The Law Commissions of England and Wales and of Scotland are calling for clarity in the existing law on what should happen if a policyholder makes a fraudulent claim on their insurance.
The Marine Insurance Act of 1906 states under section 17 if a policyholder acts fraudulently, the insurer may deny the whole insurance contract, and demand back any money paid out to a policyholder on previous claims. In practice the courts are reluctant to apply this remedy. Instead, the Commissions claim they have said that a fraudulent claimant should forfeit their entire claim, even the part that is legitimate, but their other claims should not be affected.
In their consultation paper published today, the Commissions suggest that the courts are applying the right policy but that the cases appear incompatible with section 17. The Commissions ask:
1. Should a policyholder forfeit the whole of a claim if any part of it is fraudulent?
2. Should a fraudulent claim affect previous, valid claims?
3. Should section 17 be amended?
The paper, The Insured’s Post-Contract Duty of Good Faith also asks what should happen where fraudulent claims are made on joint and group insurance.
David Hertzell, the Law Commissioner leading the project for England and Wales, said, “Insurance fraud is relatively common and should be discouraged. But the law we have for dealing with it is confusing and contradictory. If the law is to act as a deterrent, it must be clear and easy to understand.”
Professor Hector MacQueen, Scottish Law Commissioner, said, “This consultation aims to establish some clarity in what is a complex and convoluted area of law. It is also an opportunity for us to ask questions such as how should we decide what is meant by ‘fraud’ and should the duty of good faith itself be codified or left to the courts to define.”
According to figures issued by the Association of British Insurers, in 2008 1.4 per cent of claims in the UK were refused because of fraud, amounting to 4.2 per cent of the value of claims.
The Commissions seek responses by 11 October 2010. The paper, including a full list of questions, can be found on the Law Commissions’ websites at:
http://www.lawcom.gov.uk/insurance_contract.htm
http://www.scotlawcom.gov.uk/downloads/cpinsurance_issue7.pdf
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