Plenty to lose in third party fraud

When does fraud not justify forfeiture? When it's a third party claim. The law is now well enshrined as to the effect of fraud or exaggeration in claims made by policyholders against insurers (first party) following last year's decision by the Court of Appeal in AXA v Gottleib.

However, exaggerated or fraudulent claims by third parties are treated quite differently in law as forfeiture will not apply.

Where claims are made by policyholders the law is crystal clear. If a claimant policyholder has acted fraudulently, then the whole of the claim can be rejected and any interim payments recovered.

In the AXA case, the policyholder made two claims and was paid in respect of property damage.

Subsequently, the insurer sought to recover its outlay as it had discovered that the claims were tainted with fraud and therefore the whole of the claim was liable to be forfeited. (A cross-appeal in respect of other non-fraudulent claims on the policy succeeded, but it is not relevant for the purposes of this discussion).

The court was satisfied that the policyholder had made false claims exceeding £20,000 for the cost of alternative accommodation (which had not been used) and electrical work (which had not been carried out).

The Court of Appeal concluded [following Lord Hobhouse in the 2001 Star Sea judgment] that an insured who has made a fraudulent claim cannot recover the claim which could have been honestly made. This decision is not dependent on any contractual term in the policy.

The logic of the decision is that the fraudulent insured must not be allowed to think: "If the fraud is successful then I gain; if it is unsuccessful then I lose nothing."

Consequently, AXA was able to recover the whole of its outlay in respect of the claim, even though parts of the claim were not dishonest or fraudulent. Effectively the whole claim was forfeited.

It is interesting to contrast the outcome of the AXA v Gottleib case with fraudulent/exaggerated claims made by third parties.

Justice served
Two recent cases have exercised judicial minds with similar outcomes, namely Hussein v William Hill [2004] and Painting v Oxford University [2005].

In the Hussein case (a minor assault case where damages exceeding £250,000 were sought) Mrs Justice Hallett concluded that the evidence of the claimant and his two medical experts was so unconvincing that she was justified in referring the judgment and papers to the General Medical Council and the Director of Public Prosecutions.

Notwithstanding the judge's findings that Mr Hussein had "deliberately exaggerated [the claim] in the hope of persuading the defendants to settle out of court", he was awarded damages of £50.

Arguably the judge's displeasure at the claimant's fraudulent behaviour received appropriate reward in that the claimant was ordered to pay the defence costs and was therefore considerably out of pocket.

Painting v Oxford University also involved an exaggerated claim for damages, in this instance arising from the employer's negligence which had caused injury to the claimant. Liability was conceded at 80%.

An inflated claim of £500,000 was put forward, mostly relating to the claimant's loss of future earnings.

Video evidence obtained shortly before trial, however, demonstrated that the claimant was exaggerating her injuries (a finding made by the trial judge) who awarded her net damages of £25,000.

As can be seen, in the AXA case, the claim was forfeited by the fraud and yet in the Painting claim the claimant appears to have recovered £25,000 - or did she?

Significantly, the Court of Appeal disagreed with the trial judge's finding on costs.

Even though the damages award had beaten the defendant's payment into court of £10,000 the court looked more closely at the facts and invited the question: who was the real winner in this litigation?

As exaggeration was the central issue in the case, the judgment (allowing only 6% of the claimant's damages claim) was overwhelmingly in favour of the defence. Consequently, the claimant had to pay the costs of the trial which would have wiped out the damages and probably resulted in the claimant having to pay some defence costs out of her own pocket.

One might argue justifiably that in both cases "justice was done" as neither claimant benefited from their dishonesty.

In spite of this, it is a little disconcerting that the principle set out by Lord Hobhouse in the Star Sea case, namely that fraudsters should not be allowed to think they have nothing to lose by their fraudulent activity, has little or no application in third party claims.

Perhaps where courts conclude that claimants have sufficiently exaggerated claims as to be acting fraudulently then the whole claim should be struck out (as in first party claims) thereby discouraging fraudulent or dishonest behaviour.

No doubt insurers (including legal expense insurers) will continue to be vigilant in challenging or not supporting such claims.

The different approaches to first and third party claims is founded on the fundamental principle of insurance law that a contract of insurance is one of the utmost good faith.

It is undesirable to permit a policyholder who acts fraudulently to recover any part of his loss.

Disconcertingly, similar considerations do not apply to third party claims.

Maybe they should. IT

' Hugh Price is the director of insurance and a partner at Hugh James Solicitors