Fraud in insurance claims affects us all. In 2011, the Association of British Insurers estimated that insurance fraud costs around £2 billion per year. To put this into perspective, it adds £44 to the average UK household’s annual insurance bill. In 2012, insurers detected over 124,000 cases of general insurance fraud. How many went undetected?
Types of fraud
Fraud can arise in different ways:
- A fraudulent claim that is fabricated in some fundamental respect (eg, based on an event that never occurred).
- A genuine claim supported by fraudulent evidence, commonly known as a “fraudulent device”.
Types of claims
- Contractual claims under an insurance policy.
- Liability claims where a claimant claims against another party who is insured. The defendant’s insurers ultimately pick up the bill for the claim but there is no contractual relationship between the claimant and the defendant’s insurers.
The effects of fraud
Although frustrating for many insurers, the effect of fraud and fraudulent devices are different depending on whether the claim is contractual or liability based. Why? For contractual claims, insurers rights are governed by insurance law and the insurance policy (ie, are insurers entitled to decline cover under the policy?). For liability claims, the question is whether there is enough for a court to exercise its power to strike out the claim as an abuse of process.
In more detail
Contractual claims (ie, those brought under insurance policies)
You should always check the terms of the relevant insurance policy, as it may expressly set out the effect that fraud will have on a claim. Generally, insurers are entitled to decline cover for the whole claim where a fraudulent claim has been brought. This is not surprising because of the relationship of good faith between the insurer and the insured.
In contrast, the effect of a fraudulent device is more fact specific. The policyholder may still be entitled to recover on the genuine elements of the claim. Currently, insurers are entitled to decline cover for the whole claim if the fraudulent device is directly related to the claim and is intended to promote it, and “not insignificantly” improves the policyholder’s chances of recovery from insurers.
In Versloot Dredging v HDI Gerling the judge at first instance suggested another test, namely that there must be a sufficiently close connection between the claim and the fraudulent device to make it just and proportionate that the otherwise valid claim should be forfeited. Unfortunately, the judge considered he was bound by precedent and applied the existing two stage test set out above. An appeal to the Court of Appeal is pending.
Earlier this year, fraudulent devices were considered by the Privy Council in Beacon Insurance v Maharaj. At first instance, the judge held that a policyholder who had altered purchase invoices in support of a genuine fire claim had not been dishonest. The Court of Appeal overturned his decision, but the Privy Council reversed that decision, concluding that the Court of Appeal had advanced no reason that could justify its substitution of a conclusion of dishonest recklessness for the first instance judge’s assessment of mere carelessness. This demonstrates how fact sensitive this area of the law can be.
Claims against non-insurer defendants are dealt with differently to “contractual” insurance claims. There is an interesting distinction between direct claims against insurers and liability claims for which an insurer is ultimately paying. Third party liability claims are much harder for insurers to avoid paying out on.
Where a liability claim involves a fraudulent device, the court may strike it out as an abuse of process (Fairclough Homes v Summers). However, despite there being a serious abuse of process and sufficient evidence to prove fraud to a criminal standard, the genuine elements of the claim were not struck out. The court said that, although they had the power to strike out the whole claim, it was difficult to think of circumstances in which such a conclusion would be proportionate other than a “massive attempt to deceive the court”. Ultimately, the court will only strike out the entire claim in very exceptional circumstances.
This seems strange as one might expect the courts would want to actively discourage people from producing fraudulent evidence as well as making fundamentally fraudulent claims against non-insurer defendants.
A practical application of Fairclough was seen in Fari v Homes for Haringey. The local authority successfully applied to strike out Ms Fari’s personal injury claim. Ms Fari claimed over £740,000 following her fall over a cracked paving stone. She alleged her fall resulted in mobility problems, the need for a knee replacement, and the lost opportunity of fostering children. The local authority obtained video footage demonstrating that Ms Fari had exaggerated the nature and extent of her claim. The court held that Ms Fari’s claim was an abuse of process, as the true value of her claim was assessed at £1,500. The claim was struck out in its entirety.
While Ms Fari had a valid claim, it was worth a tiny fraction of the amount claimed and that wild exaggeration was her downfall.
How does this affect you?
Ultimately, the impact for the insurance industry of fraudulent claims and devices can be huge. While the courts appear to still be finding their way in terms of dealing with this issue, it is important that we all do what we can to prevent such claims from going too far.
As insurance brokers, you are generally the first port of call for any claim by or against your clients. A working knowledge of the law may help to discourage insureds who are tempted to embellish their claims with disastrous results.
It is also important to remember that the law is changing. The law on insurance fraud is soon to be placed on a statutory footing in the Insurance Bill currently before Parliament. Similarly, the law on liability claims is under review and legislation may be introduced soon to enable courts to dismiss personal injury claims that are “fundamentally dishonest”.
From a broker’s perspective, if facing a negligence claim, there may be a causation defence that the claim against the insurer was fraudulent and so would not have been paid by insurers regardless of the broker’s negligence. Again, knowledge of the law on fraud may prove invaluable in such situations.