What is insurance fraud?
By definition, ‘fraud’ may be a wrongful or criminal deception intended to result in financial or personal gain.
When people think of ‘fraud’, they may perhaps think about the concept in terms of a heinous or criminal activity such as arson, Ponzi schemes, identity theft or cheating the ATO. They are all examples of fraud, but when it comes to policies of insurance, the concept of fraud is more subtle.
Therefore, when making a claim on an insurance policy, you must be mindful of ensuring you are not considered to be making false statements in connection with the insurance claim.
Insurance Contracts Act 1984 ('the Act')
Section 56 of the Act effectively states:
- When an insurance claim is made fraudulently, the Insurer may not avoid the insurance contract, but the Insurer may refuse to pay the insurance claim.
If only a minimal or insignificant part of the insurance claim is made fraudulently and not paying the remainder of the claim would be harsh and unfair, a court may order the Insurer to pay an amount to the Insured which is just and equitable.
Section 59A of the Act allows a life insurer to cancel a contract of life insurance entered into after 28 June 2013, if the Insured has made a fraudulent claim. However, a court may order the Insurer to pay an amount which the court considers just and equitable in the circumstances.
Insurance fraud examples
To demonstrate the practical application of Section 56 to real life insurance claim scenarios, detailed below are three case summaries which respectively discuss insurance claims regarding a property fire, a domestic burglary and income protection.
Property Fire: Voitenko t/as Access Party Hire v Zurich Australian Insurance Ltd [2021] NSWSC 1441
Case Facts
Mr and Mrs Voitenko, the Insureds, operated a business from premises insured with Zurich. The policy covered the business premises and the business’ contents for $1.1M.
Only three months after purchasing the insurance from Zurich, the Insureds’ business premises and all contents were destroyed by a fire. The Insureds submitted an insurance claim to Zurich.
In the course of its investigations, Zurich concluded the fire was deliberately lit, the male Insured was the person who started the fire and the value of the losses claimed by the Insureds were intentionally and significantly exaggerated.
As a result, Zurich refused to make payment to the Voitenkos, so they commenced proceedings seeking to be indemnified for their alleged losses.
The Court’s Decision
Walton J found Mr Voitenko started the fire and the Insureds deliberately inflated and exaggerated their losses. As a result, Zurich was entitled to not pay the insurance claim.
The Court explained the interaction between ‘fraud’, as that concept is understood, and the intended effect of Section 56 of the Act.
Walton J stated it was open for the Court to find this had been a fraudulent claim (within the meaning of the Act) as a result of the Insureds deliberately and significantly exaggerating their claim, rather than Zurich proving whether Mr Voitenko started the fire at the premises.
As a result, despite the obviously more sinister and fraudulent act of arson, Walton J concluded fraud may be established by an Insurer proving an Insured has made a false statement in connection with the insurance claim for the purpose of inducing the Insurer to pay the claim.
Burglary: Ebraham v AAI Limited t/as GIO Insurance [2018] VCC 18
Case Facts
The Insured, Mr Ebraham, purchased home and contents cover with GIO.
In the Insurance Proposal, Mr Ebraham listed jewellery worth $137,000 which his father allegedly gave to him overseas together with a receipt from an overseas jeweller. The same jewellery was allegedly subsequently valued by an Australian jeweller for $187,000, but no documents were provided.
Some 5 months later, Mr Ebraham’s home was burgled. The home’s security system was disabled without any damage caused to the cover plate and, but for some roof tiles being removed, there were no signs of forced entry to the home.
Mr Ebraham submitted an insurance claim to GIO, claiming $187,000 for the jewellery.
GIO declined the insurance claim because it was made fraudulently.
GIO’s investigations concluded Mr Ebraham provided false and misleading statements regarding the circumstances of his claim because:
- The overseas valuer could not be identified nor verified, and that valuer’s documents did not accord with the mandatory obligations imposed by the relevant country.
- The Australian valuer was not qualified.
- Mr Ebraham could not provide proof of the declaration of the jewellery when it was brought to Australia.
- Mr Ebraham could provide any photographs of the jewellery.
- GIO was not convinced a burglary had in fact occurred.
- Mr Ebraham failed to disclose two prior stolen jewellery claims resulting in another insurer paying over $350,000 to Mr Ebraham.
The Court's Decision
Despite the Court making unfavourable findings about Mr Ebraham’s credibility and evidence, the Court held GIO was not entitled to refuse payment of the claim pursuant to Section 56 of the Act because GIO failed to prove the Insured knowingly made false statements to GIO in order to induce a payment under the insurance policy.
Even though Mr Ebraham failed to provide reliable evidence about the jewellery – both in terms of its actual existence or its value – the Court determined GIO was obligated to establish Mr Ebraham knowingly made a false statement in respect of the burglary or his ownership of the jewellery or the valuation from the overseas jeweller.
However, in light of Mr Ebraham failing to meet his evidentiary requirements as to the existence and value of jewellery, the Court found in favour of GIO. In short, the Court determined Mr Ebraham failed to reasonably substantiate his insurance claim.
Income Protection: AIA Australia Ltd v Richards (No3) [2017] FCA 1069
Case Facts
The Insured, Mr Richards, submitted an insurance claim to his insurer, AIA, under an income protection policy to the effect he was totally disabled.
Subsequently, AIA discovered Mr Richards was intending to perform, and was actually performing, work which he represented to AIA he was incapable of doing.
AIA confronted Mr Richards with its findings and Mr Richards made an array of admissions to AIA about his ability to work.
The Court's Decision
Upon hearing the parties’ evidence, the Court concluded Mr Richards was capable of performing his usual occupation and he intended to perform the duties of another occupation.
As a result, Mr Richards’ conduct and actions were contrary to the representations he made to AIA when he lodged his insurance claim under his income protection policy to the effect he was totally disabled.
The Court found the insurance claims made by Mr Richards were fraudulent. As a result, AIA was entitled to refuse to pay the claims made by Mr Richards and the contract of insurance was cancelled by AIA.
Insurance fraud punishment and consequences
It is important to understand that an Insurer has remedies to avoid an insurance policy altogether, or reduce the payment made on an insurance claim, if there is any element of fraud.
In that regard, ‘fraud’ is understood to mean any situation by which the Insurer proves that a false statement was knowingly made by the Insured for the purposes of inducing the Insurer to pay the claim.
Therefore, at all times, it is important to be honest and upfront with your insurer; otherwise the consequences could be dire. Insurance fraud is a criminal offence in many jurisdictions and after making a fraudulent claim or making dishonest statements to an insurer, an Insured may find it difficult to secure cover in the future.
Furthermore, the fraud need not be a serious or illegal act, such as arson.
Procedural fairness obligates an Insurer to place an Insured on notice that an insurance claim is deemed to be fraudulent. Therefore, if an Insurer raises an allegation of fraud against you, and you are afforded the opportunity to respond to the Insurer, Denning Insurance Law can assist you with your submissions.
