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Law Commissions consult on insurance claim fraud

9 July 2010

What should happen if a policyholder makes a fraudulent claim on their insurance, is the subject of a joint consultation paper published today by the Scottish Law Commission and the Law Commission for England & Wales.

Insurance contracts are based on the good faith of both the insurer and the policyholder. Under section 17 of the Marine Insurance Act 1906, 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.

The Commissions say that in practice, the courts are reluctant to go this far, stating 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 paper, The Insured’s Post-Contract Duty of Good Faith, the Commissions suggest that the courts are applying the right policy but that the cases appear incompatible with section 17. They ask: 

  • Should a policyholder forfeit the whole of a claim if any part of it is fraudulent?
  • Should a fraudulent claim affect previous, valid claims?
  • Should section 17 be amended?
  • What should happen where fraudulent claims are made on joint and group insurance?

David Hertzell, the Law Commissioner leading the project for England & 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 of the Scottish Law Commission added: “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?”

Click here to access the consultation. The Commissions seek responses by 11 October 2010.

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