Just deserts

Fraudulent claims have become the hot topic of 2010, with the estimated cost of claimants pursuing dishonest claims rocketing to approximately £2bn each year according to the Association of British Insurers (ABI). This equates to an additional cost per policy holder of £44 per annum, but perhaps more startling is the ABI's estimates that £1.9bn of insurance fraud went undetected in 2009.

The continuing unsettled economic conditions are only likely to increase the risk of fraud further, so it is imperative that the insurance and legal industries join together to fight against it.

Historically, insurance fraud has been thought of by some as a 'victimless crime'. Nevertheless, insurers have become increasingly proactive in detecting and preventing fraud through a more focused approach and improved data sharing. Despite these moves forward, an independent opinion poll commissioned by the ABI in 2009 showed that 16 per cent of people would not rule out making an exaggerated insurance claim. These statistics demonstrate how vital a robust stance against fraudulent activity is.

One area of particular concern is personal injury litigation, which has seen a dramatic rise in the number of fraudulent claims being presented. These claims range from minor exaggeration of injuries to staged accidents and fictitious injuries. With such a surge in the level of spurious personal injury claims, measures to deter dishonest claimants are more important than ever.

The difficulty in personal injury litigation is that there are few means by which a claimant can be punished for pursing a fraudulent claim. Notwithstanding that a claimant may act fraudulently in bringing their claim either by inventing injuries or exaggerating actual injuries, they are still entitled to recover 'legitimate' damages from the tortfeasor. This was reaffirmed by the Court of Appeal case of Shah v Ul-Haq [2009] EWCA Civ 542, where three respondents brought claims for personal injury arising out of a road traffic accident (see Solicitors Journal 152/23, 16 June 2009). Liability was admitted but it was alleged that the second respondent was not present in the vehicle at the time of the accident. At first instance, it was held that the second respondent had not been in the car at the time of the accident and that the first and third respondents had participated in the conspiracy. Despite this finding, the judge refused to strike out their claims although proceeded to penalise them in costs (which exceeded the level of damages awarded).

The judgment was upheld by the Court of Appeal on the basis that a claimant should not be deprived of damages to which they are entitled simply because they had fraudulently attempted to gain a greater level of damages. The court felt that the most appropriate way to deal with these situations was to penalise the claimant in costs. While this appears to suggest that a fraudulent claimant will suffer a penalty, it is artificial given that it is frequently not possible to enforce such a costs order against the claimant.

It is also highly unlikely that a fraudulent claimant will be prosecuted for perjury or perverting the course of justice since prosecutions arising out of civil proceedings are rare.

The Attorney General has demonstrated an unwillingness to intervene on insurers' behalves, even if there is evidence that a fraudulent action has been pursued. Insurers inevitably feel that they are left without a remedy and claimants have greater confidence in their chances of succeeding with their fraudulent claim with little consequence.

Deterrence theory

Proceedings for contempt of court may be the answer '“ the insurance industry is certainly awakening to the benefits of these proceedings where a claimant is thought to have pursued a fraudulent action. The benefits are twofold; such proceedings provide a method of ensuring that a dishonest claimant is held accountable for bringing a fraudulent claim while also deterring prospective claimants from making similar claims. Part 32.14 (1) of the CPR states: 'Proceedings for contempt of court may be brought against a person if he makes'¦ a false statement in a document verified by a statement of truth without an honest belief in its truth.'

In Kirk v Walton [2009] EWHC 703 (QB), Coulson J considered the requirements which must be satisfied by the applicant (usually the insurer) to make out a case for contempt of court. Mrs Kirk made a substantial claim for damages for a non-specific rheumatological injury she claimed she had suffered as the result of a road traffic accident. She signed statements of truth to the effect that she suffered considerable and permanent disability, but surveillance evidence obtained by the defendant's insurers pointed to the contrary. She eventually settled for a fraction of her claim and proceedings were brought for contempt of court.

