Chapter 2 – Some Definitions, Defences, and the Law

Defining insurance fraud

· The Canadian Task Force on Insurance Fraud was formed to create a unified action to deter and control insurance fraud. One of their major recommendations was the formation of the Canadian Coalition Against Insurance Fraud

· Insurance fraud – any act or omission w/ a view to illegally obtaining an insurance benefit

· In law, the mental intent required for the commission of a crime is referred to as mens rea – the guilty mind. This differentiates a mere mistake from the commission of an act to defraud

· Insurance fraud include such things as feigning a break-in and theft, staging an auto accident, or padding a claim significantly or intentionally

Criminal law

· It is an offense to commit a fraud

· Commonly fraud has been defined as the use of deceit, trickery, or breach of confidence to gain unfair or dishonest advantage

· The key elements of fraud were identified as dishonesty and deprivation

· Dishonesty – obtaining something illegally or by deceit

· Deprivation – taking something away so that the economic benefits flow not to the rightful recipient but to a criminal perpetrating a crime

· Specific fraudulent activities under the Criminal Code:

o Arson

o Bribery

o Criminal breach of trust

o Fabricating evidence

o Forgery or making a false document (includes computer records)

o Fraudulent concealment

o Fraudulently destroying or falsifying documents of title

o Impersonation

o Making false statement by affidavit

o Misappropriating money

· These crimes are not necessarily linked to insurance. A common type of insurance fraud involves the making of a false affidavit – an insured a sworn proof of loss form using false info

Policy conditions

· Policy conditions help to maintain the balance in an insuring relationship

· These conditions promote the control of fraud

· The basic categories of conditions are:

o Those developed by insurers that are an integral part of the policy contract wordings

o Legislated conditions that are

§ Expressly designed for certain types of policies

§ Generally applicable to policies other than those dealt w/ specifically

· Certain legislated conditions are mandatory for certain types of policies. Property insurance policies providing cover against the peril of fire are subject to the fire stat conditions. In auto insurance, most provinces have their own unique conditions

Fire insurance

Misrepresentation

· In common law provinces if a person misrepresents the facts when applying for insurance the insurer may be entitled to void the contract

· To void a policy the misrepresentation must be material – it must affect how an insurer would have judged the risk

· In Quebec the situation is similar. The insured must make material facts known to the insurer. However, the insured is not required to divulge facts that are well known and that the insurer is presumed to know. The policy will be void if a misrepresentation or concealment occurs but only if the insured was guilty of bad faith or if it can be established that the insurer would not have insured the risk

· The 2 conditions that apply in Quebec are:

o Representation of risk

o Misrepresentation or concealment

Material change

· The insured must promptly report any material change in the risk while the policy is in force

· Just b/c the insured does not report a material change does not mean that a fraud has occurred

· In the common law provinces the contract may be void as to the part of it affected by the change

· In Quebec the entire policy may be void

· Case example page 6

Termination

· To effectively cancel a policy, the precise terms of cancellation must be applied

· Only part of the premium (a pro rata amount) is returned to the insured when the policy is cancelled

· The entire premium must be returned when the policy is voided ab initio

Requirements after loss

· The insurer has a right to ask for detailed info as outlined in legislation

· To properly document a claim the insured may be asked to provide by statutory declaration:

o An inventory of destroyed and damaged property showing quantities, costs, ACV and particulars of the amount claimed

o How the loss occurred

o That the loss did not occur through any willful act or connivance of the insured

o Details of other insurance on the property

o The names of all others who have an interest in the property and any charges against the property

o Details of any changes in title, use, occupation, location, possession or exposures of the property

o The location of the property at the time of loss

o Detailed inventory of undamaged goods

o Documentation to show inventory or value of goods

Fraud

· In common law provinces any fraud may jeopardize the insured’s entire claim

· The courts have held that a gross overvaluation of a claim creates a presumption of fraud

· An insured might puff up the claim very modestly, which may not qualify as fraud

· In Quebec, the civil code provides that coverage will only be affected for the particular type of claim in question. For example, lying about property stolen in a burglary would not affect the insured’s coverage and the right to indemnity for a fire loss caused by burglars on the same occasion

Entry, control, abandonment/salvage

· The insurer has a right to enter damaged premises immediately after the loss to examine the property but does not have any right to control the property

