QBE European Operations

Issues forum
Insurance fraud
April 2013

Issues forum
Insurance fraud
April 2013

Contents Definition 2 Detection 2 Fraud indicators What can QBE clients do? Case Law 3 3 4

Conclusion 5 Disclaimer 6

QBE Issues forum/Insurance fraud - April 2013

The making of dishonest Insurance claims has become all too common. There seems to be widespread belief that insurance companies are fair game and that defrauding them is not morally reprehensible.
So said Lord Justice Millet in Galloway v GRE in 1999 and, with the Association of British Insurers (ABI) estimate that fraudulent insurance claims now cost the industry 2.1bn per year, the perception he described appears to have become even more entrenched. Although traditionally, the majority of fraudulent claims have been made against household and motor policies, in such challenging economic times there is no doubt that personal injury claims, including those made under Casualty policies (principally Employers Liability and Public Liability), have and will continue to attract the attention of fraudsters. Insurers have also striven to raise the judiciarys awareness of fraudulent activity with a series of high profile test cases, some of which are outlined below. In this Issues Forum, we seek to examine the types of fraud most regularly perpetrated, key fraud indicators, relevant counter-fraud strategies including the remedies available to identify and challenge fraudulent claims, and to consider what may be expected beyond the imminent changes to the civil justice system

QBE Issues forum/Insurance fraud - April 2013

Definition In broad terms, fraudulent claim describes the scenario of a claimant who dishonestly seeks to gain a benefit over and above his or her legitimate entitlement. In Casualty claims, the two main categories of fraud are: Fabrication: either an accident did not happen or no injury was sustained thereby rendering the entire claim bogus Exaggeration: where the claim arising from a genuine accident resulting in injury contains exaggerated elements, for example loss of earnings or care, but is in other respects bona fide. Fundamentally, there is no difference between an accident claim where in fact there was no accident and the claimant came by his injuries in different circumstances, or a case in which the claimants symptoms resolve within three weeks but his absence from work persists for eight weeks. Both represent fraudulent conduct and contribute to the spiralling costs facing the industry which are ultimately passed on to policyholders. Detection Although politicians vociferously articulate concerns over the compensation culture and, more recently, the incidence of fraudulent whiplash claims, it has been the insurance industry which has taken the lead in developing and devising fraud detection strategies. In 1994, the Claims Underwriting Exchange (CUE) was set up by various UK insurer members to provide a central database of motoring, home, personal injury and industrial disease incidents reported to insurance companies. Currently, the database contains in excess of 30 million claims details which are available to subscribers on request. The database has proven to be an invaluable source of intelligence for insurers across all lines of business. The Insurance Fraud Bureau (IFB) is also funded by insurers responsible for managing in excess of 95% of UK personal lines claims. Since its inception in 2006, the IFB has been committed to the detection and prevention of organised and crossindustry insurance fraud. CUE and the IFB represent effective means by which insurers have been able to share intelligence in their attempts to expose and challenge bogus insurance claims. Allied to traditional methods of detection like covert surveillance, internet searches and credit checks, these bodies have been successful in exposing false claims and concurrently, helping to put the issue firmly on the political agenda. However, prior to 2012, many insurers shared a sense of frustration at the perceived unwillingness of UK police forces either to treat referrals seriously or to follow them up with a sufficient number of investigations and prosecutions. It was against this background and after a period of consultation between the ABI and the City of London Police that the Insurance Fraud Enforcement Department (IFED) was set up in January 2012. Based in the City of London Polices Economic Crime Department and funded by ABI members, IFED is a specialist, 34-strong unit dedicated to exposing motor, Employers Liability and Public Liability fraud. By the end of its first year, IFED had received nearly 500 referrals from 50 insurers, made more than 200 arrests, issued cautions to some 50 suspects and secured at least one conviction resulting in a custodial sentence

QBE Issues forum/Insurance fraud - April 2013

Fraud indicators No two claims are ever the same, but features that are commonly present in fraudulent casualty claims include: The accident is not witnessed The accident is witnessed and corroborated by a close friend, colleague or family member There is a delay in reporting the incident There are discrepancies between the claimants account of the incident, those of witnesses, the pleaded allegations, or accounts contained in other sources of evidence such as hospital records There is no record of medical treatment, or there is a delay in seeking treatment The individual claimant is disgruntled in some way. For example, is or has been subject to disciplinary action, or is at risk of redundancy

