To v Australian Associated Motor Insurers Ltd [2001] VSCA 48

Court of Appeal (Vic)|2001-04-26|Before: CHARLES, CALLAWAY and BUCHANAN, JJ.A.

Insurance - Fraudulent claim - Underlying loss covered by policy - Insurer entitled to refuse payment.

G.R.E. Insurance Ltd. v. Ormsby (1983) 29 S.A.S.R. 498, not followed.

I have had the advantage of reading the judgment of Buchanan, J.A. Subject to the observations of Callaway, J.A. which I have also read, I agree that the appeal should be dismissed for the reasons given by Buchanan, J.A. I am indebted to Callaway, J.A. for drawing my attention to the decision of the House of Lords in Manifest Shipping Co. Ltd. v. Uni-Polaris Shipping Co. Ltd.[1], which was received after this appeal was argued, and which is of considerable assistance in the resolution of the issues in the appeal.

I have had the advantage of reading in draft the reasons for judgment prepared by Buchanan, J.A. Subject to what follows, I agree in them and in the orders that his Honour proposes.

Counsel for the appellant conceded that his argument entailed that no dishonesty, however gross, could ever satisfy s.56(1) where there was a valid claim that could have been advanced. In my opinion, an argument with that consequence could not be correct. It accords neither with the pre-existing common law nor with the words of the statute. Indeed, because the only right conferred on the insurer by s.56(1) is a right to refuse payment of the claim, that provision has no independent operation except where a valid claim could have been advanced.[2]

Buchanan, J.A. has concluded[3] that a claim is made fraudulently if a false statement is knowingly made in connection with the claim for the purpose of inducing the insurer to meet the claim. I do not understand that to be an exhaustive definition. A false statement made recklessly in the sense explained in Derry v. Peek[4]

would suffice and I would leave open for some future occasion a lie that was not told for the purpose of inducing the insurer to meet the claim but was nevertheless material to the question whether, or perhaps when, a payment or other benefit under the policy would be made or conferred. It might be material in the mind of the insurer but not of the insured or it might seriously (and not just in some minor respect) affect the investigation.

If Buchanan, J.A.'s formulation is understood with that extension and that qualification, it probably overcomes the problem of a false statement designed to cover up some matter of personal embarrassment to the insured that has no bearing on the claim. At least in most cases, it would not be made for the proscribed purpose or be material to the insurer.

Viscount Dilhorne's statement in Scott v. Metropolitan Police Commissioner[5] does not assist the appellant. In the first place, his Lordship said no more than what "to defraud" ordinarily means. He expressly disclaimed any attempt to frame an exhaustive definition and emphasized the importance of the context in which such an expression is used. Secondly, an insurer is deprived of its property dishonestly if it is induced to make a payment by means of a dishonest statement. I find it unnecessary to say anything about the crime of conspiracy to defraud.[6]

I leave open, too, the question whether the fact that s.56(1) permits the insurer only to refuse to pay the claim, and not to avoid the policy, implies a wider concept of fraud than is found in the pre-1984 authorities[7] and the relationship between s.56(1) and the duty of utmost good faith, particularly in the light of the recent decision of the House of Lords in Manifest Shipping Co. Ltd. v. Uni-Polaris Shipping Co. Ltd.[8]

The appellant was the owner of a Toyota Landcruiser which was comprehensively insured under a policy of insurance issued by the respondent. On 9 May 1997 the appellant went out leaving her 15-year-old son at home. The son drove his mother's car without her consent. While he was driving the car, it was damaged in an accident. The appellant returned to find her son and the damaged Landcruiser near her home. The appellant moved the car a short distance. Three days later the appellant made a statement to the police. She said that the Landcruiser had been stolen and damaged when her son was set upon by a gang of youths. On the following day the appellant claimed upon the insurance policy and repeated the false story she had told to the police. The appellant lied about the circumstances in which the Landcruiser was damaged because she believed that the policy did not cover damage caused when it was being driven by her son. Her belief was mistaken. The policy did cover damage when the car was driven by an unlicensed person without the consent of the insured.

