Last updated 4 August 2016
Insurers take fraud seriously and may well prosecute even a low-value fraudulent matter as a policy measure to discourage fraud throughout the insurance market.
Generally, where insurance has been obtained and there has been fraud, misrepresentation or non-disclosure, the insurance company has several options. It can:
- avoid the contract if the non-disclosure or misrepresentation was fraudulent (s 28(2) Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act))
- reduce its liability in respect of any claim under the policy to the extent of the non-disclosure or misrepresentation (s 28(3) Insurance Contracts Act).
Under the Insurance Contracts Act, an insurer is generally entitled to reduce the claim to the extent that its rights were prejudiced (s 54). For example, had the insurer known a vehicle was the turbo model, they may still have underwritten the policy but with a higher excess and premium.
Outright fraud may be difficult to prove but, when proved, the insurer will be entitled to deny the portion of the claim that is affected. However, if the fraud on the claim is indivisible (e.g. saying that a burnt-down house was in good condition when in fact it was condemned by the local council), the entire claim may be refused.
Special rules apply in relation to fraud, misrepresentation and non-disclosure in relation to life insurance contracts, which allow a life insurance provider to avoid the contract or vary the policy terms (s 29 Insurance Contracts Act).
An insured accused of any dishonesty should seek legal advice immediately.