The Commissions’ repeated view is that the remedies available to insurers in respect of fraudulent claims are “convoluted and confused”. It is not just the Commissions which have voiced concern. As was recently highlighted in the Commercial Court decision in Versloot Dredging BV & So DC Merwestone BV v HDI Gerling Industrie Versicherung AG & Ors [2013] 2 Lloyd’s Rep 131 (in which Ince & Co acted for the successful insurers; click here to read our briefing note), there are also members of the judiciary who are concerned as to the appropriateness of the (perceived) draconian and inflexible remedy of forfeiture of an otherwise valid claim in the event of the employment of a fraudulent device.

In the DC Merwestone, Mr Justice Popplewell commented, in the context of a fraudulent device defence, that “The blunt instrument of a relatively inflexible test of materiality… must surely be capable of yielding to a more proportionate response, which can meet the varying circumstances of each case”

Despite those concerns, and Popplewell J’s call for a “more proportionate” flexible case-by-case approach, the Commissions have, in line with the views of the vast majority of the respondents in the consultation process, proposed a default statutory regime which would provide that in the event of an insured committing a fraud in relation to a claim, the insurer should: (a) have no liability to pay the fraudulent claim; and (b) have the option to terminate its liability to pay out in respect of losses after the fraud; but (c) remain liable for legitimate losses before the fraud. If sums have already been paid out in respect of a claim that transpires to be fraudulent, those sums may be recoverable. The Commissions comment that the ability to recover them will be a matter for the law of unjust enrichment.

The draft Bill does not define the term “fraudulent claim”, the Commissions preferring to leave the concept to be developed by the common law. However, in their January 2014 commentary on the initial draft clauses, the Commissions did provide some guidance as to what would constitute a “fraudulent act”, the behaviour which the Commissions anticipate would make a claim fraudulent. Reference is made to the five classes of fraud identified by Lord Justice Mance in Agapitos v Agnew & Ors “The Ageon” [2002] Lloyd’s Rep IR 573, including fraudulently exaggerated claims and the use of a fraudulent device to support a genuine claim. We therefore expect that the concept of the fraudulent claim will remain broadly as currently understood, with the proposed legislation bringing a greater certainty to the consequences of the fraud.