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ombudsman news

issue 42

December 2004/January 2005

insurance fraud: case studies

In issue 41 we set out our approach to some aspects of insurance fraud, concentrating on "immaterial" fraud and the remedies available to the insurer.

Among the key points we set out, we noted that although a policyholder has a duty to act in "utmost good faith", the onus is on the insurer to show "beyond reasonable doubt" that a fraud has taken place. If the fraud is perpetrated only in order to recover a genuine loss and does not affect the insurer’s ultimate liability, then the policyholder will still be able to recover their losses. If the fraud is sufficiently serious to:

  • affect the insurer’s ultimate liability; or
  • entitle the insurer to repudiate the policy for fundamental breach of contract;

then the firm will be able to "forfeit" the policy (refuse to pay the claim or provide any future cover). We do not generally believe it is fair or reasonable for insurers to "avoid" policies retrospectively in cases of fraud.

The following are a few summaries of insurance cases involving fraud that we have dealt with recently.

42/3
policyholder forges documents in the course of making a valid claim – insurers wrongly attempt to "avoid" entire policy

Mr H was a self-employed plumber. In January, his home was burgled and he made a claim under his home insurance policy, which the firm duly paid. In May, his van was broken into and a number of personal possessions were stolen, including the tools he used for his work. He made another claim to the firm under the personal possessions section of his home contents policy.

During the course of its enquiries, the firm’s loss adjusters insisted that Mr H substantiate all his losses with original purchase receipts. Mr H was unable to find all the receipts, so he asked a friend to fake one for him.

When the firm discovered the forged receipt, it "avoided" the policy – in other words, cancelled it from the start. The firm not only refused to pay for the items stolen from the van, it also tried to recover the money it had previously paid out to Mr H for his earlier burglary claim. After complaining unsuccessfully to the firm, Mr H came to us.

complaint upheld
The firm accepted that the theft from the van was genuine. Mr H had been foolish to obtain a forged receipt but he was not dishonestly trying to obtain something to which he was not entitled. The loss adjusters had, in fact, been rather overzealous in insisting on strict proof of purchase for all the items stolen.

We applied the rationale of "The Mercandian Continent" case (reported in [2001] Volume 2 of the Lloyd’s Law reports at page 563) which concerned the principle of "utmost good faith". Ultimately, the case held that insurers should only be able to "avoid" a policy for fraud where the insurer’s ultimate liability was affected, or when the fraud was so serious it enabled the insurer to repudiate the policy for fundamental breach of contract.

Following this rationale, we concluded that the fair and reasonable solution was for the insurer to reinstate the policy and pay the claim. In any event, it was unlikely that the firm’s ultimate liability would be affected by the fraud, as Mr H’s work tools were specifically excluded from the home policy. Home policies often exclude cover for contents or possessions that are for business rather than personal use.

We also pointed out to the firm that even if Mr H had been guilty of fraud, it would only have been entitled to "forfeit" the policy from the date of the current claim, leaving the earlier burglary claim intact. It was not entitled to recover previous payments for valid claims.

42/4
policyholder supplies misleading and fraudulent documents in the course of making a valid claim – insurers able to "forfeit" policy from the date of the claim

Miss J made a claim under her general household policy for "escape of water" damage. As the damage was reasonably limited, the firm simply asked her to send in repair estimates. She provided three. The firm discovered that all three estimates — purporting to come from different contractors — were fraudulently produced by one contractor who had carried out extensive works for Miss J in the past. The firm considered Miss J to be guilty of fraud. It cancelled her policy and refused to deal with the claim. Miss J then bought her complaint to us.

complaint rejected
Miss J had already admitted supplying false information to the firm, and in an attempt to resolve the matter, had produced further – genuine – estimates from independent contractors. However, these merely served to show the extent to which the prices quoted in the fraudulent estimates had been exaggerated.

Once again, we applied the principles of "The Mercandian Continent" case (see case 42/3). If the fraud had not been discovered, the firm would have ended up paying more in compensation than was properly required of it, and more than Miss J was legally entitled to. To this end, the fraud affected the firm’s ultimate liability and was a fundamental breach of contract.

Having applied that rationale, we decided that the firm had been entitled to "forfeit" the policy from the date of the claim.

42/5
policyholder purposefully gives wrong details of stolen items – insurers able to "forfeit" policy from the date of the claim

Mr G made a claim for goods stolen from his home during a burglary. Among the many items he claimed for were some Star Wars DVDs. This alerted the firm’s loss adjusters to the possibility of fraud, since at the time of the burglary the films in question had not been released on DVD. The firm rejected the claim and "forfeited" Mr G’s policy from the date of his claim. Mr G complained to us, arguing that he must have mistakenly claimed for pirated copies of the DVDs, and that this mistake did not warrant "forfeiture" of the policy.

complaint rejected
We were satisfied that this was a clear attempt to defraud the firm. There was evidence that showed "beyond reasonable doubt" – more than the usual civil requirement of "balance of probabilities" – that Mr G was claiming for something that he could never have owned. This higher standard of proof indicated that Mr G would still be guilty of fraud, even if the pirated DVDs did exist, since he had attempted to claim for legitimate copies.

The value of the DVDs was relatively small compared with the overall size of the claim, but we did not feel this was a case of "innocent and minimal exaggeration". Mr G had dishonestly claimed for something he was not entitled to. This went to the very root of the insurance contract, and was a breach of the policyholder’s duty to act in "utmost good faith" when submitting a claim.

We also felt that this fraud, and Mr G’s subsequent attempt to cover it up, cast doubt on the validity of the entire claim. The firm’s decision to "forfeit" was therefore fair and reasonable.

Walter Merricks, chief ombudsman

ombudsman news issue 42 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.