REFORMING INSURANCE LAW: - Law Commission

is unduly harsh. Whatever the effect on the policy and on other policies, there needs to be
express provision in any UK legislation as to the effect of cancellation on the rights of an
innocent co-assured. It is implicit in the legislation that, unless steps are taken to cancel the
policy, it remains in full force other than in respect of the claim itself. 288
Effect of fraud on later claims
6.8 If, it is the case that the contract itself is to be treated as repudiated, then the second
uncertainty is whether the right to terminate dates back to the loss which gave rise to the
fraudulent claim or whether it takes effect from the date of the fraud. The assured may suffer
genuine loss A and then genuine loss B, followed by a fraudulent claim in relation to loss A.
Plainly, as stated above, the fraud taints loss A itself, but if the insurers have the right to
terminate the policy does that mean that loss B also disappears, or is it the case that at the time
that loss B occurred the policy was valid and in existence so that the termination of the policy
cannot affect the assured’s accrued rights in respect of loss B? The Insurance Contracts Act
1984 does not directly address this problem, although it would seem that cancellation is possible
only by the insurer giving fourteen days’ notice of cancellation in accordance with s 59 of the
1984 Act. If that is right, then the Australian solution is that the claim itself is lost, but that losses
which occur up to the date on which cancellation takes effect are payable by the insurers. Again,
the solution is not an obvious one and it might be argued that if it is right that insurers have the
right to refuse to deal with the assured in the light of his fraud then the fraud – albeit backdated
to the loss which gave rise to the fraud – should preclude future claims.
Relief from fraud
6.9 The final issue is whether fraud should disentitle the assured from making any claim against
the insurers. The point is particularly acute where fraud relates only to part of a claim, typically
in the case of an exaggerated claim where the amount of the assured’s loss is less than the sum
claimed. The approach of English law is to treat an exaggeration as fraudulent when it both goes
beyond a mere “bargaining” claim 289 designed to ensure that any offer by the insurers does not
undervalue the actual loss and where the amount of the exaggeration is substantial. English law
has rejected any possibility of apportionment 290 and has held that exaggeration which is
substantial taints the entire claim. The legal policy behind this is to discourage fraudulent claims.
One uncertainty here is that some cases take the view that the extent of exaggeration is to be
measured both in absolute and in proportional terms, so that exaggeration by a significant sum is
always fraud but a small exaggeration may also be fraud if the claim itself is small. 291 Other
288 Barroora Pty Ltd v Provincial Insurance (Australia) Ltd (1992) 7 ANZ Ins Cas 61-103; C E Heath Casualty and
General Insurance Ltd v Grey (1993) 32 NSWLR 25.
289 See: London Assurance v Clare (1937) 57 Ll LR 254; Nsubuga v Commercial Union Assurance Co plc [1998] 2
Lloyd’s Rep 682; Horne v Norwich Union Insurance Ltd July 2005, unreported.
290 Despite the views of Staughton LJ in Orakpo v Barclays Insurance Services Ltd [1995] LRLR 433, followed in
Transthene Packaging Co Ltd v Royal lnsurance (UK) Ltd [1996] LRLR 32.
291 The authorities on the extent of exaggeration are too numerous to be mentioned here. The most important recent
cases are: Orakpo v Barclays Insurance Services Ltd [1995] LRLR 443; Transthene Packaging Co Ltd v Royal
lnsurance (UK) Ltd [1996] LRLR 32; Insurance Corporation of the Channel Islands Ltd v McHugh (No.1) [1997]
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