98.This section sets out the insurer’s remedies where the insured makes a fraudulent claim. It does not apply where a third party commits a fraud against the insurer or the insured, such as where a fraudulent claim is made against an insured, who seeks recovery from its insurer under a liability policy.
99.The section does not define “fraud” or “fraudulent claim”. The remedies will apply once fraud has been determined in accordance with common law principles.()
100.Section 12(1) puts the common law rule of forfeiture on a statutory footing. Where the insured commits a fraud against the insurer, the insurer is not liable to pay the insurance claim to which the fraud relates. Where the insurer has already paid out insurance monies on the claim and later discovers the fraud, the insurer may recover those monies from the insured.
101.Section 12(1)(c) provides the insurer with a further remedy. It gives the insurer an option to treat the contract as if it had been terminated at the time of the “fraudulent act”. This is dependent on the insurer giving notice of their election to do so to the insured.
102.The “fraudulent claim” is to be distinguished from the “fraudulent act”. The latter is intended to be the behaviour that makes a claim fraudulent, which may be after the initial submission of the claim. The timing of the “fraudulent act” is relevant in determining when the liability of the insurer ceases for the purposes of section 12(1)(c). For example, if an insured submits a genuine claim in January and adds a fraudulent element in March (for example, adding an additional, fabricated, head of loss), the “fraudulent act” takes place in March. This is the point at which the contract may be treated as having been terminated, and from which the insurer’s liability ceases.
103.Section 12(2) sets out the consequences if the insurer elects to treat the contract as terminated under 12(1)(c). It may refuse to pay claims relating to “relevant events” occurring after the time of the fraudulent act. It does not have to return any premiums already paid by the insured.
104.“Relevant event”, as defined in section 12(4), refers to any event that would trigger the insurer’s liability under the particular insurance contract. Usually, this will be the occurrence of loss or damage which is insured under the contract. However, some insurance contracts, such as professional indemnity insurance contracts, are written on the basis of a “claims made” policy. In such cases, the “relevant event” may be the notification of a claim against the professional, even where no loss has actually occurred.
105.Section 12(3) confirms that the insurer remains liable in respect of relevant events that took place before the date of the fraudulent act.
106.Group schemes are an important form of insurance. Many schemes are set up by employers to provide protection insurance for their employees. The policyholder is typically the employer, who arranges the scheme directly with the insurer. The group members (typically employees) have no specific status. As they are not policyholders, if a group member makes a fraudulent claim, the insurer’s remedies are uncertain.
107.This section is intended to give the insurer a remedy against a fraudulent group member, while protecting the other members who are covered by the insurance.
108.Section 13(1) defines a group scheme to which this section applies. It may cover not only the typical employment scheme, but many other types of arrangement including block building policies taken out by landlords for tenants, and potentially insurance arranged by one company for a group of companies, if the contract is so structured. It is possible for group insurance to cover only one member, where (for example) a freeholder takes out insurance for a single leaseholder.
109.This section envisages a policyholder (A) taking out a policy which is of direct benefit to one or more third parties who are not parties to the contract (the Cs). The contract must not simply insure A’s liability in respect of the Cs, though A may itself be a beneficiary under the policy. The section applies where one of the Cs (CF) makes a fraudulent claim.
110.Section 13(2) provides that the insurer has the same remedies against the fraudulent group member (CF) as it would have against a policyholder who makes a fraudulent claim. These remedies are set out in section 12. This means that where a fraudulent claim has been made by CF, the insurer is not liable to pay the fraudulent claim. It may retain any premiums paid by, or on behalf of, CF. It may also treat CF’s insurance cover as having been terminated at the time of the fraudulent act. To exercise this option, it must serve notice on both A and CF.
111.Importantly, the insurer may not treat its entire liability under the contract as terminated, but only its liability to CF. Sections 13(2)(a) and (b) provide that the remedies are only exercisable against, and can only affect the rights of, that fraudulent member.
112.The arrangements for payment of insurance monies under a group insurance contract differ. The insurer may either pay insurance monies to the policyholder A (who would pass it on to the relevant group member), or may pay the group member directly. Section 13(3)(a) provides that the insurer may reclaim any sums paid in respect of the fraudulent claim from either A or CF, depending on which of them is (or was last) in possession of the money.