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Insurance fraud and fraud clauses

28 April 2021 Donald Dinnie, Norton Rose Fulbright
Donald Dinnie, Norton Rose Fulbright

Donald Dinnie, Norton Rose Fulbright

The Supreme Court of Appeal in an April 2021 judgment dealt with the interpretation and  application of a fraud clause found in the policy..

The clause read:

“If you, or anyone acting on your behalf submits a claim, or any information or documentation relating to a claim, that is in any way fraudulent, dishonest or inflated, we will reject the entire claim and cancel your policy retrospectively, from the date on which the incident has been reported, or from the actual incident date, whichever date is earliest.”

An employee of the insured had submitted false, untrue and misleading information regarding the claim.

The evidence was provided during an investigation process initiated by the insurer well after the claim had been lodged by the insured.  There was no suggestion that the employee was asked by the insured to fabricate anything that was not true.  The insured was not even aware what the employee was going to say to the insurer.

While the information provided was untrue, the court found that there was no examination of the employee directed to the question whether he was supplying information “on behalf of” the insured. Any ambiguity regarding the meaning of that phrase in the fraud clause should be resolved against the insurer.

Ordinarily “acting on behalf” denotes agency which the employee was not.  So there was no reason why the employee who was clearly just a witness as to how the incident occurred should be elevated to an agent for or acting on behalf of the insured in providing his version of the event.

To interpret the phrase more broadly as being “acting for the benefit or the interest of another” would not, said the court, be in keeping with the drastic consequences of the insured being penalised for fraudulent or dishonest information emanating from a third party.

Even if the broader meaning was applied the evidence did not show that the employee had perceived himself to be acting for the benefit of or in the interests of the insured.  His purpose in providing dishonest information was to shield himself from adverse consequences whether at the hands of the insurer or the insured.

The judgment is correct but it again highlights the need for insurers to review and carefully consider the wording of fraud clauses used in a policy in the light of this and other judgments where the courts have and will restrictively interpret the meaning of words and phrases used.  The acts of an employee should however only be attributed to the insured if the employee is expressly or impliedly mandated to perform the act on behalf of the insured e.g. to complete the claim form.

First published by: Financial Institutions Legal Snapshot

 

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