Updated: Mar 9, 2019
In law, fraud is deliberate deception to secure unfair or unlawful gain, or to deprive a victim of a legal right [Wikipedia]. And in Insurance, fraud is not uncommon. For Insurance Fraud there is no criminal conviction. The obvious answer as to why someone would commit an Insurance Fraud is to gain benefit from the Insurance Contract. There can be an instance where an Insured could deliberately damage or lose the subject matter of insurance to put in a claim with the Insurers. A business concern, running into losses, could put in a fire claim where the fire was set by the Insured itself. In Insurance, it is commonly known as a “Moral Hazard”. However, it all comes down to the following questions:
· Can the “Moral Hazard” or “Fraud” be proven?
· Who has the “Burden of Proof”?
In Continental Insurance Co. v. Dalton Cartage Co., 1982, the Supreme Court of Canada confirmed that a higher degree of probability will be required than is required in establishing a case of negligence, in order to establish a case of fraud.
In a recent interesting decision by the Ontario Superior Court of Justice, these matters were discussed considering an alleged theft claim.
In Demetriou v. AIG Insurance Co. of Canada, 2019, the plaintiff brought in a motion for summary judgment, alleging theft of a valuable heirloom ring, worth approximately $550,000, that was reportedly stolen from him during a trip to Punta Cana in the Dominican Republic in July, 2015.
AIG denied the claim and put in a defence based on the following grounds:
· It has not been proven that the theft ever occurred; and
· The Insured has not co-operated with the Insurers in the investigation of the claim.
However, AIG did not plead any Fraud, neither at the time of claim denial, nor in their statement of defence. It is pertinent to note here that AIG agreed that the Insured did everything possible that he could have done to report this incident to the relevant authorities, including but not limited to the Canadian Embassy of the country where the alleged theft occurred.
BURDEN OF PROOF
In Insurance, the Burden of Proof to establish a covered loss under the policy rests upon the Insured. This burden, however, shifts if the Insurer is relying upon an exclusion, such as that of Fraudulent activities, in order to deny a claim. In essence, the Insurer has to prove that the exclusion applies once the circumstances of the loss, if proven to be correct on the balance of probabilities, would establish a covered claim under the policy.
In Shakur v. Pilot Insurance Co. 1990, (“Shakur”) the Insurers appealed against the trial judge’s order of indemnifying the respondent in a robbery claim. One of the main issues discussed by the Ontario Court of Appeal was:
Did the trial judge err in reversing the burden of proof at trial, thus in effect placing the onus on the appellant to prove that a robbery had not taken place?
The appeal was upheld ordering a new trial. The Ontario Court of Appeal confirmed:
It is fundamental insurance law that the burden of proof rests on the insured to establish a right to recover under the terms of the policy. In this case, the burden rested on the respondent and remained on the respondent to prove on the balance of probabilities that a theft of her jewellery had occurred. That the appellant, in denying the allegation of theft, impliedly alleged that the respondent was fraudulent in putting forward the claim in no way shifted the basic burden of proof resting on the respondent.
AIG’s reliance on the above case was not seen well by Justice Gray J., who stated:
In my view, these cases are clearly distinguishable from the one before me. In the case before me, the insurer has expressly disclaimed any reliance on fraud or deliberate acts.
In the order I made on September 1, 2016, AIG was ordered to specify whether it was relying on the exclusions in the policies relating to dishonest acts and deliberate acts, and AIG specifically stated that it was not relying on them, and declined to provide any particulars of fraud.
The above decision, in my opinion, is a bit confusing and surprising as even in “Shakur”, the Insurers never appeared to have specifically pleaded any Fraud. In fact, Justice Griffiths J.A. Stated in “Shakur”:
In my respectful opinion, the trial judge started off on the wrong foot by describing the issue in this case as "a matter of fraud"
AIG did not plead fraud. In fact, AIG expressly disclaimed any reliance on fraud or deliberate acts when specifically asked. However, their statement of defence was looked at by Justice Gray J. as “an inchoate allegation of Fraud”, stating:
To the extent that the policy or policies contain exclusions for deliberate acts or fraud, plaintiff is entitled to know whether defendant is relying them, and if so, is entitled to particulars.
AIG’ Counsel confirmed that AIG was not specifically relying on the exclusions, “but reserves its right to rely on these provisions should further information become available.” The provisions related to intentional acts and dishonest acts were not relied upon by AIG.
Further, AIG prematurely decided by August 20, 2015 that it would not pay the claim short of litigation and reported that the file was closed on September 23, 2015, to CGI Insurance Services (a collector and supplier of information to the insurance industry). However, AIG did not advise the plaintiff of this until February 22, 2016, when it formally denied the claim on the basis that it had insufficient information to substantiate the claim.
AIG finally wished to rely upon fraud by amending its statement of defence. However, this request was denied. The court stated:
….the plaintiff has conducted the litigation based on the position that no fraud was being alleged.
In these circumstances, it is not now open to AIG to conduct the case as if it had actually made an allegation of fraud when it specifically disclaimed such a position.
While there are some discrepancies and inconsistencies in the different versions of events related by different witnesses, this is to be expected, and indeed it would be unusual if any version of events as related was perfect. While there are clearly some suspicious circumstances, they have been adequately explained by Mr. Demetriou and his family members. In any event, they would only be relevant if fraud were being relied upon, but it is not.
………..AIG’s counsel made a belated request during argument that AIG now be allowed to plead fraud. In my view, it is far too late for that.
While, pursuant to Rule 26.01, the court is to grant leave to amend at any stage of an action, there comes a point where prejudice is presumed, and amendments will not be allowed
The court, in addition to the claim, also awarded for punitive damages stating that “AIG decided at a very early stage that it would not pay the claim”.
This case will likely be appealed. There are lots of questions that need to be answered. The two big questions are:
1. How, not specifically alleging fraud led to presumed prejudice? How the plaintiff would have altered the course of action had fraud been plead on day one?
2. Shouldn’t the claim denial allude to allegations that tantamount to fraud on part of the Insured, as clearly if the claim is being denied, AIG, in a way is alleging facts stated by the Insured as not true? So why is it necessary to specifically plead Fraud?
The content of this article is intended to provide general guidance only. A specialist must be consulted for specific circumstances