Insurer remedies for fraudulent claims
In its recent decision in Taylor v Asteron Life Ltd, the Court of Appeal discusses the fraudulent claims rule – the first time that this rule has been considered in any detail by an appellate court in New Zealand.
The Court held that under this rule, a term is implied into every insurance contract, requiring the insured to act honestly when making a claim. If the insured fails to do so in any material respect, the whole of the fraudulent claim is disallowed – and the insurer may cancel the insurance policy prospectively pursuant to the Contract and Commercial Law Act 2017 (CCLA).
This case concerns the conduct of a Mr Taylor, a self-employed insurance broker.
In 1994, Mr Taylor purchased an income protection policy with Asteron. Mr Taylor subsequently developed a medical condition and in July 2010, he made a claim under his policy on the basis that he was “totally disabled”. “Totally disabled” was defined in his policy to mean where the insured is “unable to work in your usual occupation for more than ten hours per week”.
Asteron accepted Mr Taylor’s claim and made payments under the policy until September 2014, when Mr Taylor failed to provide it with financial information it requested. Mr Taylor issued proceedings, seeking a declaration that he was entitled to continuing benefits under the policy and to recover arrears of payments.
Through the discovery process, information came to light which indicated that Mr Taylor had continued to work extensively at his broking business. Asteron accordingly denied that Mr Taylor was entitled to further payments and counterclaimed for repayment of all sums previously paid under the policy. Its counterclaim was advanced on the basis that Mr Taylor owed Asteron a duty of utmost good faith in connection with insurance claims, which had been breached by his false statements as to the hours he worked during the relevant period. Mr Taylor denied this.
In the first instance, the High Court held that Mr Taylor was not “totally disabled”, as defined in the policy. He was not even partially disabled, which was defined in his policy to mean that the insured is working but because of a qualifying illness is earning 75% or less of the insured’s monthly insured income. Mr Taylor’s claims for a declaration and payment of arrears were dismissed.
The High Court further upheld Asteron’s counter-claim, finding that it could recover all sums previously paid under the policy as a result of Mr Taylor’s misrepresentations.
Court of Appeal decision
The High Court’s findings in relation to Mr Taylor’s claim were upheld on appeal. The Court of Appeal agreed with the High Court that Mr Taylor was not ‘totally disabled’ from 23 July 2010 onwards, relying on evidence that Mr Taylor regularly worked more than 10 hours per week during the relevant period. The Court agreed that even if Mr Taylor was totally disabled, he was not entitled to be paid any benefits because his policy provided for the amount of any monthly total disability benefit to be reduced by monthly earned income.
In relation to Asteron’s counterclaim for a breach of the duty of good faith, the Court noted the unusual positions taken by the parties. Asteron argued that to show a breach of this obligation, it needed to show that Mr Taylor deliberately misled Asteron. For his part, Mr Taylor argued that there was no dishonesty requirement; conduct falling short of dishonesty could breach an obligation of good faith. Mr Taylor said that dishonesty had not been put in issue and that it was therefore wrong for the High Court to make a finding that he had been dishonest.
The Court of Appeal disagreed. It considered that Asteron’s pleading was sufficient to put Mr Taylor’s honesty at issue.
The Court of Appeal further considered the nature and source of an insured’s obligations in relation to claims, to determine their consequences. If an implied term of the policy, then the insurer’s ability to cancel are governed by the CCLA. If, however, they are common law or equitable obligations, then the position is more complex. In exploring this point, the Court discussed the UK authorities and the fraudulent claims rule in detail, ultimately finding that the rule should be seen as a term implied by law in all contracts of insurance (subject to the express terms of the contract) to the effect that:
- the insured must act honestly in connection with the making of a claim; and
- if the insured fails to do so, and dishonestly makes a claim that is false in some material respect, the whole of the fraudulent claim will be disallowed.
The consequences of breach are, therefore governed by the CCLA – which entitles insurers to cancel a policy if a term is breached and either that term is essential, or the consequences of the breach are substantial. In this case, an implied term requiring an insured to act honestly is clearly essential to an insurer. Accordingly, if an insured makes a dishonest claim, the insurer is entitled to cancel the contract under section 37 of the CCLA and claim damages.
The Court further clarified that where a fraudulent claim is made and the insurer cancels the policy under the CCLA:
- the policy is terminated with effect from the date of cancellation;
- the insurer is not obliged to pay the fraudulent claim; but
- the cancellation does not affect other claims made under the policy before the date of cancellation – meaning that earlier claims properly made and properly paid cannot be unravelled.
Applying these principles to the facts, the Court held that:
- Asteron’s pleading constituted sufficient notice of cancellation of the policy.
- It did not follow from the fact of cancellation that Asteron is entitled to recover any payments made to Mr Taylor.
- However, Asteron was entitled to advance a claim for damages for the period from 23 July 2010 onwards (when false statements were made).
- In relation to the period from January 2010 to 23 July 2010, Mr Taylor was not entitled to any payment because of his earnings for that year. Asteron could, therefore, have recovered the payments it made during that period in restitution – however, in this case, Asteron had failed to plead that cause of action. Accordingly, Asteron’s award was reduced by $51,835.64 on the basis that it was not entitled to claw back the sums paid during that period.
This decision is a useful clarification of an insurer’s rights when it discovers that an insured has made a fraudulent claim. While payments made on a fraudulent claim by mistake may be recovered by an insurer, in practice there may be difficulties in recovering these sums. Insurers should, therefore, take care to fully investigate claims before making any payments. It will also be important for insurers to consider their legal claims for repayment carefully and plead the appropriate causes of action.
Taylor v Asteron Life Limited  NZCA 354.