The respondent denied the claim and the appellant brought proceedings in the Magistrates' Court to recover the cost of repairing the Landcruiser. In its defence to the claim the respondent contended that the claim was fraudulent and thus the respondent was entitled to refuse payment by reason of the provisions of s.56 of the Insurance Contracts Act 1984 ("the Act"). The section provides:

"(1) Where a claim under a contract of insurance, or a claim made under this Act against an insurer by a person who is not the insured under a contract of insurance, is made fraudulently, the insurer may not avoid the contract but may refuse payment of the claim. (2) In any proceedings in relation to such a claim, the court may, if only a minimal or insignificant part of the claim is made fraudulently and non-payment of the remainder of the claim would be harsh and unfair, order the insurer to pay, in relation to the claim, such amount (if any) as is just and equitable in the circumstances. (3) In exercising the power conferred by subsection (2), the court shall have regard to the need to deter fraudulent conduct in relation to insurance but may also have regard to any other relevant matter."

The respondent contended in the alternative that the false claim constituted a breach of the duty imported into the contract by s.13 of the Act requiring the appellant to act with the utmost good faith.

The magistrate held that the claim was not fraudulent because "if the true circumstances had been disclosed by the [appellant] the terms of the policy would have required payment by the [respondent]." The magistrate found that the appellant had breached the obligation of good faith imported into the contract of insurance by s.13 of the Act, but as the insurer's interests were not prejudiced by the breach, he held that s.54(1) of the Act precluded the respondent from refusing to pay the claim. Section 54(1) provides:

"(1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act."[9]

The respondent appealed to the Supreme Court against the magistrate's order. The questions of law raised by the appeal were stated by the order of a master to be:

"(A) Having regard to his findings that the insured had - (a) given a completely false account of the circumstances of loss when submitting her claim; and (b) done so with the purpose of obtaining insurance benefits when she (wrongly) believed that she had, in the circumstances, no entitlements to such benefits - did the learned Magistrate err in holding the claim was not a claim 'made fraudulently' within the meaning of Section 56(1) of the Insurance Contracts Act? (B) Did the learned Magistrate err in failing to apply the provisions of Section 56 of the said Act to the circumstances of this case so as to entitle the insurer to refuse payment of the claim?"

The judge held that the claim was fraudulent because the appellant had knowingly made false statements and intended to deceive the respondent by obtaining money which she believed she had no right to receive. His Honour adapted the definition of fraud stated by Lord Coleridge, C.J. in Norton v. The Royal Fire and Life Assurance Co.[10] His Lordship was reported as saying that "... he had left it to the jury whether it was fraudulent in the sense of an intention to deceive and defraud the company by getting out of them money he knew he had no right to ...." The judge in effect added the words "or believed" after the word "knew" and held that the claim was fraudulent despite the fact that the appellant would have been entitled to indemnity if she had truthfully stated the circumstances in which her car was damaged.

At common law an insurer was entitled to avoid a policy of insurance under which a fraudulent claim was made.[11] If a fraudulent claim was made, the occurrence of a loss covered by the policy did not affect the ability of the insurer to avoid the policy. Thus the policy of an insured who suffered loss but fraudulently exaggerated the amount of the loss could be avoided. In Britton v. The Royal Insurance Co.[12] Willes, J. said of a claim for twice the amount of the damage sustained by the insured:

"The law is, that a person who has made such a fraudulent claim could not be permitted to recover at all. The contract of insurance is one of perfect good faith on both sides, and it is most important that such good faith should be maintained ... It would be most dangerous to permit parties to practise such frauds, and then, notwithstanding their falsehood and fraud, to recover the real value of the goods consumed."[13]

Again, avoidance ab initio entitled an insurer to deny a prior claim untainted by fraud.[14] It was recognized that the law could result in an insured being denied indemnity to which he would have been entitled in the absence of fraud and the insurer thus escaping payment of a valid claim. As Goddard, J. said of a fraudulently exaggerated claim in London Assurance v. Clare[15]:

"[The insurers] repudiated the contract and they did not pay thereby getting, of course, a great advantage because they did not have to pay what they would have had to pay if the claim had not been fraudulent. They pay nothing ..."

