REFORMING INSURANCE LAW: - Law Commission

6.5 The common law position, which reflects the standard fraud wording used in the London
market, that in the event of a fraudulent claim the assured is to forfeit all benefit under the
policy, 279 is that a fraudulent claim does not amount to a breach of the duty of utmost good
faith 280 but rather is a breach of contract so that the remedy of the insurers is not to avoid the
contract: the remedy is contractual only. 281 This principle is now statutory in Australia, s 56(1) of
the Insurance Contracts Act 1984 stating that the insurer may not avoid the policy. 282 It is settled
law in England that the insurers have the right to refuse to pay a fraudulent claim, and s 56(1) of
the 1984 Act similarly provides that the insurers may refuse payment of the claim. From that
point onwards there are three uncertainties in English law which have been resolved in Australia.
6.6 Fraud by one co-assured is in principle not fatal to the rights of another co assured, 283 in the
absence of agency, 284 although in the case of joint insurance fraud by one joint assured affects
the rights of all. 285
Effects on the policy and on other policies
6.7 The first is whether the insurers have the right, in addition to refusing to pay the claim, to
treat the policy as repudiated and accordingly to terminate the contract for breach. This matter
was carefully left open by the Court of Appeal in Axa General Insurance v Gottleib. 286 If the
insurers are limited to refusing to pay the claim, the fraud is necessarily backdated to the loss
itself, so that fraud subsequent to the loss itself means that there was never a point at which the
insurers were liable to pay the claim. The point has been addressed in the Australian legislation, s
60(1)(e) of the 1984 Act stating that where the assured under a general policy has made a
fraudulent claim the insurers are entitled to cancel both the policy itself and also any other policy
between the parties on the basis that the insurers cannot be expected to maintain a contractual
relationship with a fraudster. 287 The notion that insurers can cancel other insurance contracts as
well is not one which has arisen in England, and there is certainly room to argue that the sanction
279 Britton v. Royal Insurance Co (1866) 4 F. & F. 905, 909.
280 A line of authority, starting with The Litsion Pride [1985] 1 Lloyd’s Rep 437, and continued in Continental
Illinois National Bank of Chicago v Alliance Assurance Co Ltd, The Captain Panagos [1986] 2 Lloyd’s Rep 470 and
by Sir Roger Parker in Orakpo v Barclays Insurance Services Ltd [1995] LRLR 433, adopted the utmost good faith
approach.
281 The Star Sea [2001] Lloyd’s Rep IR 247; K/S Merc Skandia XXXXII v Certain Lloyd’s Underwriters [2001]
Lloyd’s Rep IR 802; Agapitos v Agnew [2002] Lloyd’s Rep IR 573; Marc Rich Agriculture Trading SA v Fortis
Corporate Insurance NV [2005] Lloyd’s Rep IR 396.
282 Based on ALRC 20, para 243. See Walton v The Colonial Mutual Life Assurance Society Ltd [2004] NSWSC
616. The relationship between good faith and fraudulent claims is discussed in Sutton, paras 15.71 to 15.73 and
15.82 to 15.83.
283 VL Credits Pty Ltd v Switzerland Insurance Co [1990] VR 938.
284 Direct Line v Khan [2002] Lloyd’s Rep IR 151, in which the Court of Appeal was prepared to accept that a
husband-wife policy was composite and not joint, but that the husband acted as agent for the wife in making a
fraudulent claim. If there is agency, then s 56(1) of the 1984 Act reaches the same result: it expressly provides that a
fraudulent claim made by a person who is not the assured is itself a fraudulent claim.
285 MMI General Insurance v Baktoo [2000] NSWCA 70.
286 [2005] Lloyd’s Rep IR 369.
287 ALRC 20, paras 243 and 251.
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