REFORMING INSURANCE LAW: - Law Commission

cases suggest that the matter is to be looked at purely in proportional terms, so that, for example,
exaggeration by £2000 is not fraud where the total loss is 300 times greater. 292 The English cases
also seem to accept the concept that if the assured has suffered two entirely separate losses from
the same event fraud in relation to one will not taint the other, 293 although the point is unclear. 294
6.10 Sections 56(2) and 56(3) of the 1984 Act, by contrast, adopt a proportionality approach.
Section 56(2) states that the court may, “if only a minimal or insignificant part of the claim is
made fraudulently and non-payment of the remainder of the claim would be harsh and unfair,
order the insurer to pay, in relation to the claim, such amount (if any) as is just and equitable in
the circumstances”. This is subject to s 56(3), under which in making an order under s 56(2) the
court must “have regard to the need to deter fraudulent conduct in relation to insurance but may
also have regard to any other relevant matter.” 295 The discretion is thus a broad one, with the
relevant factors for the grant of partial relief being the degree of the fraud, the need to deter fraud
and any other circumstances. In recommending this approach, the ALRC noted that insurers
would not in practice reject an entire claim where there was a small and insignificant fraud
affecting part of it, and gave as an illustration of the circumstances in which its recommendation
for partial recovery would operate a baggage claim for A$3000 which included a fraudulent
claim for a camera worth A$200. 296 However, a subsequent example given by the ALRC in its
notes to its draft Bill referred to fraud of A$100 in a claim of A$10,000, and the Explanatory
Memorandum leading to the Act referred to fraud of A$50 in a claim of $100,000. It is unlikely
that the Australian position is in practice any different to that prevailing in England. The
examples given by the ALRC and in the Explanatory Memorandum would not be treated as
fraud at all in England, whereas in Australia they would be treated as fraud but which was
nevertheless capable of being excused under s 56(2).
6.11 Should s 56(2) be adopted in this jurisdiction? Surprisingly underwriters appear to have no
objection to the subsection, as indeed the ALRC had predicted. It has been tested in three
contexts. The first is where the assured has made a false statement in the course of his claim as
regards the circumstances of the loss or the events leading up to it: the view taken here is that a
false statement which relates to the entirety of the claim is not one which can be described as
relating “only [to] a minimal or insignificant part” of it. 297 The second is where the assured has
exaggerated his claim. The third is where the assured has suffered a number of divisible losses
and there is fraud in respect of some of them. It is notable that the ALRC’s examples were of the
third type, and it has been doubted whether partial fraud in relation to a single loss falls within s
LRLR 94; Nsubuga v Commercial Union Assurance Co plc [1998] 2 Lloyd’s Rep. 682; Galloway v Guardian Royal
Exchange (UK) Ltd [1999] LRLR 209; Baghbadrani v Commercial Union Assurance Co plc [2000] Lloyd’s Rep IR
94; Direct Line v Khan [2002] Lloyd’s Rep IR 151; Micro Design Group Ltd v Norwich Union Insurance Ltd [2005]
EWHC 3093 (TCC); Axa Insurance Ltd v Gottlieb [2005] Lloyd’s Rep IR 369; Danepoint Ltd v Underwriting
Insurance Ltd [2005] EWHC 2318 (TCC).
292 Tonkin v UK Insurance Ltd [2006] EWHC 1120 (TCC).
293 Danepoint Ltd v Underwriting Insurance Ltd [2005] EWHC 2318 (Comm), an argument not made out on the
facts.
294 Cf the facts of Direct Line v Khan [2002] Lloyd’s Rep IR 151.
295 See Sutton, paras 15.86 to 15.88.
296 ALRC 20, para 243.
297 Gugliotti v Commercial Union Assurance Co of Australia (1992) 7 ANZ Ins Cas 61-104; Tiep Thi To v AAMI Ltd
(2001) 161 FLR 61.
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