Cox J gave permission to the insurers to bring the proceedings pursuant to CPR part 32.14, having held there was a 'strong prima facie case' of contempt. Coulson J held that to succeed the applicant must establish to the criminal standard of proof: (a) the falsity of the statement in question; (b) that the statement is, or if persisted in would be, likely to have interfered with the course of justice in some material respect; (c) that at the time it was made the maker had no honest belief in the truth of the statement; and (d) the maker knew that it was likely to interfere with the course of justice. Mrs Kirk was found to be in contempt and was fined.

In the context of personal injury litigation, the course of justice must refer to the entitlement to damages, since this is the overall form of justice the claimant seeks when initiating proceedings from the outset. Where multiple allegations are pleaded, it is not necessary for the applicant to prove that every allegation of contempt is made out; an overall finding of contempt of court is sufficient. However, every allegation of contempt must be set out in the particulars and be properly pleaded. Coulson J in Kirk refused to hear further allegations of contempt that were made at trial but which hadn't been pleaded. This emphasises the importance of careful drafting when considering the particulars of contempt.

There are also certain procedural matters which must be addressed when bringing these proceedings, not least the issue of jurisdiction. Contempt proceedings can only be dealt with in the High Court. Proceedings that are being dealt with in the county court must therefore be transferred, although the CPR provides conflicting provisions in the rules on jurisdiction when false statements have been made in the county court.

Paragraph 28.1(1) of the practice direction to part 32 CPR suggests that an allegation that a statement is false should be referred to the court dealing with the original case. But this practice direction also refers to RSC Order 52(2)(a)(iii) which states: 'Where the contempt of court is committed in connection with proceedings in an inferior court'¦ an order for committal may be made only by a divisional court of the Queens Bench Division.'

Nevertheless, in Kirk, Coulson J concluded on the issue of jurisdiction that CPR 32.14 provides a High Court judge with the necessary jurisdiction to deal with a committal for contempt of court where the contempt occurred in the county court.

Talking tactics

To be successful in contempt of court proceedings, the dishonest statement made by the respondent (the original claimant) must be obvious. This may be a simple case where the respondent claims they cannot work but evidence suggests they are working, or it may be more subtle, where, for instance, the respondent is not as disabled as they claim to be.

In Kirk, Coulson J held that mere exaggeration was not sufficient in itself to discharge the burden of proof. This highlights the importance of obtaining clear and cogent evidence of the dishonest statement. The most effective evidence is likely to be surveillance evidence of the respondent doing whatever they claim they are unable to do. However, discrepancies between a statement verified by a statement of truth and surveillance evidence will not automatically give rise to a contempt of court action (the good and bad days argument). Cases which appear to warrant contempt of court proceedings should therefore be chosen carefully and the applicant must act expeditiously in applying for permission to bring proceedings.

If the respondent is found to be in contempt of court, they could face up to two years imprisonment or an unlimited fine. In Caerphilly CBC v Hughes (unreported, 2006), the respondent was sentenced to a term of imprisonment and, in Kirk, a fine was imposed. If the claim is successful, the respondent is also likely to be penalised in costs.

A major consideration for insurers and their legal advisers in pursuing this cause of action is likely to be the costs of doing so. In the usual way, the applicant will likely be ordered to pay the respondent's costs if the applicant loses at trial. However, the applicant may not recover their own costs from the respondent even where they succeed, depending on whether the respondent is financially viable or not. This could be negated if a damages award is outstanding when contempt proceedings are instigated. In this scenario, the court may make an order that the respondent's damages be held in court until the outcome of proceedings. There are of course alternative remedies such as a charging order or attachment of earnings, etc. which can prove onerous for any respondent.

Bringing contempt of court proceedings through to judgment can have a significant deterrent effect that should not be underestimated, even if insurers are wary of the costs involved. Claimants are likely to reconsider bringing a fraudulent claim if they are aware of the possibility of imprisonment and, furthermore, claimants' solicitors are likely to apply a greater amount of scrutiny to prospective clients before accepting cases.

Fraudulent claims are blighting both the insurance and legal professions and the fight against them needs to be fought over the long term. The greater the number of successful actions, the greater the effect. This in turn will assist in driving down the overall cost of paying out fraudulent claims by sending out a strong message that the insurance industry is not an easy target.