Tackling Insurance Fraud

Law and Practice

Lynne Skajaa, Dexter Morse

• Publisher: Informa Law from Routledge
• Year: 2020
• ISBN:
  9781000341409
• Edition: 1
• Topic: Diritto
• Subtopic: Diritto finanziario

Insurance fraud is a growing problem on a global scale. The ABI estimates that fraudulent insurance claims on motor and household policies alone cost insurers in excess of £1 billion every year. This book provides an analysis of the insurance industry's response to the problem and examines fraud from legal and practical perspectives to determine how to manage and reduce fraud. Key issues covered include: fraud in the insurance and reinsurance context, a look at industry-wide initiatives and individual insurance companies' approaches to the problem, consideration of recent legal developments and a look at how insurance fraud is tackled in other jurisdictions. Includes a chapter on marine insurance fraud.

CHAPTER 1

WHAT IS INSURANCE FRAUD? HOW DOES THE LAW VIEW IT?

WHAT IS INSURANCE FRAUD?

Very few countries have specific laws to deal with insurance fraud. The few that do include Finland, Norway, Luxembourg, the Czech Republic and Turkey.

If there is no specific criminal offence of insurance fraud then insurers must rely on the criminal offences of deception and dishonesty to prosecute offenders.

THE UNITED KINGDOM

Fraud is described by the Oxford English dictionary as, among other things: “the quality of being deceitful”; “criminal deception, the using of false representations to obtain an unjust advantage or to injure the rights or interests of another” and “a dishonest trick”. The second definition comes closest to the meaning of fraud at law. Unfortunately, there is no actual definition of “insurance fraud” in UK criminal legislation, or indeed in most civil or common law jurisdictions. Any offence of insurance fraud therefore falls to be dealt with as deception and dishonesty. In the UK, the appropriate crime would be an offence under the Theft Act 1968, gaining a pecuniary advantage by deception. The most appropriate sections are ss 15, 16 and 17.

Section 15 of the Theft Act 1968 states:

15 (1) A person who by any deception dishonestly obtains property belonging to another, with the intention of permanently depriving the other of it, shall on conviction of indictment be liable to imprisonment for a term not exceeding ten years.

15 (2) For the purposes of this section, a person is treated as obtaining property if he obtains ownership, possession or control of it and “obtain” includes obtaining for another or enabling another to obtain or retain.

15 (3) For purposes of this section “deception” means any deception (whether deliberate or reckless) by words or conduct as to fact or as to law, including a deception as to the present intentions of the person using the deception or any other person.

The term “property” in s 15 is interpreted widely and includes the settlement offer made by an insurer in settlement of a claim. This section can be used by insurers to deal with fraudulent claims.

Section 16 of the Theft Act 1968 provides that:

“16 (1) A person who by any deception dishonestly obtains for himself or another, any pecuniary advantage shall, on conviction on indictment, be liable to imprisonment of a term not exceeding five years”

16 (2) states a list of the situations in which a pecuniary advantage within the meaning of Section 16 is to be regarded as obtained. It includes the situation where someone “is allowed to borrow by way of overdraft, or to take out any policy of insurance or annuity contract, or obtain an improvement of the terms on which he is allowed to do so”. “16 (3) For the purposes of this section, deception has the same meaning as in section 15”

Section 16 is relevant for prosecution purposes in situations where the policyholder has told lies on inception to obtain insurance or where the policyholder told lies to receive better insurance terms than he should have done. Similarly in the reinsurance context, the placing of an insurance risk and obtaining cover when dishonestly deceiving the underwriter would also breach this section and would be regarded as fraud.

Section 17 of the Theft Act 1968 makes it clear that it is also a criminal offence to provide a false account. It states that:

“17 (1) where a person dishonestly, with a view to gain for himself or another or with intent to cause loss to another,—

(a) destroys, defaces, conceals or falsifies any account or any record or document made or required for any accounting purpose, or

(b) in furnishing information for any purpose produces or makes use of any account, or any such record or document as aforesaid, which to his knowledge is or may be misleading, false or deceptive in a material particular;

he shall, on conviction on indictment, be liable to imprisonment for a term not exceeding seven years.

