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
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
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
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
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
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The underlying principles of a "knock for knock" scheme are well established.
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