Lies, Collateral Lies and Insurance Claims: The Changing Landscape in Insurance Law

In numerous authorities, the fraudulent claims rule in insurance law has been treated as a facet of the utmost good faith doctrine. Accordingly, it has been repeatedly affirmed that it is an essential condition of a policy of insurance that the underwriters are treated with good faith, not merely in reference to the inception of the risk, but also during the period when the policy is in place, and at the claims stage.¹¹ Despite the instinctive appeal of the alignment of the fraudulent claims rule with the doctrine of utmost good faith, it might be conceptually difficult to justify a link of that nature. The reasons will be considered below.

Traditionally, the fraudulent claims rule in insurance law has been attributed to a rule of law – namely, that “no person ought to be allowed to take advantage from his own wrong”.¹² If the source of the fraudulent claims rule is traced to such a rule of law, which also stipulates its own remedy of forfeiture of the claim tainted with fraud, it is difficult to explain why there is a need for the good faith doctrine in this context. Courts have often denied the existence of alternative causes of action on matters that fall under the remit of the utmost good faith doctrine. For example, in Banque Financière de la Cité v Westgate Insurance Co Ltd¹³ it was held by the Court of Appeal that the insurer's non-disclosure could not give rise to a tortious action for damages, and the assured's only cause of action lay in breach of the utmost good faith duty at the pre-contractual stage by the insurer. By analogy, it can be argued that there is no room for the operation of the utmost good faith doctrine on a matter that has been dealt with by a rule of law.

More fundamentally, the rationale of judges who advocate a strong tie between the utmost good faith doctrine and the fraudulent claims rule is inconsistent and does not stand up to scrutiny. Lord Mance, for example, in his dissenting judgment in The DC Merwestone, was adamant that the fraudulent claims rule derives from “the foundations of good faith on which insurance rests”.¹⁴ However, in Agapitos v Agnew (The Aegeon)¹⁵ he expressed the view that it would be acceptable to treat the common law rules governing the making of a fraudulent claim as falling outside the scope of s. 17 of the Marine Insurance Act 1906.¹⁶ Considering that at the time of that decision, s. 17 of the MIA 1906 was regarded as the main source of the post-contractual duty of utmost good faith and attracted the draconian remedy of “avoidance”,¹⁷ the inconsistency is apparent. How can the fraudulent claims rule be a manifestation of the utmost good faith duty but at the same time not attract the remedy of avoidance in case of its breach?

Furthermore, it has often been doubted by scholars that the duty of utmost good faith applies in its full rigour after an insurance contract is formed.¹⁸ It can be persuasively argued that s. 17 of the MIA 1906 was intended to be a prologue to ss. 18–20, dealing with specific aspects of the pre-contractual duty of good faith.¹⁹ It is noteworthy that Sir Mackenzie Chalmers, the drafter of the Act, in his Digest of the Law of Marine Insurance²⁰ on which the Act was based, made no reference to the post-contractual dimension of the duty of utmost good faith. The uncertainty as to whether the utmost good faith doctrine has a role to play in the post-contractual context was removed by the House of Lords in The Star Sea case.²¹ It was held (with reluctance) that formation of the insurance contract does not bring the duty of good faith of both parties to an end. Nevertheless, the judiciary has found innovative ways to curb the scope of the duty at the post-contractual stage by restricting it to: i) fraudulent acts committed prior to the commencement of litigation;²² and ii) acts which would amount to repudiatory breach of the contract.²³ The judicial trend has therefore been against adopting an expansive approach with regard to the scope of the post-contractual duty of utmost good faith.²⁴ On that basis, one can plausibly argue that because there is already a rule of law that deals with the matter, there is no apparent need to expand the utmost good faith doctrine to the claims context.

Of course, it is undeniable that there is information asymmetry both at the pre-contractual stage and the claims stage. At pre-contractual stage, the assured is in control of information that the insurer would need in order to assess the risk proposed. In similar vein, once a loss occurs the assured, at the date of making the claim, has exclusive control of the information on which the claim must be based. The dominant position of the assured, having the relevant information, could be used as a justification for bringing the utmost good faith doctrine into play at the claims stage.²⁵ However, it should be borne in mind that in all insurance contracts there is an appreciation of this information asymmetry at the claims stage, and clauses are often incorporated into contracts requiring the assured to bring an incident that might give rise to a claim to the attention of the insurers. Most contracts, going further, require the assured to fully co-operate with the insurers at the claims stage and assist insurers in the investigation of a claim. Given that contractual mechanisms are utilised to balance information asymmetry at this stage, it is questionable whether it is legitimate for courts to extend the insurers’ contractual remedies for which they could have bargained²⁶ by introducing the utmost good faith doctrine at this stage.

In summary, the rationale of the opinions expressed in various judgments extending the scope of the utmost good faith doctrine to the claims stage is questionable. Whatever the scope of the doctrine in the post-contractual context will be in future, with the passing of the Insurance Act 2015,²⁷ the law concerning fraudulent claims should be considered in isolation from the utmost good faith doctrine. If so, this means that collateral lies told whilst advancing an insurance claim, even if they are material to the consideration of the claim, should not taint the claim simply on the ground that the assured has not acted in good faith.

Decoupling the fraudulent claims rule from the doctrine of utmost good faith means that determining its contents becomes an issue of policy, no doubt informed by competing legal values and perceptions.²⁸ Those who believe that a collateral lie told at the claims stage should be capable of tainting a claim, even though the claim itself is genuine, justify this on the ground that such a stance is essential to deter fraud. This is open to criticism on two grounds. First, as highlighted in the Final Report of the Insurance Fraud Taskforce,²⁹ there is no simple profile of a person who commits insurance fraud. Some people commit fraud that is premeditated in nature, usually linked to organised crime. It is very difficult to see how the severity of legal rules on fraudulent claims would have any impact on the behaviour of this kind of individual. At the other end of the spectrum, fraud is committed by opportunistic individuals; this usually takes the form of exaggeration of an...