Fraudulent Insurance Claims

• Jurisdiction: South Africa
• Citation: (2000) 12 SA Merc LJ 69
• Date: 03 September 2019
• Pages: 69-93
• Published date: 03 September 2019
• Author: JP van Niekerk

Fraudulent Insurance Claims

JP VAN NIEKERK

University of South Africa

1 Introduction: Types of Insurance Fraud

Insurance fraud in the wide sense is any fraudulent conduct occurring

in any one of the various facets of the insurance industry. It may include

matters such as fraudulent practices by insurers in connection with their

advertising or the investment of funds, or the unauthorized conduct of

business as an insurer or a broker, or a contravention of any one of many

statutory prohibitions imposed upon insurers or others involved in the

industry. In the narrow sense it is any fraud occurring in connection with

an insurance contract. Here, too, many different forms of fraud may be

committed by the various parties involved.

Insurers may commit fraud in connection with the making of claims

against reinsurers (see Jonathan F Bank & Karen L Bizzini '"Fraud" in

the Context of Reinsurance' (1990) 40

Federation of Insurance &

Corporate Counsel Quarterly

119). They are more likely, though, to be

guilty of such conduct when dealing with their own insured, such as when

considering applications for insurance. More seriously, insurer fraud may

occur in connection with the handling of claims brought by insured, and

often occur under the guise of resisting a fraudulent claim by insured. Of

course, fraud is also possible by the insurer's representatives, such as by

canvassing agents in connection with premiums and proposal forms, or

by assessors in connection with the submission and valuation of claims.

Fraud on the part of the insured may occur at two stages of his

relationship with the insurer. The first is prior to the conclusion of

the contract. Pre-contractual fraud takes many forms, for instance the

fraudulent misrepresentation of facts relevant to the risk in an attempt to

obtain insurance or to obtain it at cheaper rate; insurance of an event

which, to the knowledge of the insured, has already occurred; and the

intentional over-valuation of the property to be insured.

In this paper, though, I wish to focus on the insured's fraudulent

conduct which occurs during the currency of the insurance contract. In

particular I will deal with fraud in connection with the insured's claim on

the insurance contract.

2 The Incidence, Cause and Effect of Fraudulent Insurance Claims

Fraudulent insurance claims, so it is alleged, are rife and generally

practised not only by professional fraudsters but by the population at

large. The incidence of this form of insurance fraud is on the increase so

that things will get worse before they get better. Furthermore, this is not

merely a local phenomenon but a world-wide trend.

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(2000) 12 SA Merc LJ 69

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While it may be accepted that fraudulent claims are numerous and

involve large amounts of money, it is difficult if not actually impossible to

say with any precision what percentage of insurance claims are in one

way or another fraudulent, or what percentage of the total amount

claimed from local insurers are founded on fraudulent claims. Available

estimates are just that (e g it has been estimated that between 5 and 20 per

cent of all insurance claims in South Africa are fraudulent: see Sept 1999

Insurance Times & Investment

at 7; another estimate is that between 8 and

35 per cent of claims are fraudulent, costing the insurance industry at

least R1,2 bn per year: see 10 Dec 1999

Financial Mail

at 7 and 92).

Generally it may be thought, though, that more reliable and industry-

wide evidence is required as to the number of fraudulent claims insurers

have uncovered in a given period and as to the amounts involved. Such

statistics are necessary to dispel scepticism on the part of those who think

that cries of insurance fraud are uttered to conceal other causes of bad

underwriting results; they are also required to establish a little more

scientifically that it is a problem of sufficient proportions to warrant some

form of action and to determine what amount of money may viably be set

aside in attempting to eradicate the problem.

What are the causes of fraudulent claims?

Certainly economic motives are important: financial distress, unem-

ployment and poverty. It should be stressed that these motives apply to

both the indigent and also (if not particularly) to the affluent sections of

society. In the case of some types of insurance, such as property

insurance, fraud is by definition perpetrated by persons who have assets

to insure and the means to insure them, and insurance fraud is in that

case much more a white-collar crime of affluence than a crime of poverty.

By contrast, fraudulent claims on health and accident insurance contracts

are more likely to have some working-class involvement as well.

Further reasons for fraudulent claims include the lack of moral

conscience in modern South African society and the inefficiency of the

judicial system to deal effectively with perpetrators of insurance fraud

and thus to discourage others from committing similar acts.

But insurers, too, may in part be to blame, in particular for some types

of fraudulent claims, such as those involving exaggeration. They tell their

insured two different and conflicting sets of stories (what follows is taken

from the highly instructive article by Tom Baker 'Constructing the

Insurance Relationship: Sales Stories, Claims Stories, and Insurance

Contract Damages' (1994) 72

Texas LR

1395). Their sales stories

emphasize the insured's need to be covered and the accent is on what is

covered; by contrast, their claims stories emphasize the need to protect

the insurance fund from unjustified claims and here the accent is on what

is not covered. In short, insurers in marketing their products create the

impression that all loss will be covered, and that all claims will be paid in

full and without quibble. When this does not happen, often for complex

and legalistic even if justifiable and legitimate reasons, the insured is

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