The financial impact of fraud has grown exponentially, costing the UK economy £73 billion per year. The Association of British Insurers confirms the cost of fraud to the UK insurance industry is approximately £1 billion per year. However, it is estimated that an additional £2 billion per year goes undetected, and as the cost of claims continues to haemorrhage the industry, insurers are looking for a solution.
Most counter fraud resources concentrate on combating motor fraud which continues to be a significant issue, but fraudsters invent new ways to commit fraud. It is no surprise they have turned their attention to the more discreet areas of employers’ liability and public liability (EL/PL) fraud.
When the global financial crisis hit in 2008, the unemployment rate was a little over 5 per cent or 1.6 million. Firms have continued to lay-off staff as economic recovery faltered. Consequently, there are many people unemployed, in financial dire straits and living off the “never never”. This generates a lack of respect towards large institutions and individuals more willing to claim against them. Television advertising and spamming by claims management companies promising “no win no fee”, “100 per cent compensation” and a “totally free service” hasn’t helped matters.
Effect of the Jackson reforms
With legislation expected to curb claims management companies’ business (ban on referral fees between “regulated persons”) coupled with abolition of the recoverability of success fees and ATE insurance premiums from the defendant (the claimant will have to pay these himself), the industry is seeing a surge in personal injury claims.
Although annual numbers of EL claims have fallen, statistics show there are around 88,000 employers’ liability claims each year, of which approximately 70 per cent are successful. With increased focus on paying genuine claims quickly, one questions whether the proposals to extend the road traffic accident (RTA) portal to all injury claims up to £25,000 leaves insurers vulnerable to fraudulent EL/PL claims, the costs of which are passed onto the insured in the form of increased premiums, or whether the portal has forced insurers to review their counter fraud processes. What is clear is that, operationally, insurers need to ensure that they are ready and have robust counter fraud systems in place from day one to deal with these sorts of cases. EL and PL cases are much more complicated than RTA cases and therefore extra care will be required.
Other changes include a potential ten per cent increase in general damages such as pain and suffering and loss of amenity and “qualified one-way costs shifting” (QOCS) which departs from the usual “winner takes all” approach to costs. It means that if a claimant loses his case, he will not be liable to pay the defendant’s costs unless “exceptional behaviour” such as fraud exists. One could argue this will weed out cases which are fraudulent, as a claimant will risk exposure to significant costs risks where fraud exists. The flip side of that coin is that there are significant costs risks for the insurer since, unless the trial judge makes a finding of fraud or strikes out the claim, the defendant will not be entitled to its costs even if it wins. This will inevitably impact on an insurer’s bottom line.
So what is EL/PL fraud? It can range from the “no loss claim” (there was a genuine accident but no loss) to the scenario where an incident is fabricated. We have even seen instances of self-inflicted injury (although these are very rare) and grossly exaggerated claims are perhaps the most common species of fraud in an EL/PL context. They are also arguably the most difficult cases because they involve a genuine element, technical arguments and complicated damages calculations. Time will tell as to whether the potential ten per cent increase in general damages referred to above will see an increase in these sorts of cases.
The industry requires the full force of the law behind it in order to win the on-going battle against fraud. Case law on how to deal with cases where there is a genuine claim contaminated by dishonesty forms an important part of its arsenal.
Guidance from the Supreme Court
For instance, in the case of Fairclough Homes Ltd v Summers (which involved a genuine accident at work but a grossly exaggerated claim) the law for the first time recognised that the court has the power to strike out the whole claim (even the genuine parts) either by exercising its powers under CPR 3.4(2) or under its inherent jurisdiction, although it will only do this in exceptional circumstances, usually where a fair trial is not possible because there has been a serious abuse of process.
Disappointingly, the court did not strike out the genuine claim despite a serious abuse of process and sufficient evidence to prove fraud to a criminal and civil standard. However, the Supreme Court did note that those who commit insurance fraud should “expect to go to prison” and there have been a number of successful committal cases both before and following Summers. In the recent county court decision of Fari v Homes for Haringey (see our briefing), the judge was prepared to strike out a claim worth less than 0.5 per cent of the pleaded value and to endorse contempt proceedings against the claimant.
The combined effect of this recent spate of litigation is that it demonstrates a much welcomed shift in judicial attitude to insurance fraud, which, together with the support of the industry’s media machinery, will hopefully go some way to having the desired deterrent effect.