17 (2) For the purposes of this section a person who makes or concurs in making in an account or other document an entry which is or may be misleading, false or deceptive in a material particular, or who omits or concurs in omitting a material particular from an account or other document, is to be treated as falsifying the account or document.”

Section 17 is also relevant for insurers where the claimant provides a false account to defraud the insurer—this is particularly appropriate in large and complex fraud cases.

The common law offence of conspiracy to defraud is also useful and is dealt with in s 1 of the Theft Act 1968.

Of less practical importance for insurers but still useful is s 20 of the Theft Act 1968, which deals with the procuring of a valuable security by deception.

As making a fraudulent insurance claim is not a clear offence, any evidence must be considered under the various sections of the Theft Act 1968. This makes the law in this area, and the insurer’s position unclear. The Theft Act 1968 was updated in 1996 to cover fraudulent activities in the banking field, which would have been an ideal opportunity to add a new section creating an offence for insurance fraud. Sadly, this opportunity was missed.

CASE LAW

To some extent, case law has helped to clarify what can be regarded as Insurance Fraud. The case law itself will be dealt with specifically in Chapter 4, so only a few points will be dealt with here by way of outline.

According to MJ Willes in Britton v Royal Insurance Company,¹ it is not necessary to state the duty and consequences of breach in the insurance contract as these can be implied by law. Britton also makes it clear that if the insured makes a claim when there has not actually been a loss then this will be regarded as fraud. The case of R v Baynes,² establishes that if a claim is presented to the insurer using false evidence, then that is fraudulent. The insurance policy may require the insured to make a statutory declaration verifying his claim and the particulars (Statutory Declarations Act 1835). Indeed, the clause may go a step further to provide that such a declaration will be prima facie evidence that the loss is not of a kind excluded by the policy. However, such a provision does not prevent the onus for proving his loss at the trial from remaining upon the insured. This was confirmed in Watts v Simmons.³ Furthermore, it is a criminal offence knowingly and wilfully to make a false statement in a statutory declaration (s 5 of the Perjury Act 1911).

One area of concern for insurers is the overvaluation of claims. Often an insured will inflate a claim simply to try and recover what he believes he is entitled to and often because he feels that insurers will negotiate down the claim the insured actually presents to his insurer. It is not clear from the case law whether or not overvaluation or exaggeration of a claim amounts to fraud and it appears that it will depend upon the extent of the exaggeration by the insured as to whether or not the courts will regard it as fraud. Unfortunately, however, the courts have taken a rather schizophrenic attitude to these types of cases. For example, in Ewer v National Employers Mutual General Insurance Company,⁴ a claim in which the insured claimed for the current market value of damaged goods when all he was entitled to was the second-hand value and which was described as “preposterously exaggerated,” was not held to be fraudulent, merely a “bargaining figure.” However, in complete contrast in Central Bank of India v Guardian Assurance Company,⁵ where the true value of the claim was multiplied by 100 when the claim was submitted, the exaggeration was held to be fraudulent. It was established in O’Connell v Pearl Assurance,⁶ that the deliberate and wanton overvaluation of insured items to inflate a claim will be regarded as fraud.

The case of Orakpo v Barclays Insurance Services,⁷ illustrates that if the insurer is able to prove one fraud on the policy then that will be sufficient for the insurer to avoid the entire policy and all claims under it, including legitimate ones. If the insurer promises to pay the claim, but before doing so realises that the claim is not covered or is fraudulent, then the insurer will not be obliged to make the payment unless he was legally liable. However, if the insurer makes a payment in respect of a claim believing it to be legitimate, but later discovers that it was fraudulent then according to London Assurance v Clarke,⁸ the insurer may recover the money he has paid out but would not be entitled to recover any monies that he has incurred in actually investigating the claim (such as loss adjusters’ fees).