The claimant or witnesses are repeat claimants There is an unusually short delay between the accident and the letter of claim. Wherever more than one of the above exists, a more detailed level of scrutiny and investigation will be required to determine whether the claim is fraudulent or contains spurious elements. What can QBE clients do? Fraud indicators should be relatively easier to spot in Employers Liability rather than Public Liability cases, by virtue of the proximity and access to the claimant, together with any intelligence and anecdotal feedback from work colleagues. Clients have a major contribution to make in this respect. Claims are often conceived in the immediate aftermath of an incident so it is essential that clients accident

investigation processes accurately capture and preserve contemporaneous evidence. A careful account of the accident together with details of the individuals injuries should be obtained and recorded. All relevant witnesses should be interviewed as soon as possible, including those who were in the immediate vicinity but didnt actually witness the event. Doing so helps reduce the possibility of collusion at a later date. Discrepancies between these accounts should be challenged and articulated in contemporaneous documentation. Similarly, the late reporting of accidents should be treated as a breach of company safety policy, and fully interrogated. Caution should be exercised with adopting a no blame approach to the post incident investigation process, insofar as ensuring a full and accurate picture of events is elicited. Failure to do so for fear of indirectly attributing blame, may pave the way for fabricated or exaggerated claims later.

QBE Issues forum/Insurance fraud - April 2013

Case Law The following cases illustrate the judicial sanctions available to the Courts where a claim is proven to be fraudulent whether in whole or part. Kirk v Walton [2009] Mrs Kirk claimed to have developed fibromyalgia following an accident, leaving her severely disabled and served a schedule of loss in excess of 800,000. She claimed she needed crutches and sometimes used a wheelchair. The insurers did not dispute liability and, at an early stage of the proceedings made an offer which was initially rejected. The insurers subsequently obtained medical evidence which disputed diagnosis and raised the possibility of embellishment or exaggeration. They also obtained surveillance evidence over a sustained period of time which cast Mrs Kirk in a very different light from her various statements in which she had always maintained she was severely disabled. After disclosure of the defendants evidence, negotiations culminated in settlement of the claim. Mrs Kirk decided to accept the defendants earlier offer on terms as to costs. Post settlement, the insurers applied for the case to be transferred to the High Court for permission to bring proceedings for contempt of court against Mrs Kirk pursuant to Civil Procedures Rules (CPR) 32.14 for making false statements without an honest belief in their truth. At the subsequent hearing, a number of the insurers allegations were upheld. There was a clear disconnect between the picture of disability painted by Mrs Kirks witness evidence and the relatively normal life she was leading - as evidenced by the surveillance footage. Mrs Kirk was found guilty of contempt of court. Depending upon the gravity of the defence, contempt can carry a custodial sentence,

but on this occasion, Mrs Kirk escaped prison and was fined 2,500. Fairclough Homes v Summers Ltd (2012) The claimant was injured in an accident at work for which liability was initially admitted. This was later withdrawn when medical reports cast doubt on the claimants account of the accident. The claimant did nonetheless obtain judgment on liability with damages to be assessed. The claimant alleged that as a result of the accident, he was subject to severe movement restrictions and signed a statement to that effect. His schedule of loss totalled almost 840,000 but by that stage, the defendants had obtained surveillance evidence in which the claimant exhibited little or no disability and was actually working. Although the trial judge concluded that the claim was fraudulent, he accepted that it did incorporate bona fide elements and went on to disentangle the legitimate from the false elements, awarding the claimant just over 88,000 plus costs. Post judgment, the defendants made an application to strike out the claim as an abuse of process. The case was progressed to the Supreme Court for determination as to whether, as a matter of principle, an exaggerated claim could be struck out as an abuse. Although the Supreme Court declined to strike out Mr Summerss claim, it held that, in appropriate cases, the gross or substantial exaggeration of claims would justify striking out. However, the Court provided no guidance as to what level of fraud or exaggeration would qualify for such a sanction. Fari v Homes for Haringey Mrs Fari claimed to have injured her right knee after tripping over a defective paving slab. The defendants admitted liability and the claimant served a schedule of loss in excess of 740,000, much of

