NZILA Vice-President’s message - Kavita Deobhakta*
Can you shut the door once the horse has bolted?
Is it legally possible for an insured to retract a fraudulent claim or part of a fraudulent claim once the claim has been made?
An insurance claim will be fraudulent, or based on fraud, where the claim is false and the insured intends to deceive the insurer by getting money or some other benefit the insured knows they have no right to.
A claim can only be fraudulent if the insured is dishonest or at least culpably reckless. The relevant test is whether the insured’s conduct was dishonest by the ordinary standards of reasonable and honest people, and the insured realised that, by those standards, their conduct was dishonest.
A fraudulent claim may fall into several categories. The English Court of Appeal summarised them in a 2005 decision, Agapitos v Agnew.
In particular, a claim will be fraudulent where the insured:
• has suffered no loss at all or the loss was self-inflicted
• intentionally claims an exaggerated loss
• believed at the time they had suffered loss but, having subsequently discovered no, or a smaller, loss was suffered, failed to correct the false information.
NZ courts view fraudulent claims as a breach of the duty of good faith owed to the insurer, and avoidance of the policy from the beginning is the appropriate remedy.
However, the UK and other jurisdictions have found the duty of good faith, and avoidance, have no place in the world of fraudulent claims and it is a breach of contract. When the fraudulent claim is made, at the least, the claim is forfeited. There is also an assumption the policy is repudiated and ceases to exist from that point on (as opposed to being void from inception).
Some policies have express policy conditions against fraudulent claims. A typical clause could read: “If any claim or part of a claim is made fraudulently or falsely, the policy shall become void and all benefit under this policy will be forfeited.”
From the insurer’s point of view, it does not have to pay the fraudulent claim. It may also be discharged from any further liability or claims payments under the policy and not be obliged to deal any further with the insured.
But can a fraudulent claim be withdrawn once it’s made?
Effectively, the answer is no. While an insured can withdraw or retract a claim, if the claim was fraudulent, they are saddled with the consequences. The situation has not come before the courts often, but there are a few cases that have considered it.
The basic principle is that a lie does not cease to be a lie just because the person who made it subsequently withdraws it. The consequences of making a fraudulent claim are not mitigated by a subsequent retraction. The law is vigilant to discourage insurance fraud and has zero tolerance for fraudsters.
In the 2006 Privy Council decision, Stemson v AMP Insurance, where the insured had burnt down his own house, a further issue arose as to whether he had lied when stating he had no intention of selling the house (when in fact he did have such an intention).
The insured subsequently admitted that fact before the claim was rejected. He argued the case should be seen as one where he had corrected the false statement voluntarily, rather than one where the lie was detected or unravelled by insurers. The court rejected that argument, saying a lie being detected or unravelled before a settlement or during a trial does not make it immaterial at the time it was told.
In the 2009 English decision Fox v Direct Line Insurance, the insured was paid substantial sums as a settlement for his fire-damaged home. He later sought to recover an additional amount, about £4,000, for expenditure he had not incurred. He withdrew the claim when he became aware the insurers suspected something was not right and had put their loss adjuster on the case again.
The court held it was not possible for the insured to withdraw the fraudulent claim as a matter of principle. There was a caveat that, even if the judge was wrong on that point, any withdrawal had to be voluntary and not because the insurer had discovered or was about to discover the fraudulent part of the claim.
In Fox, it was held that the insured had not technically made a fraudulent claim because, by the time he had requested the additional false payment of £4,000, the claim had been resolved through a binding agreement between him and his insurer.
Had that not been the case, the insurers would have been entitled to recoup all the claim, about £70,000-£80,000, despite only £4,000 being fraudulent. It seems overwhelmingly likely, especially in light of the Stemson decision, the NZ courts would take the same approach.
So what does this mean in practical terms?
The most serious consequences relate to a situation where part of a claim is fraudulent but another part is valid. While the insured may try to retract the fraudulent part of the claim (because of an attack of conscience or they realise the insurer has got wind of something suspicious and is going to investigate), it is too late.
Assuming the insurer discovers the part fraud, the result will be that no part of the claim is payable.
If the insurer has already made an interim payment for the claim (whether valid or not), that amount becomes repayable and the insurer can bring an action against the insured to recover it.
Even if a fraudulent claim is withdrawn or retracted, the insurer can publish those details on the Insurance Claims Register, where they will effectively remain in perpetuity with potentially serious consequences for the insured’s ability to obtain future coverage.
For the insurer, the situation is straightforward. The claim is not payable and the policy may potentially be avoided from the beginning or voided from that point. If the entire claim is withdrawn, it will not be paid.
But what if only one part or element of the claim is fraudulent? The position is less clear and needs to be considered depending on the facts and circumstances of each claim. Paying the “good” part of a claim might be seen by a court as acting inconsistently with insurers’ strict legal rights.
Fraud costs insurers and innocent policyholders significant amounts annually, so any attempts to dilute the consequences of fraud should be approached with caution. A retracted or withdrawn fraudulent claim should, in theory, never alter the fact of the original fraud itself.
The stable door cannot be shut once the horse has bolted.
* Kavita is a partner at Morgan Coakle. This article was prepared with Morgan Coakle lawyer Phillip McKinnon.
Welcome to the NZILA annual conference
As NZILA Auckland conference co-convenor, I look forward to offering delegates the opportunity to hear speakers present papers of global and national significance.
Auckland’s hospitality will be second to none, with plenty of beautiful food and wine.
The NZILA conference, on Wednesday 11 September to Friday 13 September, is at SkyCity, Auckland. The theme is: Awesome Tamaki Makaurau.