Generally offences related to fraud are either defined in the penal codes or in certain countries like Finland, Norway, Luxembourg and Czech Republic where there are specific laws to deal with insurance fraud.
Fraud is described by the Oxford English dictionary as, among other things: "the quality of being deceitful," criminal deception, the using of false representation to obtain an unjust advantage or to injure the rights or interests of another or the use of a dishonest trick. There is no actual definition of insurance fraud in most civil or common law jurisdictions, the offence of insurance fraud, therefore falls to be dealt with as deception and dishonesty,1 since making a fraudulent insurance claim is not a clear offence, hence the evidence is to be considered under various provisions of criminal law.
It is evident that making a fraudulent insurance claim is not a clear offence; the evidence brought must be considered within the frame work of various provisions of the criminal law. What can be regarded as insurance fraud may be clarified by the case law on the subject. For example, it is not necessary to state the duty and consequence of breach in the insurance contract as these can be implied by law,2 where insured makes a claim or where there has not actually been a loss then this will be regarded as fraud. Where a claim is presented to the insurer using false evidence, than that is fraud.3
However, overvaluation of claims is an area of concern in insurance business. It is done to try and recover what one believes he is entitled to and often because one feels that the claim one has made can be negotiated with the insurer.4 In one case overvaluation of goods was not treated as fraudulent and it was termed a bargaining figure.5
However, in another case where true value of goods was multiplied by 100 at the time of submission of claim, the act was held to be fraudulent, 6 where the insurer is able to prove fraud on the policy then that will be sufficient for the insurer to avoid the entire policy and all claims under it. Where the insurer promises to pay the claim, and before doing so realises that the claim is not covered or is fraudulent, then the insurer will not be obliged to make payment. Where the act of committing fraud is detected at a later stage, the paid amount can be recovered.7 In such case the burden of proof lies with the one who claims that fraud has been committed. However it is a difficult task for insurer to prove such claims as the standard of proof required is much higher.
How a defence can be made by an insurer around the pleadings of law? A claim where fraudulent amount has been demanded can be defended by putting the Claimant to "proof of loss" and challenging that proof. In the cases relating to claims of risk, an innocent or negligent misrepresentation or non-disclosure can be argued, and it results in avoidance of the contract from inception where misrepresentation or non-disclosure was a material fact and the risk was underwritten by the underwriter. In such cases, the standard of proof is the "balance of probabilities" which can only be determined by an expert evidence.8
A plea of fraud by an insurer does not amount to repudiation of the policy of the insurer and it does not prevent the insurers from relying upon other defences, such as breach of claim conditions.9 The Privy Council made it clear that a plea of fraud by insurers does not remove their entitlement to rely upon other terms in the policy.
Where knowingly and wilfully false evidence has been given, the person can be prosecuted for perjury, however, the reality is that perjury is very difficult to prove. An insurer has to prove: (a) false statement: and (b) the fact that underlying facts were false.
In these matters, the United States applies Model Insurance Fraud Act, which stands enacted in most states. The law has defined the fraudulent insurance acts.10 Similarly "Unlawful Insurance Acts" have been defined.11 These Provisions cover both fraud committed against an insurer and fraud committed by an insurer or someone purporting to be an insurer or agent. The Model Act requires insurers to introduce anti fraud proceedings, 12 and to insert fraud warnings.13 The acts of fraud under the Model Act are criminal acts. However, the Act provides for restitution for an innocent party,14 the law also provides wide immunity for informants who reveal information of fraud.15
In United States insurance companies who decline to settle claims without showing extremely good reasons supported by strong evidence may face bad faith litigation. An insurance contract is a contract of good faith on both sides and where an insurer unreasonably refuses to pay a claim, it is considered to have acted in "bad faith." Such litigation is dependent on the test of "reasonableness."
It is an alien concept to English law. However, the court of appeal in one case observed that a duty of good faith does stand attached to an insurer who actually knows the facts it relied upon and the same have been undermined, such Act would be in bad faith.16
The court further observed that a failure to make any inquiry of the insured before taking the drastic step of avoiding the policy was a breach by the insurer of his duty of good faith. The courts have further laid down the following principles in this regard: (i) Where the Reinsurer simply refuse to control exercise, the reinsurer acts in bad faith:17 and (ii) an insured is entitled to recover damages for breach of contract, the courts have found it in favour of insurance by saying that there is no such thing as a cause of action in damages for late payment of damages.18
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates Karachi)
1. See, for example, the definitions of "Dishonesty", "Fraudulently" and "Wrongful gain" under Pakistan Penal Code. Section 24 defines the word "Dishonestly" as whoever does anything with the intention of causing wrongful gain to one person or wrongful loss to another person, is said to do that thing "dishonestly". The word "Fraudulently" under section 25 is defined as, "A person is said to do a thing fraudulently if he does that thing with intent to defraud but not otherwise". The word Wrongful gain has been defined in section 23 as; "Wrongful gain" is gain by unlawful means of property to which the person gaining is not legally entitled.
2. Briton v Royal Insurance Company (1866) F and F 905.
3. R.v Barnes (1843) I Car & Kir 65.
4. It is not clear from the case law whether or not over valuation or exaggeration of a claim amounts to fraud and it appears that it will depend upon the extent of exaggeration by the insured as to whether or not the courts may regard it as fraud.
5. Ewer v National Employers Mutual General Insurance Company {1937} 2 All ER 24.
6. Central Bank of India v Guardian Assurance Company {1936} 54 L ILR 24.
7. London Assurance v Clare {1937} 57 L ILR 247.
8. Where the insurer or reinsurer pleads misrepresentation then the contract will be avoided from inception. However if fraud is alleged and proved then the party who committed the fraud cannot bring an action based upon its own misfeasance, nor it can recover the premium it has already paid.
9. Super Chem. Products Ltd v American Life and General Insurance co Ltd (2004) All ER (D) 43 (January)
10. See, Section 2 of the Model Insurance Fraud Act.
11. Id. Section 3
12. Id. Section 11 (a)
13. Id Section 11 (b)
14. Id. See Section 5
15. Id. See Section 10
16. Drake Insurance PLC V Provident Insurance PLC (2003) EWCA Cir 1834.
17. Eagle Star Insurance Co Ltd v J.N Croswell and others (2004) EWCA Cir 602.
18. The provident of India v Lips Maritime Corporation (1988) AC 397.