Commentary on Sections Part 4: Fraudulent Claims Section 12: Remedies for fraudulent claims
98.This section sets out the insurer’s remedies where the insured makes a fraudulent claim. It does not apply where a third party commits a fraud against the insurer or the insured, such as where a fraudulent claim is made against an insured, who seeks recovery from its insurer under a liability policy.
99.The section does not define “fraud” or “fraudulent claim”. The remedies will apply once fraud has been determined in accordance with common law principles.(22)
100.Section 12(1) puts the common law rule of forfeiture on a statutory footing. Where the insured commits a fraud against the insurer, the insurer is not liable to pay the insurance claim to which the fraud relates. Where the insurer has already paid out insurance monies on the claim and later discovers the fraud, the insurer may recover those monies from the insured.
101.Section 12(1)(c) provides the insurer with a further remedy. It gives the insurer an option to treat the contract as if it had been terminated at the time of the “fraudulent act”. This is dependent on the insurer giving notice of their election to do so to the insured.
102.The “fraudulent claim” is to be distinguished from the “fraudulent act”. The latter is intended to be the behaviour that makes a claim fraudulent, which may be after the initial submission of the claim. The timing of the “fraudulent act” is relevant in determining when the liability of the insurer ceases for the purposes of section 12(1)(c). For example, if an insured submits a genuine claim in January and adds a fraudulent element in March (for example, adding an additional, fabricated, head of loss), the “fraudulent act” takes place in March. This is the point at which the contract may be treated as having been terminated, and from which the insurer’s liability ceases.
103.Section 12(2) sets out the consequences if the insurer elects to treat the contract as terminated under 12(1)(c). It may refuse to pay claims relating to “relevant events” occurring after the time of the fraudulent act. It does not have to return any premiums already paid by the insured.
104.“Relevant event”, as defined in section 12(4), refers to any event that would trigger the insurer’s liability under the particular insurance contract. Usually, this will be the occurrence of loss or damage which is insured under the contract. However, some insurance contracts, such as professional indemnity insurance contracts, are written on the basis of a “claims made” policy. In such cases, the “relevant event” may be the notification of a claim against the professional, even where no loss has actually occurred.
105.Section 12(3) confirms that the insurer remains liable in respect of relevant events that took place before the date of the fraudulent act.