Introduction

With policyholders still feeling the impact of the cost of living crisis and with business insolvencies running at their highest since 1993 and, by all reliable accounts likely to exceed that later this year, most insurers (and their teams of counter-fraud investigators) will be carefully scrutinising any insurance claims submitted for the possibility of fraud.

Given this backdrop it is timely and helpful to remind brokers, and anxious policyholders, about some of the key issues involved in fraud and what needs to be considered in such cases.

It is also worthwhile highlighting that brokers should be wary and make proper enquiry of their policyholder clients in respect of the claim and what is being said and claimed, to ensure they provide the correct advice/warnings to their policyholder clients before submitting the claim onto the insurer.

Background

Unlike most contracts where the maxim caveat emptor (‘let the buyer beware’) applies, contracts of insurance are different because it is the prospective policyholder who has the knowledge of its own business, and the insurer must assess the risk based on what it is told. In Britton v Royal Insurance Co [1866] Willes J said, “The contract of insurance is one of perfect good faith on both sides, and it is important that such good faith should be maintained.”  In a similar vein, an insurer is duty bound to treat its customer fairly in accordance with the FCA’s Insurance Conduct of Business Sourcebook.

Since the parties have to comply with this duty of utmost good faith, common law imposed the fraudulent claims rule which is now set out at section 12 of the Insurance Act 2015.  This means that, subject to the crucial exception of collateral lies (considered further below), where a policyholder has falsely presented its claim, the insurer is not liable to pay the claim, including those parts of the claim that are genuine.  In addition, the insurer can give notice to terminate the contact and keep any premium it has received.

Definition of fraud

Whilst sections 12 & 13 of the Insurance Act provides an insurer with statutory remedies when its policyholder makes a fraudulent claim, unhelpfully, the Insurance Act does not define ‘fraud’ or ‘fraudulent claim’ so common law principles must be used to determine their meaning.

The usual starting point is that “fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false.” (Derry v Peek [1889]).

The important point to emphasise is whether the policyholder acted dishonestly or was reckless as to whether what was said was honest.

What might be considered a fraudulent claim?

Some examples might include:

• submitting a claim where there has been no loss.
• deliberately inflating the value of a claim.
• making a false statement about the circumstances of the loss.
• making a false statement about compliance with contractual conditions.

Collateral Lies

As mentioned briefly above, there is an important exception to the principle that a policyholder will lose their right to an indemnity under the insurance policy if the claim is justified but the information given in support of it is dishonestly embellished.

In Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2016] the Supreme Court held that where a policyholder tells what are termed ‘collateral lies’ (lies that are immaterial to the existence or amount of the claim) the insurers cannot refuse an indemnity.

The reason for this exception is because there is a substantial difference between the position where an insured deals fraudulently with insurers to gain something to which it is not entitled, as opposed to an insured who dishonestly embellishes or ‘gilds the lily’ with falsified evidence but stands to gain nothing more than the insured is legally entitled to in any event.

Sometimes the difference between the two becomes blurred and the circumstances/factual matrix requires careful consideration and analysis to determine whether there is a fraudulent claim or a collateral lie.

Further, the policy wording itself should be carefully examined to establish if it expressly excludes a claim where the insured makes a false statement or submits a false document in support a claim (where the insurers may have taken on board the last sentence of Lord Mance’s dissenting judgement in Versloot).

Key factors to bear in mind when considering fraud

When considering if a fraudulent claim has been made the court will have regard to the following:

• If an insurer alleges its policyholder has been fraudulent the insurer has the burden of proof to prove that allegation – it is not for the policyholder to disprove it although, if it can, that helps!

• The burden of proof for insurance fraud is based on the balance of probabilities – the civil standard of proof as opposed to the criminal standard.

• Given the serious implications the court will require an insurer to provide “strong and cogent evidence” to discharge this burden.

• The test used by the court to consider whether a policyholder has been dishonest was clearly set out by the Supreme Court in Ivey v Genting Casinos (UK) Ltd [2017] as being: i) by determining what the policyholder’s knowledge or belief was about the established facts (the subjective element); and ii) based on those facts, determining whether the individual’s conduct was honest or dishonest by applying the standards of ordinary decent people (the objective element). It does not make any difference if the policyholder felt their conduct was not dishonest.

• All the circumstances known to the policyholder at the time of the alleged fraud will need to be examined (not what the policyholder might have subsequently found out).

• A court will have regard to the personal attributes of the policyholder, such as their experience and intelligence, and explanation as to why they acted as they did.

The above requires careful and objective consideration of all the available evidence to establish the reasons why the policyholder acted in the way they did and, in this regard, context is everything.

My ‘Top 10 Tips’ for brokers advising their clients about interviews requested by insurers

When the insurer suspects there is a potential for fraud being involved with the claim, they will usually appoint an investigator.  Frequently the broker will receive an email from such an investigator ‘requiring’ a face-to-face interview with the policyholder.  In such circumstances it is important for the broker to ascertain the following:

1. What is the purpose of the interview?

2. Has the investigator provided a list of questions they intend to ask?

3.What does the policy wording say about interviews?

4. Does the policy give the insurer or the investigator power to compel attendance by the policyholder?

5. Who is going to advise the policyholder during the interview? Does that adviser have experience of handling such interviews?

6. What warnings have been given to the policyholder regarding the interview by the broker or the adviser?

7.Has clarification being provided as to whether the interview to be recorded? Recording the interview ensures fairness to both parties and should prevent any bias slipping into a subsequent statement made during or following an interview about what was said (or not said).  It might also be crucial to understand the ‘way’ in which it was said. 

8.  Check what was said in the original notification of the claim and whether that needs to be clarified and what corroborative evidence there is.   

9. Trying to rectify or row back later from an inadvertent comment made during an interview is always far more difficult and uncertain.

10. Interviews are always stressful for policyholders and brokers should warn their clients very carefully about whether to attend an interview with an investigator on their own or whether the client is better advised to have their own representative present (who is experienced in dealing with both insurance matters and interviews by investigators) at any such interview. It may save the policyholder (and broker!) anxiety later on.

Conclusion

So, what are the key things to be borne in mind during any interview? 

Firstly, for the policyholder, it is essential to stick to the facts of the incident, don’t embellish or invent things because you can’t remember details (and never make assumptions, even if pressed by the interviewer). In the present climate insurers and their investigators will be looking out for anything that looks/sounds remotely suspicious. It is always worth seeking advice from your broker if unsure about any aspect of the claim.

Secondly, for the broker, take care when being asked by a policyholder to make a notification on their behalf. 

Consider the claim and give appropriate and adequate advice to the policyholder before submission of the claim. It may avoid difficulties arising later on.

Thirdly, if the policyholder client is requested to attend an interview make sure that, as a broker, you have considered whether the client has to attend and, if so,  ensure the client is given clear advice about the interview and always consider whether the client should obtain representation. Failing to provide such advice might be regretted later.

Finally, and most importantly, a policyholder facing a claim declined or a policy avoided due to fraud will have difficulty obtaining any future insurance. Brokers can in some circumstances (not all) avoid this occurring by ensuring they are duly diligent when reviewing the policyholder’s claim initially and advising them appropriately before submitting the claim to insurers.

Problems overlooked at the notification stage are always much more difficult to unpick later especially once passed onto the insurers.  Obtaining early advice is usually well worthwhile.

Roger Jones is a Partner of Wynterhill LLP.

This post is intended to provide guidance of a practical nature but does not contain legal advice or advice as to what action you should or should not take specific to your insurance needs or those of your business, or with regard to any particular situation.