· An insured may not abandon property to the insurer unless the insurer sanctions it

· The insured must take all reasonable steps to protect the property from further damage

· In Quebec, similar conditions exist in the section entitled safeguarding and examination of property

Notice to police

· In Quebec, the insured is required to promptly give notice to the policy of any loss caused by a criminal act

· Requiring insured to report crimes to policy may deter insurance crime

Investigations and general legal concepts

Waiver and estoppel

· The principles of waiver and estoppel apply to all insurance transactions

· Waiver – the voluntary or intentional relinquishment of a known right or conduct from which someone can infer that a right is relinquished

· Estoppel – a principle whereby an insurer is not permitted to renege on its position when an innocent party has relied on it

Duty of care

· A certain standard of performance is expected from insurance professionals

· Fiduciary duty – derived from the position of special trust and confidence that one who holds funds or items of value for another occupies. It implies a strong duty of responsibility on behalf of the holder of the funds or property towards the owner of the funds or property

· It is debatable whether the premium belongs to the insurer or whether the insurer is actually holding it ‘in trust’ until a claim occurs

· Generally in Canada, the relationship b/w the insurer and the insured has not been considered to be a true fiduciary relationship

· The commercial nature of the insurance relationship results in a certain degree of conflict b/w the insured and the insurer

Bad faith and good faith

· Bad faith – an absence of good faith

· Utmost good faith affects all areas of performance of the insurance contract but major areas are:

o Disclosure by an insured when applying for insurance

o Handling of claims

(case examples page 12)

· Insurers may expose themselves to bad faith claims should they:

o Fail to promptly investigate the event

o Intentionally offer an amount that is substantially and drastically lower than would be considered reasonable given the circumstances

o Fail to settle in a reasonable period of time considering the insured’s circumstances

o Unreasonably deny the claim

o Bring unfounded allegations against an insured in a self-interested and callous manner

o Ignore plaintiff’s evidence that adequately responds to issues in dispute

(case examples page 13)

· Punitive or exemplary damages – meant to punish the defendant. Such damages are awarded when conduct has been deemed to be high-handed, oppressive, outrageous, wanton, or evil usually w/ some form of malice towards the plaintiff

· Aggravated damages – aim to compensate but take full account of intangible injuries such as distress, loss of dignity, and humiliation caused by the defendant’s behaviour. They are not awarded in addition to general damages but as part of the general damages. Punitive damages and aggravated damages differ in that aggravated damages compensate plaintiffs rather than punish defendants

· Strategies for preventing bad faith lawsuits:

o Treat insureds fairly and w/ dignity

o Conduct a thorough investigation b4 taking action

o Consider any alternative measures to handle the claim

o Investigate in a professional manner until the case is closed

o Reassess positions as new evidence becomes available

Rights of individuals

· Insurance personnel should be aware of the Charter of Rights and Freedoms

· The Charter sets out some of the standards that must be respected by law enforcement

· Modern issues relating to good faith have considered the Charter and the invasion of a person’s right to privacy

· The legal system is fundamentally in place to ensure that justice prevails

· Public policy is an influential factor and shifts with time

· An act may not be a tort or a crime but it may be against public policy and theoretically would not be tolerated by our courts of law

Standard of proof

· The ordinary standard of proof on a civil matter is on the balance of probabilities

· In a criminal matter the standard of proof must be beyond a reasonable doubt

· Assessments are made based on the evidence raised and not on what is suspected to be true

· Proof must be more persuasive when fraudulent behaviour has been alleged. The burden of proof is more than the standard balance of probabilities test but less than beyond reasonable doubt required in a criminal case

Burden of proof

· In a criminal trial the burden of proof always remains w/ the Crown

· In a civil case the burden of proof usually is on the person bringing the action, the plaintiff

· The facts recorded in a proof of loss form must be proven by the insured

Evidence

· Evidence – anything presented at trial which attempts to prove the case

· Two main categories of evidence:

o Direct evidence – proves the fact in issue w/out the need to infer or make presumptions

o Circumstantial evidence – based on making inferences from connected facts

· Types of evidence:

o Sworn statements – from witnesses or the insured are the most common form of evidence. There are some instances when unsigned (unsworn) statements will be accepted by the courts

o Expert evidence – given on scientific, technical or professional matters given by qualified persons. Experts may also qualify to give opinion evidence based on the special knowledge or skill they possess

o Testimony given under oath – by witnesses at trial is a common method to bring evidence before the judge. Latin term – viva voce

o Documents – such as written contracts, deeds, share certificates, and other items

o Experiments – sometimes conducted in court by experts

o Real evidence – such as physical object can be brought before the court. This may include photos, videotapes, audiotapes, or any article

