Insurance: fraudulent claims - circumstances where the whole claim may not be forfeited

An insurer settles a claim under a policy and enters into a settlement agreement with the insured to reflect this. It subsequently emerges that a portion of the claim was fraudulent. Can the insurer recover the full amount paid out to the insured on the basis of the fraud?

In a recent case the court concluded that the insured was not entitled to the fraudulent amount. But because there was a separate settlement agreement, the insured did not, by presenting the fraudulent portion of the claim forfeit the entire claim. He could therefore retain the amounts previously paid out by the insurer.

In this case, the insured made a claim under his household insurance policy following a fire. Insurers agreed to pay a total of £72,428.48 under the policy. Of this, £42,412.50 constituted the cost of repairs to the building and £4,112.50 for VAT on those repairs, subject to the insured providing invoices demonstrating the VAT payment. The agreement to settle the building repairs and VAT was set out in a settlement agreement and was recorded as being “in full settlement and discharge of all [the insured’s] Buildings claims” under the policy.

In fact, the invoice produced by the insured to substantiate his VAT claim was fraudulently generated and no VAT had been paid. The insurer challenged the legitimacy of the invoice, in light of which the insured attempted to withdraw the fraudulent invoice and admitted the fraud to the insurer. The insurer sought repayment of the entire £72,428.48 on the basis that the Insured had submitted a fraudulent claim and therefore forfeited his whole claim (whether or not the remainder was legitimate).

The court held that:

1. it was common ground that presenting a fraudulent claim results in the entire claim being forfeited, even if part of it is genuine. Similarly if an insured seeks to rely on a fraudulent device (a fraudulent embellishment to support a genuine claim) the entire claim is forfeited;

2. in this case, however, the claimant had not advanced a fraudulent claim or relied on a fraudulent device to claim under the policy. Rather, according to the court, the settlement agreement was a separate agreement which contained a condition precedent to payment of the VAT that the insured submit a legitimate invoice evidencing payment of such a sum. The insured had attempted to comply with this condition precedent by submitting a misleading document;

3. as such, the insured was not entitled to recover the VAT claim, but was not obliged to refund the entire claim.

Although the judge did not explain fully the reasoning behind the decision, it appears that the key aspect to him was that there was a separate settlement agreement between insurers and the insured. Because there was a separate settlement agreement, any complaint arising out of the settlement would fall to be dealt with under the settlement agreement not the policy. This reasoning is only relevant where there is a separate agreement between the parties. If insurers are simply quantifying and paying a claim under a policy, then insurers can rely on all the legal principles relating to fraudulent claims and fraudulent devices.

Fraudulent claims are likely to continue to increase in light of the economic downturn. The courts have stated that for reasons of public policy an insured should not be allowed to succeed with the genuine portion of his claim if he puts forward a fraudulent element. Were the position otherwise, the insured could fraudulently exaggerate his claim knowing that there was no down side in doing so: the legitimate claim still gets paid. This public policy still has some force where a settlement agreement is being considered (although it is worth bearing in mind that the insurer may have other defences, such as misrepresentation, to fall back on). But in any event, it is expected that the courts will scrutinise very closely whether or not there is in fact genuinely a separate agreement between the parties, rather than simply a quantification of a claim under the policy.

Further reading: Direct Lines Insurance Plc v Fox [2009] EWHC 386