A fraudulent claimant forfeited all rights under a policy of insurance. As a matter of public policy, attributable to the need to promote honesty on the part of insured persons and proponents for insurance, whose knowledge of the relevant circumstances of the casualty as well as the nature of the risk was generally greater than that of their insurers, the courts would not aid a fraudulent claimant.[16] The courts would not look behind fraud to see if otherwise there was a valid claim or a claim unaffected by the fraud, and no effort was made to reduce or extinguish claims only after gauging the effects of the fraud upon insurers.

The courts' attitude to fraudulent claims was a manifestation of the fundamental principle of insurance law that the utmost good faith must be observed by each party, the importance of which has often been emphasised. For example, Scrutton, L.J. said of marine insurance:

"Now, insurance is a contract of the utmost good faith, and it is of the gravest importance to commerce that that position should be observed."[17]

"It is absolutely necessary that there should be the purest good faith between the parties and the most accurate representation of all material particulars."[18]

Their Lordships were speaking of a proponent's duty of disclosure to an insurer contemplating issuing a policy of insurance, but the requirement of the utmost good faith applies equally to events after as well as before the conclusion of the contract of insurance, and the justification for the requirement is the same in both cases.

The appellant contended that the purpose of s.56 of the Act was to prevent a fraudulent claimant being punished by limiting the effect of fraud to reduction of the liability of the insurer by the extent to which it had been prejudiced by the insured's fraud. Accordingly, if the insured did suffer loss covered by the policy, he or she could recover the amount of the loss notwithstanding the commission of fraud in connection with the making of the claim. The fraud itself would have no legal consequences. In every case the claim would not be payable simply because there was no loss or other event covered by the policy.

I can detect no such intention in the section. In my opinion the changes to the common law position effected by s.56 are only to limit the insurer's remedy in the event of fraud to the denial of the fraudulent claim rather than avoidance of the policy and to enable the Court to order payment where only a minimal or insignificant part of the claim, is fraudulent and it would be harsh and unfair not to pay the remainder. Otherwise the legal position remains unaltered: an insurer need not pay a fraudulent claim, whether or not there is an underlying loss which is covered by the policy. There was a moral or public policy dimension to the common law principle, which is preserved in s.56. While s.56 is remedial, and is to be construed beneficially, its effect cannot be pushed beyond the meaning of the words in the section. As Mason, Brennan, Deane and Dawson, JJ. said in Khoury v. Government Insurance Office (NSW)[19]:

"[T]he rule that remedial provisions are to be beneficially construed so as to provide the most complete remedy of the situation with which they are intended to deal must, as has been said, be restrained within the confines of 'the actual language employed' and what is 'fairly open' on the words used."

In my view the appellant's construction is not fairly open on the words found in s.56.

Counsel for the appellant next contended that the claim was not false. He described the claim as the assertion that the car was stolen. That claim was true in that the appellant's son stole the car. Counsel relied upon the extended definition of "theft" contained in s.73(14)(a) of the Crimes Act 1958. The claim was not rendered false, so it was said, because the identity of the thief was misstated.

The submission assumes that the word "claim" in s.56(1) does not refer to the form of the demand upon the insurer but is synonymous with the identification by the insured of the relevant class of indemnity provided by the policy which the insured invokes, in this case the indemnity against loss or damage caused by theft of the insured property. I doubt that the assumption is correct. While it may be true of sub-s.(2), which speaks of non-payment of the remainder of a claim, sub-s.(1) is concerned with fraud in the making of the claim, that is, fraud in the formulation and presentation of the claim. In my opinion if a false statement is knowingly made in connection with a claim for the purpose of inducing the insurer to meet the claim, the claim is one made fraudulently within the meaning of s.56(1). It is not necessary to analyse the false statement to determine whether or not the falsity attaches to the basis upon which the insured is claimed to be liable.

