On 25 December 2011, a catastrophic hail storm struck metropolitan Melbourne, resulting in widespread property damage. The storm also gave rise to an unprecedented number of fraudulent insurance claims.

Indemnity disputes arising from hail damage claims are usually determined by the Financial Ombudsman Service. In the absence of directly relevant case law there has been uncertainty within the industry as to whether insurers can deny claims with some manufactured 'hail' damage in their entirety, or whether they must pay to repair the proportion of damage that was genuinely caused by hail.

In this unreported decision of the Magistrates Court of Victoria, it was held that an insurer is entitled to deny indemnity on the basis of fraud where an insured claims for manufactured damage, even where there is a relatively high proportion of genuine hail damage.

The insured was the owner of a Ford utility which was damaged by hail on 25 December 2011 and a claim was made for storm damage. Indemnity was denied by the insurer on the basis of forensic evidence that approximately 90% of the damage was inconsistent with hail damage and had been manufactured with tools. The insured issued proceedings in the Magistrates' Court of Victoria for the agreed value of the vehicle. Hall & Wilcox acted for the insurer.

The Court accepted evidence that in addition to some genuine hail damage, the insured's vehicle had significant manufactured damage. Even the insured's own expert conceded that between 16% and 36.6% of the damage was inconsistent with hail. The inconsistent indentations exhibited scratch marks and often appeared in linear or clustered patterns. The court did not accept that the inconsistent damage could have pre-existed the storm or that it could have been caused by wear and tear. It was held that the insured intentionally caused the damage in an effort to render the vehicle a total loss and make a claim for the agreed value of the vehicle.

Section 56(2) of the Insurance Contracts Act 1984 provides that where a fraudulent component of a claim is "minimal or insignificant," the Court may order the insurer to pay such amount as is just and equitable in the circumstances. The Court considered the meaning of s.56(2) in the context of the forensic evidence and concluded that even if it accepted the evidence of the insured's expert (that 16% to 36.6% of the damage was inconsistent with hail), the fraudulent conduct could not be considered "minimal or insignificant".

The Court held that the insurer was entitled to deny indemnity.

AR Carpentry Pty Ltd v Insurance Manufacturers of Australia Pty Ltd

Even where a vehicle has genuine hail damage, if an insured intentionally causes further damage with the intention of having the vehicle written-off, the insurer is entitled to deny the entire claim on the basis of fraud.

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