· A duty exists to sue reasonable care to preserve evidence

· Spoliation – the destruction of evidence b4 the case comes to trial

· What sanctions will be imposed when physical evidence is destroyed may depend on:

o Whether the party who did not have access to the evidence would be prejudiced by its loss

o Whether the evidence is relevant

o Whether it was destroyed intentionally to suppress the truth

Privilege

· Certain documentation in a claim file and evidence of communication may be granted special status to shield it form the opposing side

· The court applies the dominant purpose test to the item of evidence. Generally one can expect the following:

o Communication b/w the solicitor and client (insurer) is privileged whether litigation is anticipated or not

o Settlement negotiations are privileged

o Evidence collected in anticipation of litigation is privileged

o Reports produced by the investigative services division or insurance crime prevention bureau are privileged but they must have been made for the dominant purpose of obtaining legal advice and for anticipated litigation

Sample Review Questions - Fraud Awareness and Prevention

1. The Canadian Task Force on Insurance Fraud defined insurance fraud as any act or omission w/ a view to illegally obtain an insurance benefit.

2. The Criminal Code of Canada provides that:

Everyone who, by deceit, falsehood or other fraudulent means…defrauds the public or any person…of any property, money or valuable security…is guilty of an indictable offence.

3. The 2 key elements of fraud identified by case law in the criminal courts are:

a. Dishonesty – obtaining something illegally or by deceit.

b. Deprivation – taking something away so that the economic benefits flow not to the rightful recipient but to a criminal perpetrating a crime.

4. The 10 specific fraudulent activities mentioned in the Criminal Code are:

a. Arson

b. Bribery

c. Criminal breach of trust

d. Fabricating evidence

e. Forgery, or making a false document (including computer records)

f. Fraudulent concealment

g. Fraudulently destroying or falsifying documents of title

h. Impersonation

i. Making false statement by affidavit

j. Misappropriating money

5. Two basic categories of policy conditions are:

a. Those developed by insurers that are an integral part of the policy contract wordings

b. Legislated conditions that are:

i. Expressly designed for certain types of policies

ii. Generally applicable to policies other than those dealt w/ specifically

6. The statutory condition dealing with misrepresentation – in common law provinces if a person misrepresents the facts when applying for insurance the insurer may be entitled to void the contract – the misrepresentation must be material. In Quebec, the situation is similar but the insured is not required to divulge facts that are well known and that the insurer is presumed to know.

7. Representation of risk in Quebec – the insured if the insurer requires it, is bound to represent all the facts known to him which are likely to materially influence an insurer in setting…premium, the appraisal of the risk or the decision to cover it, but he is not bound to represent facts known to the insurer or which from their notoriety he is presumed to know, except in answer to inquiries

8. The statutory condition relating to material change – the insured must promptly report any material change in the risk while the policy is in force. Just b/c the insured does not report a material change does not mean that a fraud has occurred.

Example: the insured had decided to demolish his rental property and construct a triplex in its place. Tenants were vacated but the insurer was not notified. A few days later the home was destroyed by fire. Evidence was not established that a material change occurred. The court was satisfied that the home was unoccupied for less than 30 days. There was insufficient evidence that the insurer would have refused to insure or change its coverage has it been informed of the redevelopment plan.

10. The insured may be asked to provide by statutory declaration:

a. An inventory of destroyed and damaged property showing quantities, costs, ACV, and particulars of the amount claimed

b. How the loss occurred

c. That the loss did not occur through any willful act or connivance of the insured

d. Details of other insurance on the property

e. The names of all others who have an interest in the property and any charges against the property

f. Details of any changes in title, use, occupation, location, possession or exposures of the property

g. The location of property at the time of the loss

h. Detailed inventory of undamaged goods

i. Documentation to show inventory or value of goods

11. Two examples of claims that, according to the statutory conditions dealing w/ fraud, would invalidate a claim are:

a. The insured submits a proof of loss for property alleging he owns property that in fact belongs to someone else. A deliberate false statement is made in order to defraud the insurer.

b. The insured submits a proof of loss grossly exaggerating the value and quantity of property lost. She intends to defraud her insurance company.