It was submitted on behalf of the appellant that a fraudulent claim required knowledge on the part of the claimant that he or she was not entitled to the claimed benefit. Belief was not sufficient. Thus an insured who was entitled to indemnity could not make a fraudulent claim. The submission was founded upon the definition of fraud formulated by the Chief Justice in Norton v. The Royal Fire and Life Assurance Co. set out at [12] above. Counsel for the appellant submitted that the judge erred in extending the definition to include claimants who believed they had no entitlement under the policy. In my view the mental element required to establish fraud is an intention to deceive, that is, an intention to create a false belief in the person deceived for the purpose of obtaining money or some other benefit. It is not necessary to go further and stipulate knowledge or belief as to a lack of entitlement to the money or other benefit claimed. In fact most fraudulent claimants, like the claimant in Norton[20], know they are not entitled to that which they claim, but the claimant who lies because of a mistaken belief as to entitlement is equally dishonest.

To the same end it was submitted on behalf of the appellant that it is not possible for a claimant to defraud another of a benefit to which the claimant is entitled. Counsel relied upon the dictum of Viscount Dilhorne in Scott v. Metropolitan Police Commissioner[21], a case concerned with the crime of conspiracy to defraud, that "'to defraud' ordinarily means, in my opinion, to deprive a person dishonestly of something which is his or of something to which he is or would or might but for the perpetration of the fraud be entitled." In my opinion the meaning of the word "fraudulently" in s.56 is not governed by the law relating to the crime of conspiracy to defraud. Even if it were the case that the latter is not concerned to punish persons seeking to recover by lies property to which they are entitled, the law relating to contracts of insurance is concerned to discourage dishonesty in connection with insurance claims. In my view the word "fraudulently" in s.56 of the Act encompasses a lie which could not prejudice the insurer even if it were believed as well as a lie which does not prejudice the insurer because the insurer is not deceived. The claimant's dishonesty is commensurate in both cases.

The appellant relied upon the decision of the Full Court of the Supreme Court of South Australia in GRE Insurance Ltd v. Ormsby[22] as supporting the contention that a fraudulent claim could not be made by an insured who was entitled to indemnity. In that case the Full Court held that the insured, who had produced false evidence to support an otherwise valid claim, could recover under a policy of insurance. The policy covered loss of stock in shop premises caused by theft consequent upon entry into the building by forcible and violent means. The lock on the insured's shop was forced, the shop was broken into and a number of items were stolen. The insurer refused to indemnify the insured, alleging that the insured had attempted to bolster their claim by causing further damage to the door and lock at a later time. Photographs of the door in a heightened state of disrepair were sent by the insured to the insurer in support of the claim. Mitchell, J. held that the false statement did not entitle the insurer to refuse to pay the claim because "the claim itself was valid". It did not become a fraudulent claim because there was an attempt to support it by evidence which was intentionally false. Walters, J. relied upon the definition of fraud stated by Lord Coleridge in Norton and held that the claim in the present case was not fraudulent because "there never was an intention on the part of the respondents to get, and knowingly to get, more than what they had really lost." Cox, J. said that "I do not think that an assured should be held to have vitiated his claim by reason merely of the kind of conduct, subsequent to the claim, that the appellant alleges to have happened here."

