Fraud

What is fraud?

The FOS believes that there are two essential components of insurance fraud:

  • an intention to deceive;
  • a desire to induce the insurer to pay more than the true entitlement.

Both components must be present for fraud to occur ( Ombudsman News 21).

Like the courts, the FOS has had to address the problem of cases where a valid claim is made but where “fraudulent devices”, such as forged documents, are used to support it. So, for example, a policyholder may produce forged receipts to support a claim. This is not in itself conclusive evidence of fraud. Although the use of forged documentation is to be deprecated, the claim itself may be entirely genuine. In such circumstances there is no desire to induce the firm to pay more than the true value of a genuine claim. There is, therefore, no fraud. More rarely, it may be that the policyholder is unaware that the receipts are forged. Again, in such circumstances, there is no fraud.

An exaggeration is not always fraud. Nor is a genuine mistake regarding either the original purchase price or the replacement cost of a lost item. The FOS gives as an example the fact that many people believe their cars to be worth more than they are in reality.

What evidence is required?

The FOS states that the fact that members of the insurer's staff are personally convinced of the claimant's bad faith is not sufficient proof of dishonesty. This is no doubt a reference to the syndrome of “the claims manager's nose”. Those who deal with claims on a day-to-day basis frequently believe that they have a feel for when a claim is fraudulent. Whether they are right or not, it is clear that they will not be supported by the FOS unless they are able to produce more objective evidence.

In particular, the FOS will expect to see two things:

  • concrete evidence of lies, inconsistent statements or acts of deception;
  • evidence of a desire to induce the firm to pay more than the true entitlement.

The latter requirement may be difficult to meet as it can require an analysis of the claimant's motives. It is advisable for a firm to carry out the necessary investigations at an early stage. By the time the matter is referred to the FOS, it may well be too late to uncover any new evidence and the claimant, if fraudulent, will have had ample opportunity to concoct an explanation.

The fact that the claimant may have lied in another context is not sufficient proof of fraud in a current claim. For example, a loss adjuster investigating the claim may draw the insurer's attention to the policyholder's conduct in connection with an earlier claim under a different policy. Such evidence may raise doubts about the policyholder's honesty, but it is not conclusive proof of fraud in the current case.

What action should an insurer take?

If an insurer suspects fraud it should make its views known to the policyholder, who may then respond to the allegations.

The FOS will not support an insurer which, suspecting fraud, uses a spurious technical reason to reject a claim.

If a firm can put together sufficient evidence to give a strong indication of fraud, the FOS may decline to deal with the complaint on the basis that it is more appropriate for the matter to be determined by the courts. This is particularly so where evidence from third parties is involved, since in a court evidence may be taken under oath, and witnesses may be cross-examined.

Fraud at the time of application or renewal may entitle an insurer to avoid the policy from outset.

Fraud at the time of claim will not entitle an insurer to avoid the policy from outset. There are instead two possibilities:

  • If the fraud is perpetrated only in order to recover a genuine loss and does not affect the insurer's ultimate liability, then the policyholder will still be able to recover his losses and the policy will remain in force.
  • If the fraud would affect the insurer's ultimate liability, or amount to a fundamental breach of contract, the insurer may forfeit the policy from the date of claim. This means that cover will cease and the claim will not be paid. It will not be able to recover payments made in connection with earlier claims in the absence of evidence of earlier fraud.

Two examples from Ombudsman News 42 illustrate this approach:

  • A plumber made a claim under a household policy for personal possessions and work tools stolen from his van. The loss adjuster instructed by the insurer wanted purchase receipts for all items. Unable to produce receipts, the plumber arranged for a friend to forge one. On discovering the fraud, the insurer set aside the policy from outset, declined to pay the claim, and demanded that the plumber return a payment made in respect of a previous burglary claim. The FOS indicated where it felt part of the fault lay: “The loss adjusters had, in fact, been rather overzealous in insisting on strict proof of purchase for all the items stolen.” In fact, the fraud had not affected the insurer's liability for the loss. Accordingly, the FOS instructed the insurer to reinstate the policy and pay the claim. Nor was the insurer entitled to recover the earlier claims payment.
  • A policyholder submitted three estimates in support of a water damage claim. The insurer established that all three had been produced by one contractor, who had already carried out other work for the policyholder. Further genuine estimates showed that the three estimates were exaggerated. As a result, the fraud would have increased the insurer's liability. The FOS therefore supported the insurer's decision to forfeit the policy and decline to pay the claim.