Insurance fraud doesn’t pay – AFCA determination exposes the facts

Insurance fraud involves intentionally misleading or fabricating information to gain an unfair financial benefit from an insurance claim or policy. While the threshold for proving fraud is high, if established, it can have serious consequences. 

Not only is it a criminal offence, but a fraudulent component in a claim can result in the whole claim being refused. A recent determination by the Australian Financial Complaints Authority (AFCA) underscores this principle, reinforcing the rights of insurers when faced with fraudulent claims.

Case overview:  AFCA Determination 12-00-1056705

The complainant (a corporation and owner) of a lot within a development lodged a claim under a Residential Strata Plan insurance policy held by the owners corporation (OC).  The claim arose following a severe weather event resulting in a number of lot owners lodging claims.  This particular claim had two components:

• A water damage claim for physical loss and damage to the complainant’s unit; and
• A loss of rent claim, purportedly arising from the water damage, due to the complainant’s inability to lease the unit while it was undergoing repairs.

The insurer accepted and paid the water damage claim.  The second component, loss of rent, was initially declined.  However, after the complainant pursued the matter through the insurer’s internal dispute resolution (IDR) process, the insurer reversed its partial declinature and paid the loss of rent claim. 

However, the insurer investigated further and discovered the complainant had submitted a fabricated rental agreement and ledger during its claim submissions and the complainant’s unit was never available for rent during the repair period.  The insurer subsequently concluded the loss of rent had been falsified and the claim was fraudulent.

As a result, the insurer:

• Denied any further liability (for both heads of claim); and
• Commenced recovery proceedings against the complainant, seeking reimbursement for all payments made (including the otherwise uncontroversial water damage claim), plus costs.

The complainant boldly responded by lodging a complaint with AFCA, arguing that the insurer’s indemnity reversal and recovery intentions were unjustified, and that the insurer’s decision letter (relating to the complainant’s fraud) to the OC had breached the complainant’s privacy.

AFCA’s determination

AFCA rejected the complaint, finding:

• The complainant misrepresented the loss of rent claim, with an intention of deceiving the insurer;
• As a corporation, the complainant had no entitlements under the Privacy Act 1988 (Cth) and, further, by issuing a claim decision letter to the OC as its insured was not committing a privacy breach; and
• As a result of the complainant’s fraud, the insurer was entitled to deny the claim in full.

The legal framework

An insurer’s right to refuse payment of a fraudulent claim is contained in section 56(1) of the Insurance Contracts Act 1984 (Cth) (ICA).  While the ICA prohibits an insurer from avoiding a contract itself, it does allow insurers to deny fraudulent claims.

In the Victorian Court of Appeal’s decision in Tiep Thi To v Australian Associated Motor Insurers Ltd [2001] VSCA 48, the Court confirmed that, subjection to section 56(2), a fraudulent claim, irrespective of whether it includes some genuine loss, can be denied in full under section 56(1). 

The insurer and AFCA relied heavily on the Tiep decision.  While part of the complainant’s claim (i.e. the water dater damage claim) was a legitimate loss[1], AFCA found that the fraudulent component – the fabricated loss of rent claim – tainted the claim as a whole.  Accordingly, AFCA confirmed the insurer was justified in denying the claim in full and seeking recovery of all amounts paid. 

Key takeaways

It may be that the complaint turned on its facts noting section 56(2) of the ICA empowers a court to order an insurer to pay if only “a minimal or insignificant part of the claim is made fraudulently and nonpayment of the remainder of the claim would be harsh and unfair”.  Here, the complainant’s loss of rent claim represented approximately 75% of the total amount paid by the insurer. 

However, one would like to think, that even if the percentages were reversed and ‘only’ 25% of the claim was fraudulent, AFCA would have made the same finding.  Fraud taints the integrity of the whole claim and an extension of indemnity and payment does not preclude an insurer from seeking to recover a payment already made.  

 

[1] Which, in some circumstances pursuant to s 56(2), can be paid.