Insurance Contracts CP - Law Reform Commission

F
Effects of fraud
8.27 Once the fraudulent claim is discovered, the courts hold that the entire claim is forfeit. In
Galloway v Guardian Royal Exchange (UK) Ltd 46 the victim of a burglary submitted a claim for £18,000,
including in the claim an item which did not exist which was estimated at £2,000. The entire claim was
rejected. There is a de minimis rule which is uncertain in its application. Some judges take the view that
if the fraud is an unsubstantial element in a large claim it will not necessarily taint the claim eg a loss of
0.3% of the claim in Tonkin v UK Insurance. 47 Eggers is critical of the Tonkin approach 48 but the Law
Commissions appear to side with the Tonkin decision:
―The courts are clearly right to reject the idea that policyholders are allowed some margin of
fraud, so as to increase claims by 10%, 5% or even 1%. On the other hand, the issue of
whether the fraudulent element of the claim is more than minimal must be looked at in the
context of the claim itself. We think it would be wrong to state that the courts should never
consider the amount of the fraud as a proportion of the claim. A misrepresentation which
appears substantial in the context of a £20,000 claim may be viewed differently in the context
of a £2 million claim. 49
8.28 However, it is only the claim that is made fraudulently that is forfeit, as English 50 and Scottish 51
cases in recent years have made clear.
8.29 Generally, while the definition of fraud follows the tried and tested patterns laid down in cases
such as Derry v Peek 52 there are some refinements. Because of the wording of some general clauses
against ―fraudulent devices‖ and ―fraudulent instruments‖ the judicial analysis takes account of these
express terms. MacGillivray explains:
―If the assured makes a claim where he has suffered no loss or claims for a loss which he has
himself caused, insurers do not need to rely on any condition relating to fraudulent claims; but
in practice, where the circumstances are suspicious, it may be much easier to show that the
assured has made a fraudulent statement in the advancement of his claim than it is to show
that he wilfully destroyed his own property. The clause thus enables the assurers to assume a
lesser burden and still defeat the claim. This approach had the full support of, at any rate,
Willes J in his summing-up to the jury in Britton v Royal Insurance Co:
―Of course, if the assured set fire to his house, he could not recover. That is clear. But it is not
less clear that, even supposing it were not wilful, yet as it is a contract of indemnity only, that is,
a contract to recoup the insured the value of the property insured by fire, if the claim is
fraudulent, it is defeated altogether. That is, suppose the insured made a claim for twice the
amount insured and lost, thus seeking to put the office off its guard, and in the result to recover
more than he is entitled to, that would be a wilful fraud, and the consequence is that he could
not recover anything. This is a defence quite different form that of wilful arson. It gives the goby
to the origin of the fire, and it amounts to this – that the assured took advantage of the fire to
make a fraudulent claim.‖ 53
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[1999] Lloyd‘s Rep IR 209; Micro Design Group Ltd v Norwich Union Insurance Ltd [2005] EWHC 3093 (TCC);
Aviva Insurance Co v Brown [2011] EWHC 362 (QB) shows that where the fraud is discovered before all
payments have been made, it will not matter what percentage of the claim is tainted as long as it is not de
minimis.
[2006] EWHC 1120 (TCC).
In Soyer, Reforming Marine and Commercial Insurance Law, p.239.
Issues Paper 7, para. 326, citing Tonkin at para 3.27.
Agapitos v Agnew [2002] EWCA Civ 247; Axa General Insurance Ltd v Gottlieb [2005] EWCA Civ 112.
Fargnoli v GA Bonus Plc [1997] CLC 653.
(1889) 14 AC 337 at 374 per Lord Herschell.
Para 19-057, citing Britton, reported at (1866) 4 F & F 905 at 909.
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