12. False representation in Quebec – a claim made for property affected by a false representation can be denied. The Civil Code provides that coverage will only be affected for the particular type of claims in question. Example: lying about property stolen in a burglary would not affect the insured’s coverage and right to indemnity for a fire loss caused by burglars on the same occasion.

13. Statutory conditions do not grant the insurer the right to control the property. The insurer has a right to enter damaged premises immediately after the loss to examine the property and continues to have a right to enter to appraise the damages.

14. When a claim results from a criminal act, the general conditions imposes the insured to promptly give notice to the policy. This may help deter insurance crimes.

15. The principle of waiver – the voluntary or intentional relinquishment of a known right or conduct from which someone can infer that a right is relinquished. For example, if an insurer knows certain facts that would bar recovery under the policy, but treats the policy as if it were in force, then later these facts cannot be used to avoid liability.

16. The principle of estoppel – a principle whereby an insurer is not permitted to renege on its position when an innocent party has relied on it. For example, if an adjuster leads an insured to believe that a claim will be paid, this principle prevents a denial of coverage at some later date.

17. Fiduciary duty – implies a strong duty of responsibility on behalf of the holder of the funds or property towards the owner of the funds or property.

18. Six examples of bad faith exposures are:

a. Fail to properly investigate the event

b. Intentionally offer an amount that is substantially and drastically lower than would be considered reasonable given the circumstances

c. Fail to settle in a reasonable period of time considering the insured’s circumstances

d. Unreasonably deny the claim

e. Bring unfounded allegations against an insured in a self interested and callous manner

f. Ignore plaintiff’s evidence that adequately responds to issues in dispute

19. Punitive damages are often awarded for bad faith claims.

20. Aggravated damages – aim to compensate but take full account of intangible injuries such as distress, loss of dignity, and humiliation. It compensates plaintiffs rather than punish defendants.

21. In Wigmore v. The Canadian Surety Company, the judge cited 3 elements to determine whether a fiduciary duty existed:

a. The fiduciary has discretion and power

b. The fiduciary can affect the legal and practical interests of the beneficiary

c. The beneficiary is particularly vulnerable to the fiduciary’s power

22. Insurers have a right to resist inflated claims and they can do so vigorously.

23. Strategies for preventing bad faith lawsuits:

a. Treat insureds fairly and w/ dignity

b. Conduct a thorough investigation b4 taking action

c. Consider any alternative measures to handle the claim

d. Investigate in a professional manner until the case is closed

e. Reassess positions as new evidence becomes available

24. Against public policy – an act that supports, encourages, or permits conduct that offends the foundations upon which our society exists, theoretically would not be tolerated by our courts.

25. The standard of proof required in a civil court of law to prove fraud must be more persuasive. The burden of proof is more than the standard balance of probabilities test but less than beyond any reasonable doubt required in a criminal case.

26. In a criminal trial the burden of proving a charge always remains w/ the Crown. In a civil trial the burden of proof usually is on the person bringing the action, the plaintiff.

27. Evidence – anything presented at trial which attempts to prove the case.

28. The 2 main categories of evidence are:

a. Direct evident – proves the fact in issue w/out the need to infer or make presumptions

b. Circumstantial evidence – based on making inference from connected facts

29. The 6 types of evidence are:

a. Sworn statements

b. Expert evidence

c. Testimony given under oath

d. Documents

e. Experiments

f. Real evidence

30. Spoilation of evidence – refers to its destruction b4 the case comes to trial. Sometimes it is done intentionally b/c the item undergoes destructive testing.

31. Documentation or communication that is privileged are:

a. Communication b/w the solicitor and client (the insurer) whether litigation is anticipated or not

b. Settlement negotiations

c. Evidence collected in anticipation of litigation

d. Reports produced by the investigative services division or insurance crime prevention bureau. They must have been made for the dominant purpose of obtaining legal advice and for anticipated litigation.

CIP Study Guide

Fraud Awareness and Prevention C39