which comprised claims for past and future care. It transpired that the claimant had a pre-existing deformity within her knee and the defendants surveillance evidence established that she had grossly exaggerated the effect of her injuries. The medical experts agreed that the injury would have resulted in a minor aggravation of no more than two to three months. Before trial, the defendants made an application to strike out the entire claim on the basis that the exaggeration was so extensive that it amounted to an abuse of process. On hearing the application, the trial judge found that the claimant had suffered a very minor injury, valuing the legitimate element of the claim at no more than 1,500 - less than 0.5% of the original claim. In his judgment, the claimants attempts to deceive the court were significant and, because the award was so small, he decided to apply the Supreme Courts reasoning in Fairclough v Summers and struck out the claim in its entirety. Airbus and QBE Insurance v Adam Roberts Mr Roberts was an aircraft technician employed by Airbus. He alleged that due to an accident in work he was left severely disabled and pursued a claim for continuing losses including loss of earnings, care and support, equipment, adaptations to property, medication and treatment. His schedule of loss was not fully quantified, but considered to be potentially worth more than 500,000. QBE commissioned surveillance evidence which captured Mr Roberts carrying out arduous activities completely at odds with his contention that he could only walk short distances with the aid of crutches. QBE disclosed the surveillance evidence and quickly settled the claim on the basis that Mr Roberts retained interim payments already made of 8,000, but received no other damages and no costs. As with

QBE Issues forum/Insurance fraud - April 2013

Mrs Kirks case, following settlement, QBE applied for the case to be transferred to the High Court and brought proceedings for contempt of Court pursuant to CPR 32.14. At the hearing in December 2012, QBEs allegations were upheld. The Court found that the surveillance evidence was wholly inconsistent with the Defendants description of his condition and in finding Mr Roberts guilty of contempt imposed a custodial sentence of six months, making it plain that but for a number of personal mitigating factors the sentence would have been longer. Other remedies Referral to IFED, striking out and/or contempt of court proceedings, should be reserved for the more exceptional cases where, in the words of the Supreme Court in Summers, there has been a massive attempt to deceive the Court. From an insurers perspective, any claim where damages or third party costs are reduced can represent a successful outcome and other, less draconian remedies may be more suitable where the attempt at deception, though fraudulent, is less extreme. Tactically, the question as to whether fraud can be proven may be finely balanced. However, by presenting relevant evidence at the appropriate stage, insurers can set the tone for negotiations in an attempt either to secure the withdrawal or discontinuance of the claim, or sizeable discounts in damages and costs. CPR Part 36 offers remain a useful remedy against exaggeration of a bona fide claim, where the defendant can pick its way around the bogus elements by using Part 36 in an attempt to meet the legitimate components only, and capping its own potential costs in the process if that offer is not beaten in court.

The Jackson Reforms and the Legal Aid Sentencing and Punishment of Offenders Act 2012 Key components of the programme of reforms include: The abolition of Conditional Fee Agreements (CFA) and after the event insurance (ATE) Qualified one way costs shifting (QOCS) A new pre-action protocol for Employers Liability and Public Liability cases in which the costs savings will be substantial, provided that liability is admitted and the claim resolves within a foreshortened three-stage process. Although over time, the costs associated with CFAs and ATEs have become disproportionate, one paradoxical benefit has been the level of screening applied to new cases by ATE insurers before policies have been issued to individual claimants. With the abolition of ATE insurance, that level of initial scrutiny will no longer apply to claims arising from accidents on or after the 1 April 2013. Under the new QOCS rules, defendants who successfully repudiate claims at the post litigation stage will no longer be able to recover costs against unsuccessful claimants. Although a claimant will lose the benefit of QOCS should his claim or part of it is proven to be fraudulent, in reality, the majority of fraudulent claimants tend to be impecunious. In those circumstances, the prospects of being exposed and presented with a sizeable order for costs is unlikely to disincentivise prospective claimants who may be contemplating a bogus or exaggerated claim. The imminent procedural changes to the pre-action protocol will also shorten the time available to investigate and communicate liability decisions for EL and PL claims 30 and 40 days respectively from claim notification. However, the financial savings to defendants for keeping within protocols will be significant, bringing with it inevitable pressure to make an early admission of liability - a point that wont be lost on those wishing to exploit the new system; not least of all, fraudulent claimants.