THE BURDEN OF PROOF

If an insurer disputes the entitlement of an insured to make a claim then the insured has the onus of proving the circumstances of the loss to establish that it falls within the scope of the insurance policy. However, if in its defence to the claim the insurer alleges that it is not obliged to pay the claim because the insured has committed a crime—fraud—then the onus, or the burden of proving the crime, is on the insurer. The onus of proving fraud is very difficult for the insurer, which partly explains why there are so few prosecutions for insurance fraud in the UK.

Although an insurer’s claim for fraud is a civil suit, the standard of proof is much higher than usual, because it is necessary to establish criminal intent in a civil context.

Fortunately for insurers there are other ways around the pleading of “fraud” in English law. For example, insurers or reinsurers can defend a claim by putting the claimant to “proof of loss” and challenging that proof. No fraud is alleged but the result achieved is actually the same—the non-payment of the claim. If the allegation involves the placing of the risk then it is possible to argue that there has been innocent or negligent misrepresentation or nondisclosure, which results in avoidance of the contract from inception, provided that the misrepresentation or non-disclosure was of a material fact and that the underwriter was induced by it to underwrite the risk. The standard of proof involved in this situation is the “balance of probabilities” with proof of materiality being determined by expert evidence and proof of inducement from evidence from the actual underwriter involved, or if he is not available it can be inferred. There therefore appears little point in pleading fraud in English law; however, there is one advantage that such a claim can bring. If the insurer or reinsurer pleads misrepresentation then the contract will be avoided from inception, claims that have already been paid and premiums are returned and the parties are put in the position that they would have been in if the contract had never existed. However, if fraud is alleged and proved then the party who committed the fraud cannot bring an action based upon its own misfeasance, nor can it recover the premium it has already paid—these “profits” would be retained by the insurer or reinsurer as a “windfall” from the soured deal.

It has long been considered in English law that if an insurer who defends a claim by alleging fraud against the insured is not able to rely upon any other defence, which means that if the fraud of the insured is not actually proven, then the insured will be able to recover under the policy no matter what. This is no longer true following the recent decision of the Privy Council in Super Chem Products Limited v American Life and General Insurance Company Limited,⁹ which makes it clear that a plea of fraud by an insurer does not amount to a repudiation of the policy by the insurer and thus does not prevent the insurers from relying upon other defences, such as breach of a claims condition. In this case the insured’s chemical factory was destroyed by fire on 3 April 1990. The insured’s insurance provided cover for material damage and business interruption. Condition 13 of the policy stated that, “If the claim be in any respect fraudulent, … or, if the claim be made and rejected and an action or suit be not commenced within three months after such rejection … all benefit under the policy shall be forfeited”. In November 1991 the insurers denied liability on the basis that the insured had been guilty of arson and that proceedings had not been brought against the insurers within twelve months of the date of loss as stipulated in the policy. The insured commenced proceedings against the insurers in the Trinidad courts. The allegations of fraud were not made out in court and it was therefore left for the Privy Council to determine whether or not the insurers could now rely on the contractual...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Foreword
• About the Authors
• Table of Contents
• Table of Cases
• Table of Legislation
• Introduction
• Chapter 1 What is Insurance Fraud? How Does the Law View It?
• Chapter 2 The Typical Insurance Fraudster—Is There Such a Thing?
• Chapter 3 Insurance Fraud Indicators
• Chapter 4 Fraud in Insurance Law Generally
• Chapter 5 Fraud in Marine Insurance Law
• Chapter 6 Fraud in the Reinsurance Law Context
• Chapter 7 The Insurance Industry’s Response
• Chapter 8 Recent Developments—A Hindrance or a Help to Tackling Insurance Fraud?
• Chapter 9 The Approach of Other Countries to the Problem of Insurance Fraud
• Chapter 10 Conclusions
• Bibliography
• Index