Going on the offensive and pursuing sanctions against fraudsters remains a key area of focus for the insurance industry and there continues to be a good deal of discussion in relation to the different options that are available; contempt of court, strike outs, exemplary damages are all sanctions that can be imposed if once proceedings are commenced the claim is found to be fraudulent. What happens though if the 'fraudulent' claim is mistakenly paid by an insurer under the belief at the time that it was genuine and before any proceedings are commenced? In such circumstances the aforementioned procedural remedies will usually not be appropriate but that is not to say that a remedy does not exist.
The tort of deceit is a cause of action that can enable insurers to recover financial loss that has been incurred as a result of being deceived; this can include the costs of investigating the fraud.
In order to succeed in a tort of deceit action the following legal test must be met:
1. There must have been a representation made by the fraudster which can be clearly identified, which must be a representation of fact.
2. The representation must be false.
3. It must have been made dishonestly.
4. It must be proved that the representation must have been intended to be relied upon and was in fact relied upon.
The distinction between 2 and 3 above might appear to be a subtle one but it is important to highlight that both elements are required. The statement must be both false and dishonestly made. The leading authority on this point is still Derry v Peek (1889) in which Lord Herschell said:
"First, in order to sustain an action in deceit, there must be proof of fraud and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false".
Tort of deceit in action
To illustrate the tort of deceit in action let us consider how it may have practical application to a fraudulent road traffic accident. Let's assume we are dealing with a staged accident that is completely fictitious having been entirely invented. One of the fraudsters involved poses as a claimant and instructs solicitors to pursue a claim for compensation against the 'fault' vehicle. He claims to have suffered personal injury and produces a medical report that appears to corroborate those injuries.
If we pause here and consider the above 'test' for the tort of deceit:
1. The first requirement is satisfied by the fraudster's representation that he was involved in an accident and suffered injury as a result.
2. The second requirement would be satisfied by virtue of the fact that there was no accident – it was a premeditated fabrication.
3. The fraudster knew when he claimed to have been involved in the accident that this was a false statement and so the third element is also met.
We need to continue with the scenario in order to fully deal with the fourth requirement. Let's assume that the insurer settles the fraudster's claim having been induced into doing so by the representations that a genuine accident occurred that was not the fraudster's fault and that injury was sustained as a result. In making these representations the fraudster clearly intended for the insurer to rely upon them and if the insurer does indeed rely on them then the final part of the test is made out.
To complete the scenario, after the claim is settled it is later exposed to have been a pack of lies and after some investigation the insurer is able to prove that the accident did not occur. This unfortunately is not a particularly uncommon scenario although the use of the tort of deceit as a means of seeking redress is quite rare. As the above example illustrates, the tort of deceit does not involve a complicated process and it has a wide practical application. Naturally, cases should be selected with care and an assessment will need to be made at the outset as to whether the fraudster has funds or assets that can be targeted in order to ensure a full recovery can be made.