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Introduction:

According to figures from the US Coalition Against Insurance Fraud, the cost of claims fraud in the US alone in 1995 amounted to US$ 85.3 billion, which equates to a cost of US$ 326.47 for each American citizen. Research by the Rand Institute for Civil Justice in the US revealed that over one third of people injured in vehicle accidents exaggerated their symptoms, which adds US$ 13-16 billion to the annual US insurance bill.

Figures from the pan-European trade association, the Comitй Europйen des Assurances, estimate the minimum total for insurance fraud in the 25 European countries it represents of EUR 8 billion (GBP 5.6 billion), which equals two percent of annual insurance premiums. However, statistics from individual European countries suggest that this figure is very conservative. For example, according to the Association of British Insurers (ABI) insurance fraud cost the UK insurance industry GBP 650 million in 1999, 3.9 percent of claim payments, and as a result each insured pays an extra four percent in insurance premiums. In Italy, 4.58 percent of all claims and 3.25 percent of claims paid by the five major insurers were fraudulent, according to ISVAP, the insurance regulator.

In contrast, estimates of insurance fraud in Japan are low, but the problem of fraud committed by insurance company employees is serious and is growing.

The types of fraud committed vary from class of business to class of business. For example, exaggerated or totally fabricated claims are common in travel insurance, because it is often easy for the insured to commit fraud, since the alleged loss probably occurred thousands of miles away, making a detailed and thorough investigation difficult and uneconomic for the insurer. In motor claims, exaggerated symptoms and falsified injuries (such as through staged accidents) are common for third party claims, while among household claims dropping laptop computers and spilling paint on the floor "accidentally on purpose" is very common.

Public perceptions of insurance fraud:

According to research commissioned by Royal & SunAlliance in May 2000, over 50 percent of people would inflate the value of a claim by at least a third if it meant they could replace their GBP 9.99 High Street sunglasses with trendy designer shades, while 70 percent of people surveyed believed that fraud is a common practice. The top 10 items for which people are likely to inflate a claim are

1. New carpets

2. Expensive jewelry

3. TAG Heuer / Rolex watches

4. Computers

5. Three-piece suites

6. Wide-screen televisions

7. Games consoles

8. Laptops

9. Digital cameras / camcorders

10. Designer clothes

Royal & SunAlliance estimates that fraud costs it GBP 50 million per year. Gallup conducted a survey on public attitudes to insurance fraud on behalf of Saga Insurance in 1999. It found that one in four people in the UK felt that making a false insurance claim was understandable, acceptable or even praiseworthy. The acceptance of dishonesty by younger people highlighted in the ABI survey was confirmed in the Gallup survey, where almost one fifth of those aged 25-34 admitted to knowing someone who had filed a false insurance claim.

According to research in the US, almost 10 percent of Americans would commit insurance fraud if they could get away with it, and 29 percent would not report insurance fraud committed by someone they knew. One quarter of Americans share the view that it is perfectly acceptable to exaggerate a claim to make up for the premiums they have already paid.

How does the law view insurance fraud?

There are very few countries that were found to have specific laws about insurance fraud. The few that do include Finland, Luxembourg, Czech Republic and Turkey.

United Kingdom

Theft Act 1968. There is no definition of "insurance fraud" in UK criminal legislation, or indeed in most civil law jurisdictions. Any offence of insurance fraud therefore falls to be dealt with as deception and dishonesty. In the UK the appropriate crime would be an offence under the Theft Act 1968, gaining a pecuniary advantage by deception. The most appropriate sections are Sections 15, 16 and 17.

Because there is no clear offence of making a fraudulent insurance claim, the evidence has to be considered under the various sections of the Theft Act. This makes the law in this area, and thus the insurer's position, unclear. The Theft Act was updated in 1996 to cover fraudulent activities in banking, which would have been an ideal opportunity to add a new section creating an offence of insurance fraud, but sadly the opportunity was missed.

The burden of proof:

If an insurance company disputes the entitlement of an insured to make a claim, then the insured has the onus of proving the circumstances of the loss to establish that the loss falls within the scope of the insurance policy. However, if in its defense to the claim the insurer alleges that it is not obliged to pay the claim because the insured has committed a crime - fraud - then the onus, or the burden of proving the crime, is on the insurer. The onus of proving fraud is very difficult, which partly explains why in practice so few prosecutions for insurance fraud are made.

Although an insurer's claim of fraud is a civil suit, the standard of proof is the criminal standard of proof. Therefore the prosecutors of insurance fraud must prove the case of fraud "beyond all reasonable doubt". That burden has been described in mathematical terms as 90 percent certainty or more, in contrast the usual civil burden of proof, "on the balance of probability", which is 51 percent or more.

Fortunately for insurers there are other ways around the pleading of "fraud" in English law. For example, insurers or reinsurers can defend a claim by putting the claimant to "proof of loss", and challenging that proof. No fraud is alleged, but the result achieved is the same - the non-payment of the claim. If the allegation involves the placing of the risk, it is possible to argue that there has been innocent or negligent misrepresentation or non-disclosure, which results in avoidance of the contract from inception, provided that the misrepresentation or non-disclosure was of a material fact and that the underwriter