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Zero tolerance begins with fixing fraud clauses

01 October 2011 Donald Dinnie, Norton Rose

All insurers have active anti-fraud campaigns in place and generally adopt a zero tolerance approach to fraudulent claims. They typically rely on fraud terms within the policy document. However, the courts often interpret fraud-based claims rejections dif

The South African Insurance Association (SAIA) Code of Conduct provides that insurers must reject claims where evidence exists that the claim is fraudulent, to the extent that the policy allows them to do so. In terms of the code, members of SAIA are unequivocally opposed to fraud and improper conduct and will do everything in their power to identify, verify, investigate and prevent such behaviour. They are also expected to participate in combating fraud and improper conduct by sharing information amongst members and keeping the South African Insurance Crime Bureau (SAICB) informed of cancellations of a contract where it is found the insured acted fraudulently or in an improper manner.

No easy fraud rejection

Over the past two decades insurers have been frustrated in their efforts to adhere to the code by judgments that have limited the insurers’ ability to successfully reject claims on the basis of fraud – of course, each case is dependent on its facts.

In 1984 the appellate court in Lehmbeckers’ Earthmoving Excavators (Pty) Limited v Incorporated General Insurances, held that the phrase “all benefits under this policy shall be forfeited” meant that from the time the fraudulent claim was made, the insured should have no further benefit or claim under the policy. A valid claim which had already accrued remained untouched by the insured’s subsequent unrelated fraudulent claim.

In the 1990 judgment of Videtsky v Liberty Life Insurance Association Limited, the court found that the relevant fraud was not directed towards inducing the insurer to pay an amount which it was not obliged to pay. The court said that the insurer who desires additional protection when fraudulent claims are submitted would have to insert a protective term into the contract. There was no need for the law to amplify what the insurer saw fit not to do.

In Fourie v Centresure (1997), the policy provided that if any statement made in support of any claim was an untruth or concealment, all benefits under the policy would be forfeited. The insured made statements to the assessor regarding progress in the matter which was later admitted to contain untruths. The court found that, on the facts, the untruth or concealment were not made in support of the claim but made to the assessor during investigations about the possible cause of the fire and interpreted the fraud forfeiture clause against the insurer.

An unnecessary lie

In 2000, in Strydom v Certain Underwriting Members, the policy contained a clause forfeiting any benefit if any claim under the policy was fraudulent or fraudulent means or devices were used by the insured in obtaining a benefit under the policy. The insured knowingly made a false statement about the cause of the collision to conceal his negligence. It was not, however, necessary for the insured to make this admission, as he was insured against own negligence. The court, accordingly, found that the claim for damage to the vehicle was not affected by the false statement in the claim form. The statement could not have influenced the insurer as a prudent insurer to accept, reject or compromise the claim of the insured.

In 2003, the Supreme Court of Appeal in Schoeman v Constantia Insurance Company Limited authoritatively stated the position of the common law regarding fraud and insurance policies, holding that there is no implied term that a fraudulently exaggerated loss results in forfeiture of all claims under the policy. In the absence of a fraud clause only the fraudulent part of the clause is forfeited.

In 2004 the Supreme Court of Appeal in South African Eagle Insurance Company Limited v KRS Investments CC declined to introduce a doctrine of forfeiture of valid claims, untainted by fraud, that accrued contractually before a policy is terminated for fraud.

In 2009, the court in Springgold Investments (Pty) Limited v Guardian National Insurance Company Limited, in interpreting the liability exclusion “if any claim is in any respect fraudulent, or if any fraudulent means or device are used by the insured to obtain any benefit under this insurance”, held that to interpret the clause literally as giving the insurer the right to avoid liability even if the benefit sought is one to which the insured was entitled, would produce startling and unintended results. The court said that to successfully rely on that fraud clause, the insurer would have to prove that the misrepresentations relied upon by it were made and that they were fraudulent in the sense that they were made knowingly with the intention of obtaining a benefit under the policy.

Prejudice must be proved

What these judgments have done is to establish that at common law, there is no implied term entitling an insurer to deny an entire claim for fraud which is in part fraudulent; under common law, fraud can only be relied on if it prejudices the insurer; fraud clauses in policies will be restrictively interpreted; and success lies in carefully wording the fraud clause.

Where they are carefully worded, an insurer can successfully rely on the fraud clause in the policy. That was done in 2002 in Hiepner v SA Eagle which provided that if any claim under the policy is in any respect fraudulent, all benefit under the policy would be forfeited. The insured claimed genuinely for the loss of his vehicle, but fraudulently for other articles alleged to have been in the vehicle at the time of the loss. The insured had sought to argue that there existed two different claims separate from each other and that accordingly, the claim for the vehicle should be paid. The court found otherwise. There was only one insurance policy in terms of which the various articles were insured and the fraud clause could be relied on to reject the entire claim

In 2005, in Papagapiou v Santam Limited, the Supreme Court of Appeal also gave a fraudulent insurance claim short-shift. The insured had approached the loss adjuster with the request to inflate the damage to the property loss. The insurer, when it learnt of the fraudulent request to inflate the claim, rejected the claim relying on the fraud clause. The court found that the fraudulent conduct of the insured constituted fraudulent means or devices in order to obtain a benefit under the policy. It did not matter that the fraud was committed before the claim was lodged or that the loss adjuster had not acceded to the request to inflate the damage and that no fraudulent benefit had been obtained under the policy. The matter was upheld in favour of the insurer.

Keep it simple

Having regard to the judgments, and the ever increasing trend towards plain language use (including that which will be required by the Consumer Protection Act), insurers who adopt a zero tolerance approach to fraudulent claims would benefit from reviewing and, where necessary, amending their fraud clauses.

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