Conclusion Quite apart from the enormous cost associated with fraudulent claims, the propensity for fraudulent Employers Liability and Public Liability claims can impair an insurers overriding objective to pay valid claims promptly. There is a risk that defendants will cast suspicion on many genuine claims by putting claimants to strict proof when, in other circumstances, they may not have been called upon to do so. In such lean economic times and with reforms to the civil justice system imminent, there is every reason to believe that Casualty claims will continue to attract the attention of fraudsters. Against such a background, organisations need to be vigilant in dealing with liability claims. Equally, claimants who are prepared to invent allegations or symptoms, or to exaggerate their claims must understand that in doing so, they may face serious consequences. The encouraging messages to take from the recent developments described here are that the substantial time and resources committed by insurers to counter fraud strategies have succeeded in placing insurance fraud firmly on the radar of the government and judiciary in a way that was not hitherto the case. Insurers and their clients now have substantive tools at their disposal to identify fraudsters, as well as successfully challenge their claims.

QBE is pleased to be at the forefront of legal decisions which illustrate our resolve to successfully combat fraudulent claims. We are also proud of our reputation in the payment of valid claims and, as providers of general insurance, we ensure that claimants are compensated appropriately, and fraudsters are taken to task.

QBE Issues forum/Insurance fraud - April 2013

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Authors Ben McBean Ben is a claims controller in QBEs UK Casualty Claims Technical Team. He joined QBE in 1997 and is a Bachelor of Law. He specialises in complex technical and high value catastrophic injury claims with a particular interest in fraud, tour operators liability and occupational stress. Ben is also responsible for co-ordinating QBEs UK Casualty fraud strategy. Matthew Harrington Matthew is the Senior Partner of BLMs Cardiff and Bristol offices. He specialises in high value injury and occupational disease claims, together with the defence of health and safety prosecutions. A regular speaker at risk management and insurance industry events, Matthew joined BLM in 2007.

Disclaimer This publication has been produced by QBE Insurance (Europe) Ltd (QIEL). QIEL is a company member of the QBE Insurance Group. Readership of this publication does not create an insurer-client, or other business or legal relationship. This publication provides information about the law to help you to understand and manage risk within your organisation. Legal information is not the same as legal advice. This publication does not purport to provide a definitive statement of the law and is not intended to replace, nor may it be relied upon as a substitute for, specific legal or other professional advice. QIEL has acted in good faith to provide an accurate publication. However, QIEL and the QBE Group do not make any warranties or representations of any kind about the contents of this publication, the accuracy or timeliness of its contents, or the information or explanations given. QIEL and the QBE Group do not have any duty to you, whether in contract, tort, under statute or otherwise with respect to or in connection with this publication or the information contained within it. QIEL and the QBE Group have no obligation to update this report or any information contained within it.

To the fullest extent permitted by law, QIEL and the QBE Group disclaim any responsibility or liability for any loss or damage suffered or cost incurred by you or by any other person arising out of or in connection with you or any other persons reliance on this publication or on the information contained within it and for any omissions or inaccuracies. QBE Insurance (Europe) Limited and QBE Underwriting Limited are authorised and regulated by the Financial Services Authority. QBE Management Services (UK) Limited and QBE Underwriting Services (UK) Limited are both Appointed Representatives of QBE Insurance (Europe) Limited and QBE Underwriting Limited.

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4276/QBEIssuesForumInsuranceFraud/April2013 QBE Insurance (Europe) Limited, QBE Re (Europe) Limited and QBE Underwriting Limited are part of QBE European Operations, a division of the QBE Insurance group. All three companies are authorised and regulated by the Financial Services Authority.