It is an unfortunate reality that fraud thrives in times of recession.
The cost of bogus and inflated claims is estimated by the Association of British Insurers (ABI) at more than £2.1 billion a year – costing the average policyholder an additional £50 in premiums. Yet, according to a 2009 YouGov/ABI survey, one in five would not rule out making a fraudulent claim in the future.
Although it is too early to gauge the extent of fraudulent activity that will be triggered by the COVID-19 pandemic, if historic trends are anything to go by, insurers should be prepared for a material increase.
Two English prosecutions brought by Allianz and Jet2 Holidays, serve as a stark warning to anyone tempted to pursue a fraudulent claim. And while the Scottish system does not allow such action against fraudulent claimants, insurers in Scotland shouldn't lose heart; decisions in recent Scottish fraudulent claims cases show that costs can be minimised if the right strategy is used.
Allianz Insurance v Fitzhugh Stephenson
In June this year, Allianz was successful in its private prosecution of Fitzhugh Stephenson, who made a false £4,000 personal injury (PI) claim. Stephenson originally submitted a claim solely for vehicle damage and hire, which Allianz paid. 19 months post-incident, he submitted a further claim for PI, triggering an investigation by Allianz which led to the amendment of its defence to fraud.
Despite Stephenson opting to discontinue his claim, the brazen nature of the fraud provoked Allianz to commence a private prosecution. Stephenson admitted he had been the subject of a cold call by a claims company and explained that he was encouraged to make the PI claim.
The Crown Court considered the fact that the fraud had persisted for over two years and that Stephenson had signed various false statements of truth. It was persuaded by Allianz's submissions, detailing the impact of fraud on the insurance industry and the knock-on effect to the cost of premiums. Stephenson was handed an immediate 12-month prison sentence, while Allianz recovered its full costs from central funds.
Jet2 Holidays Ltd v Hughes & Anor
Jet2 had a similar victory in the fight against fraudulent sickness claims in this 2019 English Court of Appeal decision, as described in our recent blog. . A couple commenced their claim under the PI pre-action protocol and served witness statements, verified by statements of truth. The claim was later withdrawn prior to formal proceedings commencing. Contempt of court proceedings were then issued after Jet2 uncovered social media evidence that contradicted the couple's allegations of food poisoning.
This ruling confirms that the High Court has the power to find individuals in contempt of court where false statements, made under a pre-action protocol and verified by statements of truth, are submitted by a potential claimant.
The significance of these decisions is that fraudulent claims were previously often submitted on the basis that, if rejected, proceedings would not have to be issued. Hence, the fraudster is exposed to no risk.
Indeed, earlier in 2019, the Court of Appeal in Zurich Insurance Ltd v Romaine stated that it was aware of this method being used, whereby "tranches of deliberately low-value claims (sometimes on an industrial scale)" were issued, only to discontinue if fraud is alleged.
Fortunately though, the Allianz and Jet2 cases demonstrate that deliberately false statements made in support of a claim that is then abandoned (pre-issue or otherwise) will not be tolerated by the English courts.
Fraudulent claims in Scotland
In Scotland, a prosecution for contempt of court cannot be brought privately and although it is possible for an individual to bring a private prosecution, the procedure rarely happens.
The different approach to fraudulent claims more generally (more fully explained in our blog) is illustrated by the 2018 Court of Session decision in Grubb v Findlay.
In that case, the Inner House (Scottish Civil Court of Appeal) confirmed that a claimant who significantly exaggerates their claim will nonetheless be awarded damages for any genuine loss incurred. This can be contrasted with the position in England and Wales where the court would dismiss the claim in its entirety.
This year is also likely to see the introduction of Qualified One Way Costs Shifting (QOCS) in Scotland and that, along with the lower discount rate north of the border, may encourage more fraudulent claims to Scotland; where the higher potential rewards will be coupled with less severe consequences for fraudulent claimants.
AB v Inverurie Skip Hire Ltd
Despite the different approach in Scotland, the Scottish courts are willing to penalise fraudulent claimants in legal costs.
This was the case in Grubb and also in AB v Inverurie Skip Hire (where Brodies acted for the defender), which demonstrated that a defender can protect itself from the costs of the exaggerated elements of the claim.
The claimant in AB suffered a head injury after falling from an HGV trailer. He valued his claim at £2,563,042.54 but accepted a tender (part 36 equivalent) of £225,000 following disclosure of surveillance evidence.
The tender was lodged nine months before it was accepted, and the defender sought its legal costs for that period. The claimant argued that he should not be penalised because when he initially rejected the offer, he did not know that the surveillance evidence existed.
He argued that the defender had delayed in sharing the medical evidence that commented on the footage, and so had unnecessarily prolonged the litigation.
Lord Bannatyne found that the defender was entitled to delay disclosure of the surveillance footage and related medical opinion because, in order for surveillance evidence to be effective, it needed to be obtained over more than one time period and as close as possible to the date of proof or trial.
He also noted that the information in the surveillance footage was already known to the claimant and, accordingly, to his agents. There was therefore no reason to deviate from the ordinary rule in relation to tenders and costs.
Robust approach to reduce fraudulent claims
The belief that insurance fraud is a victimless crime is likely to persist and, as money becomes tight, a fraudulent claim may be a temptation too difficult for some to resist.
Yet, insurers can take heart from the fact that there are ways in which fraudulent claims can be defeated and the cost of claims can be recouped or mitigated.
In Scotland a robust approach remains crucial, in light of both the current economic climate and the imminent introduction of QOCS. Although criminal prosecution and dismissal of the claims in full is difficult or impossible to achieve, careful investigation and strategic case management can significantly lessen the impact of these claims.