Unlike the appellant, the insured in Ormsby knew that they were entitled to indemnity under the policy. In my view that is not a material distinction. Both the appellant and the insured in Ormsby intended to deceive the insurer by a representation they knew to be false. In the case of the appellant the representation was a statement that the insured vehicle had been stolen by a gang of youths; in Ormsby the representation was that the damage displayed in the photographs given to the insurer was caused by thieves. I regret to say that I find I cannot agree with the conclusion in Ormsby. For the reasons set out above, I consider that the existence of an underlying valid claim does not render fraud irrelevant; the dishonest intention required for fraud is at least one to induce a false belief in the insurer for the purpose of obtaining payment or some other benefit under the policy, with or without belief or knowledge of a lack of entitlement; and fraud which relates to the claim made with the requisite intent will disentitle the claimant even if made subsequent to the first presentation of the claim.[23]

Counsel for the appellant submitted that s.56 of the Act only applied to fraudulent misstatements which were material, that is to say, misstatements which would influence a prudent insurer's decision to accept, reject or compromise a claim. The submission adapted the requirement of materiality which applies to innocent non-disclosure and misrepresentation prior to the formation of a contract of insurance. The submission derives support from some decisions in the United States[24], although in other decisions United States judges have insisted upon the principle that an insurer may avoid a policy upon the making of a fraudulent claim as one which "provides insureds with an incentive to tell the truth" and have refused to "dilute that incentive to allow an insured to gamble that a lie will turn out to be unimportant."[25] Section 56 does not in terms distinguish between material and immaterial fraud, and in my view there is no reason to think that the section was intended to alter the common law in this respect.[26]

The appellant invoked s.56(2) of the Act. Counsel submitted that if the fraud could not affect the insurer's liability, it was "minimal or insignificant" within the meaning of the sub-section. The difficulty with this submission is that the fraud to which the sub-section applies is fraud relating to only part of a claim so the non-payment of the remainder of the claim would be harsh and unfair. Where, as here, the fraud relates to the entire sum or benefit claimed, the division contemplated by the sub-section cannot be achieved.[27]

For the foregoing reasons I agree with the conclusion of the judge below that the respondent was entitled to refuse payment of the claim because it was made fraudulently within the meaning of s.56(1) of the Act.

The appellant sought leave to add the following question of law to those settled by the Master:

"If the learned magistrate ought to have found that the claim was a claim made fraudulently within the meaning of s.56(1) of the Insurance Contracts Act, should the magistrate have gone on to apply the provisions of s.54 of the Act?"

While it may be appropriate in particular cases to amend questions of law in appeals from the Magistrates' Court[28], in my view questions not argued before or decided by the judge hearing the initial appeal under Order 58 generally should not be added on appeal to this Court. In any event I am of the opinion that Fullagar, J. was correct when, in Gugliotti v. Commercial Union Assurance Co. of Australia[29], he held that "section 54 has no application to cases which fall within section 56(1)."[30] Section 54 modifies the effect of contracts of insurance, whereas the entitlement of an insurer to refuse to pay a fraudulent claim is derived from a statutory prescription. Further, the regime established by s.54 is at odds with the amelioration of the effect of fraud provided by s.56(2). If s.54(1) applies to a fraudulently exaggerated claim, an insurer will always be obliged to pay the true loss of the claimant, whereas s.56(2) requires the overstatement to be minimal or insignificant and non-payment of the remainder to be harsh and unfair before the amount of the loss must be paid. Accordingly, I am of the opinion that the application should be refused.

[2] Section 56(1) will also be of practical utility to an insurer where there might otherwise have been doubt or a dispute as to the validity of the claim.

[7] Compare some of the cases cited in GRE Insurance Ltd. v. Ormsby (1982) 29 S.A.S.R. 498. I agree with Buchanan, J.A. that the latter does not represent the law now in force.

[8] [2001] UKHL 1; [2001] 2 W.L.R. 170. The case has to be read mindful of the fact it concerned marine insurance and of the wide language of s.13 of the Insurance Contracts Act 1984. As to the question, raised in argument in the present case, whether a fresh claim may be made in respect of the same casualty after a fraudulent claim is rejected, see and compare Lord Hobhouse of Woodborough's speech at [62].

