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The University of Southampton
Southampton Law School

The Deterrence of Opportunistic Insurance Fraud

Research undertaken by Southampton Law School has questioned heavy sanctions associated with opportunistic insurance fraud, leading to a legal and industry-wide overhaul in the approach to this contentious area of policy. As an alternative to the sanctions, the research has enabled interventions that are more effective and less costly to implement.

Context

Signing documents

The cost of opportunistic fraud committed by otherwise honest policyholders has been estimated at £1 billion per year in the UK. Prior to the research by SLS, the common law and the insurance industry assumed that the most effective policy to reduce such fraud was deterrence, and that this was best achieved by Draconian sanctions.

One particularly contentious policy stated that a deliberately false statement made to the insurer resulted in the insured party forfeiting their claim. Such approaches were expensive to implement and risked damaging consumer and commercial relationships, as they can lead to false accusations.

Research challenge

Research by Professor James Davey and Dr Johanna Hjalmarsson successfully challenged the narrative that ‘Draconian sanctions deter’.

Hjalmarsson argued that the law made the sanctions more readily available for use by insurers than intended, with insurers using alternative and more creative routes to nullifying claims. She clarified the need for analysis of the economic incentives underpinning fraud and commercial practice.

Davey’s research advanced this analysis into new territory. In an article in the Lloyds Maritime and Commercial Law Quarterly (LMCLQ), he questioned the effectiveness of sanctions, saying that ‘the forfeiture rule is of marginal significance in providing effective deterrence’ AND that it ‘fails to account for the complex and diverse nature of fraudulent claims’.

This research demonstrated that ‘nudges’ towards honest conduct could be more effective than the current sanctions.

Shaping law and policy relating to the deterrence of opportunistic fraud

Davey’s LMCLQ article was the primary academic material presented to the Supreme Court in the case Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2017], with the Judge, Lord Mance, referring to it during oral submissions on multiple occasions.

The Court unexpectedly reversed the long-standing position that any dishonesty meant that the entire claim was forfeit. The law was altered so that the underwriter did not have a defence where the dishonest statement was found not to be relevant to the insurer’s ultimate liability.

Counsel in the case described the decision as ‘one of the most significant insurance cases to be decided in recent years’ leading to ‘an important change in insurance law’.

This form of direct academic engagement with active litigation is unusual, with the counsel confirming that ‘what was particularly original about Professor Davey’s criticism and research was the way it drew upon empirical data and used it to test some of the assumptions supporting the existing law. As far as I know, this was the first time that such data had been applied in this context.’

The underlying research is also likely to influence future litigation, as a leading QC noted: ‘Professor Davey’s research is likely to have particular impact in shaping the development of the law by providing insights for solicitors and barristers advising clients and arguing insurance fraud issues in the courts’.

Changing insurance industry practice in counter-fraud activities

Davey’s research was used and his recommendations implemented by the Insurance Fraud Taskforce, an ad hoc committee of experts to advise on investigating fraudulent behaviour and setting down guidance on best practice for the entire British insurance industry.

A key recommendation from Davey was to commission independent experimental economics research to test effectiveness of ‘nudges’. The Taskforce did this in 2018, resulting in a report considered ‘ground-breaking’ by a key industry figure. The results of the report were promoted to the Association of British Insurers, and the industry subsequently designed an information blueprint to implement its recommendations.

Key Publications

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