Winning the war on fraud

This year fraud leapt up the political barometer as three major initiatives made significant progress on this front. The insurance industry now has an opportunity to ensure that its voice is heard in regard to the plans.

There is no precise legal definition of fraud in English law and no single criminal offence that can be called fraud.

The current law on fraud is contained mainly in eight statutory deception offences in the Theft Acts 1968 - 1996, the offence of fraudulent trading in the Companies Act 1985 and the common law offence of conspiracy to defraud.

However, these and other statutory offences do not adequately encompass the infinite variety of fraudulent behaviour in modern-day society.

On 25 May 2005 the Fraud Bill was first introduced in the House of Lords. The bill sets out provisions for a general offence of fraud with three ways of committing it; by false representation, by failing to disclose information and by abuse of position.

Clause 2 makes it an offence to commit fraud by false representation. The person must make the representation with the intention of making a gain or causing loss or risk of loss to another. The gain or loss does not actually have to take place

Clause 3 makes it an offence to commit fraud by failing to disclose information to another person where there is a legal duty to disclose the information and does so to make a gain for himself or to cause loss to another.

Clauses 3 and 4 of the new Bill are close to the heart of the insurance industry. They complement the utmost good faith obligations of a proposer for insurance contained in sections 18(i) and 20(i) of the Marine Insurance Act 1906.

An offence could be committed under these clauses if a person intentionally fails to disclose material information or misrepresents material information when proposing for an insurance policy in order to obtain better (or any) cover, or cover at better rates.

Clause 4 makes it an offence to commit a fraud by dishonestly abusing one's position.

Accordingly if this Bill is given Royal Assent in 2006, no longer will insurance fraud be a square peg in a round hole within the criminal justice system.

The Attorney General, Lord Goldsmith, has also said that the government will seek affirmative resolutions from both houses of Parliament in order to implement Section 43 of the Criminal Justice Act of 2003.

Section 43 makes provision for serious and complex fraud trials to be conducted by a judge sitting without a jury.

The provision can only operate where the judge is satisfied that the length or complexity of the trial is likely to make it so burdensome upon the jury that the interests of justice so require, and The Lord Chief Justice gives his approval.

Hotly contested
He must first consider whether any case management steps can be taken to reduce that burden, but they do not have to be so significant that they will materially disadvantage the prosecution.

It remains to be seen whether, in the current political climate, the government will push ahead with this hotly contested reform, which has been described as the thin end of the wedge by legal and political commentators alike. The move is opposed by many in the legal profession, notably by both the Bar Council and the Law Society.

This is a long overdue reform reflecting nothing more than common sense. Lay juries simply do not have the ability as an eclectic group of "12 good men and true" to dissect, follow and interpret complex financial transactions and then seek to apply what are themselves complex legal tests in order to establish culpability.

Insurance fraud in the commercial arena, when detected, may potentially come within this regime.

Perhaps the most significant initiative of all was Lord Goldsmith's announcement that a wide-ranging review will consider the scale and costs of fraud (both direct and indirect) to the country, the role of government and industry in tackling it, as well as its prevention, detection, investigation and prosecution or punishment.

He said: "We must make sure that our laws and procedures are fit for a modern age so that we can tackle sophisticated economic crime vigorously and effectively."

A review team has been established which will report jointly to the attorney general and the chief secretary to the Treasury by late spring of 2006. This team will consult widely with stakeholders in the public and private sectors before delivering its report.

Proportionate voice
In view of the conservative estimate that personal lines and commercial fraudulent claims amount to £1.5bn per annum, compared to the total cost of fraud to the economy of £14bn a year, the insurance industry must demand a fully recognised and proportionate voice in this review process.

However, those in the industry charged with defeating fraud should recognise that more practical advancements in the fight against fraud could be made by taking an active role in the Law Commission's project on insurance contract law reform when the scoping study is published in January 2006.

The forthcoming Law Commission review should also be seen as an opportunity.

If it can be persuaded to carry out a root and branch review, rather than a 'tinker around the edges' looking at the old chestnuts of non-disclosure and breach of warranty, the industry should seize upon this chance to effect real reform in order to lead the global insurance marketplace.

While the debate will cover far more than simply the impact of fraudulent claims, there can be no reason why any draft Insurance Law Review Bill produced by the Law Commission cannot include a statutory definition of fraudulent conduct consistent with the new Fraud Bill.

The Act could set out the consequences of insurance fraud for all to recognise, thereby putting an end to ambiguous policy wordings and an unclear set of common law rules. IT

' Nick Young is a partner at Davies Arnold Cooper