English Law’s Response To An Insured’s Fraudulent Representations - Part 1

Over the course of two articles, we consider English law's response to fraudulent representations made by an insured in the course of insurers' investigations (the subject of this article) and in statements made in litigation proceedings which induce settlement (the subject of the next article).

Fraud can come in many guises: from deliberately deceiving underwriters on the nature of the risk to be insured, to exaggerating the circumstances or extent of any loss. Insurers often have to rely upon information provided by insureds when assessing claims which could, unbeknown to insurers, include misrepresentations by the insured intended to obtain a higher settlement amount or achieve payment more quickly. In this article we consider English law's draconian approach to fraudulent statements and how insurers could better identify potentially untrue statements.

1. Introduction

   It is well understood that the insured owes a duty of utmost good faith, including in respect of any claims presentation and co-operation. That duty includes not making fraudulent claims or using fraudulent devices. The duty applies throughout the parties' relationship.

2. Fraudulent Devices

   A fraudulent claim is one in which an insured knowingly seeks a benefit to which it is not entitled. Fraudulent devices were historically distinguishable from fraudulent claims and have been defined by the English Court of Appeal[1] as "[t]he making of statements which are known by the insured to be untrue or which are made recklessly, not caring whether they are true or false, in support of a claim honestly believed by him to be good both as to liability and amount". Most commercial policies will include an express term providing that in the event of a fraudulent claim the insured forfeits all benefits under the policy. Absent an express term, the English common law imposes such a requirement pursuant to the duty of good faith.

   Where fraud is established, the claim fails in its entirety (including that portion which is genuine and indemnifiable) and the policy may be terminated, even in circumstances where an insured could have successfully maintained the claim without the use of fraud. This principle seeks to ensure that an insured will not gain from the use of fraud and will lose everything if fraud is employed. The principle is draconian by design to deter the deception of insurers who have no or little knowledge of the incident giving rise to the claim.

3. Versloot Dredging: The High...