A recent UK case has provided an opening for awards of exemplary damages for serious insurance fraud.

What are exemplary damages?

Typically, in civil proceedings the court awards damages to compensate a plaintiff for a loss suffered as a result of a defendant's wrongdoing. The court also has the ability to award exemplary damages which, rather than having a compensatory purpose, are intended to punish and to deter others from engaging in similar conduct.

Exemplary damages are awarded relatively rarely and require "outrageous" conduct, i.e. some sort of either deliberate wrongdoing, or egregious recklessness, on the part of the defendant.

Exemplary damages for insurance fraud in the UK

In a recent case, Axa Insurance v Financial Claims Solutions Ltd & Ors [2018] EWCA Civ 1330, the United Kingdom Court of Appeal has confirmed that insurers can recover exemplary damages for deliberate insurance fraud.

This case involved a brazen attempt at perverting the course of justice to recover for fraudulent claims on motor vehicle insurance policies. The scheme was devised by an entity calling itself "Coelum Legal", which was not, in fact, a law firm authorised to conduct litigation in the United Kingdom.

The scheme

In simple terms the scheme operated as follows:

  1. A claim was lodged on an insured's Axa motor vehicle policy, alleging losses suffered by the other party to a car accident with the insured. Losses claimed included damage to cars, the cost of a rental vehicle from a credit hire company, and personal injury losses due to whiplash. The documentation supporting the claims, including expert medical evidence was all (it later emerged) fraudulent.
  2. Coelum Legal then filed proceedings and obtained judgment by default against the insured. The total amount claimed was £85,000.
  3. The proceedings against the insured were not served on Axa and Axa only became aware of the proceedings after judgment by default had been entered.
  4. Meanwhile, Coelum Legal issued enforcement proceedings against Axa, telling the Judge that Axa had been served by registered post. In fact, Coelum Legal had sent an envelope of junk mail to Axa, which had been disposed of by post room staff. Again, judgment in default was entered in both cases.
  5. Following this, Coelum Legal took steps to enforce the judgment and bailiffs attended Axa's offices to attempt to seize computers in aid of enforcement.

Not surprisingly, Axa and its legal advisors became suspicious of the claims and carried out an extensive investigation which revealed that the claims were fraudulent. Axa obtained injunctions preventing further enforcement. It also brought proceedings for the torts of deceit and unlawful means conspiracy to recovery compensatory damages, being the costs of the investigation to uncover the fraud of around £24,000, and also exemplary damages.

The High Court decision

In the High Court the compensatory claim was successful, but the Judge refused to award exemplary damages. Citing Rookes v Barnard [1964] AC 1129 (HL), the Judge noted that in the United Kingdom exemplary damages were only available in three scenarios:

  1. Oppressive, arbitrary, or unconstitutional conduct by government servants;
  2. Conduct calculated to make a profit that may exceed the compensation payable to the plaintiff; or
  3. Express authorisation by statute.

The Judge recognised that the second category could potentially apply. However, the profit sought to be gained was equivalent to the compensation that would have been payable had the scheme proved successful. On this basis, the case was not one where paying compensation in accordance with the normal principles would leave the tortfeasors "up on the deal". Further, there were other avenues which achieved the goals of punishment and deterrence, e.g. through the criminal courts or the contempt of court jurisdiction.

The Court of Appeal decision

The Court of Appeal revered this decision. The Court of Appeal commented that:

  • The profit sought to be gained was not equivalent to the compensation payable. Looking at it from the perspective of those engaging in the fraud at the outset the potential profit was likely to exceed the damages payable if the claim was unsuccessful (i.e. in the present case those involved were hypothetically weighing up a potential profit of around £85,000 compared to a damages award to cover Axa's costs, being only around £24,000);
  • In any case, it would not be appropriate to limit the recovery of exemplary damages only to cases where the profit made by the wrongdoer could not be fully recovered through a compensatory award. This was inconsistent with the broader purpose of exemplary damages to punish and deter outrageous conduct; and
  • The fact that criminal or contempt of court proceedings might also be brought was also not a bar to an award of exemplary damages.

The Court of Appeal considered that this was a "paradigm case" for the award of exemplary damages because it involved a cynical, sophisticated and sustained fraud. The Court awarded exemplary damages of £20,000 against each of the three respondents involved in the scheme.

Application to New Zealand

There have not been any New Zealand cases in which exemplary damages have been awarded in this context. However, there is some real scope for development in this area.
The New Zealand courts' approach to exemplary damages has typically been broader than in the United Kingdom. The courts here do not consider themselves bound by the rigid categories set out in Rookes v Barnard.

There has been some narrowing of the jurisdiction in recent years. In Couch v Attorney-General (No 2) [2010] NZSC 27, [2010] 3 NZLR 149 the Supreme Court confirmed that only deliberate or subjectively reckless behaviour would meet the threshold, whereas some earlier cases had suggested that objective recklessness or egregious negligence might be sufficient. However, insurance fraud will inevitably be deliberate so this line of authority is unlikely to be a barrier to awards in the present context.

Ultimately, there would seem no reason why the New Zealand courts would not take a similar approach to the United Kingdom if a suitable case emerged.

A claim for exemplary damages might potentially be very attractive to an insurer faced with egregious or sustained fraud because it is a remedy that the insurer can wield itself, rather than being at the mercy of the criminal authorities. If such awards become more routine, they will also send a strong message that insurance fraud does not pay.

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