Insurance Contracts CP - Law Reform Commission

―The problem is that two people may act together in taking out insurance, but may act
separately at the time of the deliberate destructive act or fraudulent claim. If, for example, a
wife asks her husband to take out insurance on their home we think it is fair to hold her
responsible for the husband‘s lie on the application form. It would be unfair, however, to hold
her responsible for her husband‘s arson or wilful fire-raising several months later, especially
where this constituted an attempt on her life.‖ 78
8.47 The limited reform that the Law Commissions put forward on this question is as follows: a
presumption should be enacted which provides that, when insurance is secured by two or more persons
to insure their joint interests, any fraud committed by one party should be regarded as having been done
by all parties. Should a joint policyholder prove the act or omission was not done on their behalf or with
their knowledge the innocent policyholder‘s share of the claim should be paid. 79 On the scope of the
recovery remedy the Law Commissions ask:
―Should the legislation provide that the recovery will be limited to the innocent insured‘s own
interest, and will only be payable if the guilty insured would not benefit from any recovery? 80
8.48 The Commission has reached the conclusion that, on the forfeiture rule of law for post contract
formation fraud, the law, as it has generally developed, rightly seeks to encourage honesty and good faith
dealings in the presentation and authentication of claims. 81 The Commission agrees that the approach
taken in the courts in England and Scotland in isolating section 17 of the Marine Insurance Act 1906 from
this duty is a sensible one. The remedy that would be available if section 17 (or indeed the duty of good
faith at common law were to govern this situation) that is, retrospective avoidance, would be
unacceptable and disproportionate in its effects.
8.49 However, the Commission also considers it odd that in the co-insurance situation the law
draws a distinction between joint insurance and composite insurance for the purpose of the forfeiture
provision insofar as an innocent party under a composite policy could recover even if payment on the
composite policy would benefit the wrongdoer. The Commission notes that Rix J, in State of Netherlands
v Youell and Hayward 82 suggested that even under a composite policy forfeiture may apply if in effect the
wrongdoer benefits from the innocent parties‘ claim. The Commission thinks that any formulation of the
forfeiture rule in Irish law should require the courts to ―police‖ the innocent claim, regardless of the nature
of the policy. To this extent the British Columbia proposals appear to be soundly based. On the
substantive question of whether a move towards the ―modern approach‖ should be adopted, the
Commission would favour giving the British Columbia and Alberta position a detailed examination and
have formed the preliminary view that this kind of legislative development would be preferable to the
existing position and a more structured alternative to a broad judicial discretion along the lines of the
Australian 1984 Act, section 31.
8.50 The Commission provisionally recommends that the law should continue to provide that an
insured should be prohibited from recovering on a claim by submitting a fraudulent claim or fraudulent
evidence to support a claim; but that it should also provide that an innocent co-insured or beneficiary may
recover on a proportionate basis; provided that the fraudulent insured cannot benefit from the policy.
H
Is there a duty in claims processing?
8.51 The two most important observations on the duty of utmost good faith that may be owed by an
insurer to an insured given by the English and Scottish courts suggest a strong difference of opinion. In
78
79
80
81
82
Issues Paper, para 5.48.
Issues Paper 7, paras 5.49 and 7.46.
Issues Paper 7, paras 5.49 and 7.46, endorsing Higgins v Orion Insurance Co Ltd (1985) 17 DLR (4th) 90,
discussed at para. 5.28 of the Issues Paper.
In Chapter 10 the Commission will discuss whether a broader power to allow linked claims as part of a judicial
discretion should be introduced.
[1997] LRLR 94.
175