Summary of article by UK legal academic Gerald Swaby entitled “Blurring distinctions: Should innocent insureds be tarred with the same brush as their fraudulent agents? (Insurance Law Journal April 2013 Vol 24 No. 1).
A husband and wife go through an acrimonious separation. One spouse acts violently against the other by burning the house down. Should the victim forfeit his/her insurance claim?
In his recent article, Gerald Swaby argues that the victim should not forfeit her claim in this situation. There have been a number of cases, where the husband and wife hold a joint policy and one party (frequently, the husband) commits a fraudulent act. The wife then makes a claim on the insurance policy. This begs the question – should she be indemnified either in full, or in part, under the policy?The traditional approach, for a joint insurance policy allows for the wrongdoing of a co-insured to preclude a claim by the innocent co-insured because the fraudulent act of one will taint the whole contract including the innocent party’s interests. Further, if the fraudster husband is acting as an agent for his innocent wife, then the claim will be tainted due to the principles of agency law, which holds a principal liable for the acts of their agent, including, even, fraudulent acts. The rationale for this is to prevent the wrongdoer indirectly benefitting from fraud. This is the position in the UK. A husband can be an agent for his wife and the wife can be precluded from making any claim, if the husband commits fraud.
In a 2001 UK case (Direct Line v Khan), the husband and wife owned a home as tenants in common. The husband committed fraud. The wife was a co-insured under the joint policy but innocent of the fraud. The Court of Appeal held that the wife’s claim was not severable from her husband’s fraud. Her husband acted as her agent and she was his principal. As a joint policy holder, the fraud taints the innocent just as if he were an agent for the other party. The Court in this case refused to sever the policy (holding that the wife’s interests were separate to those of her husband).
Gerald Swarby takes the view that this is a harsh approach and an unjust decision and that where there is a joint interest with a co-insured, the UK Courts should be able to develop an equitable discretion to sever the policy. He prefers the more modern approach, which has been adopted in Australia, where the Courts are more willing to sever joint insurance policies.
In a 1998 Tasmanian case, the Court held that the insurance contract was composite, in accordance with the social reality of the situation. Although this decision does not bind all states, it is nevertheless persuasive. Although Australian law follows the UK common law that the husband can be an agent for his wife,
Gerald Swarby says that it remains to be seen whether an Australian court would adopt the same approach as the approach in Direct Line and allow a husband’s fraud to taint his wife’s claim via agency. The agency argument would be good for insurers but, due to the Australia approach to joint policies (which enables them to be severed), this may not occur. Further, the Insurance Contracts Act 1984 (ICA) alters the common law position. Section 56(1) provides that, if the insured makes a fraudulent claim, the insurer may not avoid the contract, but may refuse payment of the claim. under S56(2) of the ICA, the Court has a discretion to allow the fraudulent party to be fully or partly indemnified for his or her loss, where a minimal or insignificant part of the Claim is made fraudulently, provided it is just and equitable and non-payment would be ‘harsh and unfair’, while bearing in mind then need to deter fraud (S56(3).
The Joint Law Commissions have proposed statutory reform; that there should be a presumption that any fraud committed by one party is done on behalf of all parties. The starting point is all policy-holders forfeit their claims and the onus should be on the innocent party to rebut this presumption. If the policy-holder can prove that the fraud was not carried out on his or her behalf, or with his or her knowledge, then the innocent party should have the benefit of the policy.
Gerald Swarby argues that this is unfair to the innocent insured as it shifts the onus onto the innocent insurance to prove she should be indemnified. He further argues that insurers should not be allowed to pursue an innocent insured for the insurer’s investigation costs in connection with the agent’s fraud, particularly in consumer claims because the principal (usually the innocent wife) is often impecunious.
Comment
In practice, policies often impose the consequences of the fraud on the innocent insured, whether or not the policy is a composite one. They may include a term that allows the insurer to refuse to pay a claim if either of the insureds is guilty of fraud.
Alternatively, there may be a term permitting the insurer to refuse to pay a claim if either of the insureds is guilty of fraud. Or the insurer may include a term making each insured responsible for the conduct of the others. If it does so, it appears that the term must make it clear that it applies whether the insurance is composite or joint. However, it is unclear whether such terms override the common law position. In the 2000 case of MMI General Insurance Ltd v Baktoo, the Court held that the wife was not entitled to recover and that an exclusion clause in the contract, which stated that a co-insured acted as agent for the other co-insured, does not discharge the insurer’s liability of payment to the innocent insureds.