Fraudulent claims within the meaning of section 56 of the Insurance Contracts Act
Insureds were found to have lit a fire at their business premises and also to have significantly and deliberately exaggerated the value of their stock and equipment losses entitling their insurer to refuse payment of the claim made under a business insurance policy.
The Supreme Court of New South Wales was called upon to consider whether a claim made on a business policy in respect of fire damaged property was a fraudulent claim within the meaning of section 56 of the Insurance Contracts Act, 1984 (ICA) and accordingly if so, whether the insurer was entitled to refuse payment of the claim.
In summary, section 56 of the ICA provides that:
- where a claim under a policy is made fraudulently, the insurer may not avoid the contract but may refuse payment of the claim;
- in 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;
- in exercising the power conferred by s56 (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 plaintiff insureds, Mr Voitenko and Mrs Voytenko, carried on party hire and dumpling/spring roll supply businesses respectively from the same premises. In May 2010 the insureds, for the first time after a number of years trading, took out a business insurance policy with Zurich Australian Insurance Ltd (“Zurich”). The policy covered all contents of the business for loss and damage by fire to the sum of $1,100,000.
Three months later, in August 2010, following a fire at the business premises the insureds made a claim under the Zurich policy for stock and equipment losses. In the course of assessing the claim, Zurich made interim payments to the insureds in a total sum of $284,917. Upon suspecting that the claim was made fraudulently, Zurich ceased making payments. The insureds commenced proceedings seeking to be indemnified for the balance of their alleged losses in the sum of $814,883. Zurich’s defence was primarily based on section 56 of the ICA as follows:
- that the evidence indicated that the fire was deliberately lit, and that Mr Voitenko was, on the balance of probabilities, the person who likely lit the fire;
- that the value of the stock and equipment claimed for indemnity had been significantly and deliberately exaggerated.
By cross claim, Zurich sought repayment by the insureds of the interim payments made to them.
The decision at trial
After review of extensive evidence lead at trial, Walton J found that on the balance of probabilities Mr Voitenko had lit the fire (taking into account the standard of proof required per Briginshaw v Briginshaw given the seriousness of the matter). He also found that both insureds had significantly and deliberately exaggerated their losses. Accordingly Zurich was held to be entitled to refuse to pay the insureds’ claims and also to repayment of the interim payments made.
In reaching this decision, Walton J noted that it was important to bear in mind that the reference to fraud in the context of s56 of the ICA did not ultimately require a finding that Mr Voitenko lit the fire. Fraud may be established by the making of a false statement - that is, one knowingly made in connection with the claim - for the purpose of inducing the insurer to meet the claim.
Accordingly, even absent the finding that Mr Vointenko had lit the fire, the claims made by the insureds in this matter would nevertheless have been found to be fraudulent claims within the meaning of section 56 of the ICA by reason of the findings that the claims had been deliberately and significantly exaggerated. This was important as regards Mrs Voytenko’s claim given that it was found that there was insufficient evidence to implicate her in the lighting of the fire.
Implications for you
This case serves as a useful refresher about the relevant principles of what may be a fraudulent claim within the meaning of section 56 of the ICA. That is, a fraudulent claim is not limited to a claim where the underlying acts of the insured caused the claim to arise, but can also be one where the insured knowingly makes false statements in connection with the claim.