[9] No mention was made of s.12, which provides that the effect of the Part in which s.13 is found is not limited in any way by the subsequent provisions of the Act. In Entwells Pty. Ltd. v. National and General Insurance Co. Ltd. (1991) 6 A.N.Z. Insurance Cases 61-059 Ipp, J. held that s.54 did not limit or restrict the effect of s.13, for it merely provided the extent of the remedy for the duty imposed by s.13. It is not necessary to decide the question for the purpose of resolving this appeal.

[11] Britton v. The Royal Insurance Co. [1865] EngR 66; (1866) 4 F.& F. 905 at 909 per Willes, J.; Goulstone v. Royal Insurance Co. [1858] EngR 38; (1858) 1 F. & F. 276 at 279 per Pollock, C.B. In Black King Shipping Corporation and Wayang (Panama) S.A. v. Massie [1985] 1 Ll.Rep. 437 Hirst, J. rejected an argument that avoidance for breach of the duty of utmost good faith was not avoidance ab initio, but rather avoidance as far as the loss in relation to which the breach was committed. This "half-way house" position was characterized as "a pure expedient to avoid the hardship caused by avoidance ab initio where there were prior valid claims." But see Manifest Shipping Co. Ltd. v. Uni-Polaris Shipping Co. Ltd. [2001] UKHL 1; [2001] 2 W.L.R. 170 at [71] per Lord Hobhouse of Woodborough.

[13] See also Chapman v. Pole (1870) 22 L.T. 306; Grenier v. Monarch Fire and Life Assurance Co. (1859) 3 L.C.J. 100; Seghetti v. Queen Insurance Co. (1866) 10 L.C.J. 243; Haase v. Evans (1934) 48 Ll.L.Rep.131; Galloway v. Guardian Royal Exchange (UK) Ltd [1999] Lloyd's Rep. I.R. 209.

[14] Moraitis v. Harvey Trinder (Qld) Pty. Ltd. [1969] Qd.R. 226.

[16] The same public policy is reflected in s.56(3) of the Act.

[17] Greenhill v. Federal Insurance Co.Ltd. [1927] 1 K.B. 65 at 76.

[18] Everett v. Desborough [1829] EngR 490; (1829) 5 Bing 503 at 518.

[20] In a claim for the cost of fire damaged fixtures and stock in trade the plaintiff deliberately overstated the value of the damaged property.

[23] In Vermeulen v. S.I.M.U. United Insurance Association (1987) 4 ANZ Insurance Cases 60-812 at 74,987 Hardie Boys, J. said that he had "considerable difficulty with the decision in the Ormsby case ..." In New Zealand Insurance Co. Ltd. v. Forbes (1988) 5 ANZ Insurance Cases 60-871at 75,455 it was suggested that Ormsby was an exceptional case decided on its own facts. Cf. Clarke, The Law of Insurance Contracts, 3rd ed. at p.750.

[24] See, for example, Berkshire Mutual Insurance Co. v. Moffett [1967] USCA5 493; (1967) 378 F2d 1007; Security Insurance Company of New Haven v. Smith (1931) 35 S.W.2d 581.

[25] Longobardi v. Chubb Insurance Co. (1990) 582 A2d 1257 at 1263. See also Chaachou v. American Central Insurance Co. [1957] USCA5 112; (1957) 241 F2d 889; St. Paul Mercury Insurance Co. v. Salovich (1985) 705 P2d 812.

[26] It may be observed that at common law an insurer could avoid a policy of insurance if a misrepresentation made prior to its inception was either fraudulent or material. See Babatsikos v. Car Owners' Mutual Insurance Co. Ltd. [1970] V.R. 297 at 307 per Pape, J. See also The Bedouin [1894] P.1 at 12 per Lord Esher, M.R. A different regime applies under the Act. See s.28.

[27] The only example given by the explanatory memorandum to the Insurance Contracts Bill was: "[I]t may be unfair for an insured to have the whole of the legitimate claim for the loss of contents worth $100,000 disallowed because he fraudulently claimed for the loss of a non-existent watch worth $50."

[28] There is power to do so under Rule 64.22(1). See also s.10(3) of the Supreme Court Act.

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