For as long as there are insurance products, there will be fraudulent claims. This seems certain.
We revisit the law relating to fraudulent claims and draw attention to one recent development in this area.
Historically, there have been three different types of fraudulent claims:
1. Entirely fraudulent claims.
There are two types:
a) Loss or damage to property is caused by the insured’s deliberate actions, fraudulently portrayed as accidental.
b) A fraudulent fabrication of the existence of the loss or damage in the first place.
2. Genuine claims that the insured fraudulently exaggerates.
3. Genuine claims that the insured fraudulently bolsters.
We address each in turn.
Entirely fraudulent claims
a) Common-law
Technically, an insurance policy does not require a term that addresses fraudulent claims. This is because the common-law (case-law that sets precedents) already prohibits fraudulent claims and provides a remedy for them.
Without becoming too legalistic, the common-law position in New Zealand differs from that in England.
In England, a fraudulent claim is treated as a breach of the rule that a wrongdoer cannot profit from his or her own wrongdoing. It is not treated as a breach of the duty of utmost good faith. This distinction is not academic because this means the remedy of avoiding the policy for a breach of the duty of utmost good faith (e.g., a breach of the duty of disclosure) is not available. In England, the only common-law remedy for the insurer is to be released from the claim payment.
In New Zealand, a fraudulent claim is treated as a breach of the duty of utmost good faith. This lays open the path to not only non-payment of the claim, but also to avoidance of the policy. This leads to the further issue of whether the avoidance is retrospective or not. This is not presently clear from the case-law in New Zealand.
As most insurers are content to simply not pay the claim, the avoidance issue has not been litigated further in New Zealand. In certain circumstances the issue is real. For example, if in the same policy year, the insured makes a fraudulent claim and subsequently makes a genuine claim, can the insurer not only refuse to pay the fraudulent claim, but also allege that the contract came to an end as result (avoidance) and be relieved of paying the second genuine claim?
b) Policy term
If a term of a contract expressly addresses an issue such as fraudulent claims, this overrides the common-law. Because of the uncertainty of the common-law in New Zealand it is perhaps not surprising that nearly every policy does.
Most insurance policies expressly include a term that gives the insurer not only the remedy of non-payment of the claim, but also the discretion to bring the policy to an end from the date of the fraudulent act. This term will give the insurer the right to legally refuse to pay the second genuine claim in the example above.
c) Fraud by a third party
The insured must commit the fraudulent act.
However, there are two situations where the insured can be tainted with fraud by the actions of another party:
• Where the insured is a company, the actions of a director or senior manager of the company can be attributed to the company itself, making the company’s claim fraudulent.
• Where the insured adopts the material statements of a third party to pursue the claim without investigating the truthfulness of the statements. The third party will be the insured’s agent and if the third party’s statement is fraudulent, the insured becomes tainted with that fraud.
d) Section 11 Insurance Law Reform Act 1977
In an early case in New Zealand, the court held that section 11 was potentially available to the insured to save a fraudulently exaggerated claim.
However, subsequent cases have corrected this and confirmed the section does not apply. This must be right. One of the requirements for section 11 to apply is that the insurer’s promise to pay under the policy:
… is so defined because the happening of such events or the existence of such circumstances was in the view of the insurer likely to increase the risk of loss occurring …
This is addressing events or circumstances before the loss occurs, not a fraudulent exaggeration afterwards.
Genuine claims that the insured fraudulently exaggerates
For an insurer to rely on this ground of fraud, the insurer must prove that the insured knew the claim amount exceeded a proper figure.
The courts will accept a certain amount of ‘horse trading’ about the quantum of the claim. An inference that the claim is not honestly made may be justified where the claim is greatly exaggerated.
It is difficult to know where to draw the line between genuine negotiation and fraudulent exaggeration. Generally, the courts look at the degree of the exaggeration; obviously, the greater the exaggeration, the easier it is to impute fraud by the insured.
Genuine claims that the insured fraudulently bolsters
The English Supreme Court recently clarified the English position where the insured uses fraudulent means to bolster what the insured doesn’t apparently realise is already a genuine claim.
While the Supreme Court upheld the existing law about fraudulently exaggerated claims, it said it was a step too far and disproportionately harsh to deprive an insured of his or her claim because of fraudulent conduct when the claim was always recoverable.
In reaching that decision, the Court held that there is an important difference between a fraudulently exaggerated claim and a legitimate claim supported by fraudulent evidence. In the former case, the insured is seeking to obtain something that he or she is not entitled to. However, in the latter case, the fraudulent evidence does not entitle the insured to obtain anything more than the insured’s legal entitlement. The Supreme Court referred to the fraudulent evidence as a ‘collateral lie’.
While this decision is not technically binding on a New Zealand Court, we expect a New Zealand Court will follow this decision of England’s highest court.
Summary
1. The New Zealand common-law allows an insurer to refuse to pay an entirely fraudulent claim. It may also allow the insurer to avoid the policy from the date of the fraudulent act.
2. A term of an insurance policy stating the remedies for fraudulent claims will apply instead of the common-law.
3. The fraud must be committed by the insured, unless the insured’s position is tainted by the fraudulent actions of an agent that the insured supports.
4. The courts tolerate an element of ‘horse trading’ about the legitimate quantum of the claim. The greater the insured’s exaggeration though, the more likely the court is to find the insured’s position fraudulent.
5. The New Zealand Courts are likely to adopt the English law that a collateral lie made in relation to a genuine claim does not allow the insurer to decline the claim.
Please feel free to contact us if you require any further information.
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Crossley Gates | cgates@keegan.co.nz
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Frank Rose | frose@keegan.co.nz
