Should insurers have to honour subsequent claims on a policy once a fraud has been uncovered?
Over the last three years, the Law Commissions of England and Wales and Scotland have conducted a series of consultations on insurance-related matters. The latest – ‘Insurance contract law: the insured’s post-contract duty of good faith’ – was released in early July. It addresses the issues arising from one of the fundamental components of the insurance contract: the good faith of the insured, and concentrates on the matter of fraud by the insured.
The current common law position is that the whole of a claim tainted by fraud is forfeit, but that other outstanding and even subsequent honest claims against the same policy must be honoured. The commissions ask whether this is appropriate and whether any reform to this state of affairs should be embodied in statute.
The commissions believe clarification of the law would be beneficial and that this would be achieved by repealing the prescriptive provisions of section 17 of the Marine Insurance Act 1906.
The commissions advocate a formal restriction (albeit already in de facto existence) on the remedies available to insurers in the face of fraud.
The commissions go on to propose that insurers be allowed to retain the right to terminate a contract in the face of fraud and so limit their liability for future claims, but that claims submitted between the occurrence of the fraud and the termination should be honoured.
So how should insurers react to this proposal? Certainly there is an argument that an insurer ought not be forced to honour additional, or even pre-existing, obligations made to a subsequently discredited insured. Surely the occurrence of fraud calls into question the good faith of all representations, past and present.
Fraud is difficult to detect; the commissions should see by proposing a liability for other claims, they do not recognise that those claims may be honest only in appearance, not in substance.
Perhaps the benefit of the considerable doubt that a proven fraudulent claim creates in the insurer/insured relationship should be given to the insurer. A mutual duty of good faith is so fundamental to the operation of an insurance contract that when one of the parties breaches that duty, the whole basis of their relationship is tainted and the contract should be considered void.
It is some time since the days when insurers enjoyed the full benefit of the protection afforded by Section 17 of the Marine Insurance Act. Pragmatism suggests that acceptance of a clearly codified, but hopefully somewhat extended, remedy of forfeiture may be the best that insurers can hope for.
Also susceptible to being overturned may be the commission’s proposal that insurers be entitled to claim damages from an insured in the form of the reasonable and foreseeable costs of investigating a fraudulent claim.
But such costs should only be recoverable in so far as they are not recouped by the saving made in avoiding the legitimate elements of partially fraudulent claims. This limitation seems both unworkable and inequitable and should surely be abandoned in favour of a straightforward recovery option. It might be expected that the commissions would advocate a more robust approach.
Mike Noonan is head of strategic claims management at QBE European Operations