitled to reject a valid claim but there are many different views about how this works in practice (see the consultation paper [add hyperlink to http://lawcommission.justice.gov.uk/docs/ICL7_Insureds_Duty_of_Good_Faith.pdf).

The current position is that a fraudulent device will vitiate a valid claim if:

  • it is directly related to the claim and is intended to promote it; and
  • if believed, it would objectively and before any final determination of the parties’ rights, yield “a not insignificant” improvement in the insured’s chances of recovery from insurers.

The law was reviewed by Popplewell J in Versloot Dredging v HDI Gerling where he suggested that there should have to be a sufficiently close relationship between the claim and the fraudulent conduct to make it just and proportionate that a valid claim should be forfeit. However, he considered he was bound by contrary authority. The insured appealed and we are presently waiting for the Court of Appeal’s judgment.

In the meantime, this issue was revisited last month by the Privy Council in Beacon Insurance v Maharaj Bookstore. In what some have seen as a generous decision towards the insured not necessarily in line with previous authority, the court held that the judge at first instance had been entitled to decide that the insured’s alteration of invoices submitted to the insurer was free of any dishonest intent.

Defence of illegality

This discussion would not be complete without mention of the ex turpi causa doctrine. In broad terms, the court will not allow a claimant to recover where the claim arises out of his own criminal or illegal conduct. Last year, the  Court of Appeal upheld the defence in Joyce v O’Brian where the claimant’s injury occurred shortly after stealing some ladders with his uncle, the negligent defendant driver of the get-away car. Last month, the Supreme Court looked at the defence again in Hounga v Allen in the context of a race discrimination claim brought by an illegal immigrant employee.

Comment

Although there is much to be commended in the recent proposals to reform the law concerning claims tainted by fraud, the provision in the Criminal Justice and Courts Bill will only apply to injury claims, leaving the courts to follow the Supreme Court’s decision in Fairclough Homes Ltd v Summers in non-injury claims. Confining the reforms to claims for personal injury leaves the courts with an uncomfortable split between the approach taken to fraud in injury claims and that taken in other civil claims.

The existence of the two regimes we have at present can be confusing but is at least defensible because contractual claims made under an insurance policy are quite distinct from claims made against non-insurer parties. Creating a third regime applying only to injury claims not only muddies the waters still further but penalising dishonest injury claimants more than those making other types of claim is hard to justify as a matter of moral and legal principle.

Click here for our briefing on Gosling v Screwfix Direct Ltd.

Click here for our briefing on the Insurance Contracts Bill. The Bill is available here.