The answer? Not what you’d expect.
Proving that an insured has been fraudulent under section 56 of the Insurance Contracts Act 1984 (Cth) where the evidence is mainly circumstantial is no mean feat.
Insurance Australia Ltd (IAL) learned this lesson on 4 November 2016, in a disputed insurance claim for property damage resulting from a fire: Rolleston v Insurance Australia Ltd  NSWSC 1561.
The insurer’s word against the insured’s
Rolleston had been constructing an expensive residence in the Sydney upmarket suburb of Mosman, and was insured by IAL against risks including loss or damage by fire.
In 2013, a fire substantially damaged the property and Rolleston claimed on his insurance. IAL refused the claim on the basis that it was fraudulent under s56 of the Act.
IAL submitted that:
- The plaintiff procured someone to start the fire deliberately, or was involved with that person doing so; and
- The plaintiff made deliberately false and fraudulent statements to IAL’s investigators in the course of their investigations.
Rolleston was not living at the property at the time of the fire. He had served a prison sentence and on the day before the fire, a parole order was lifted that had prevented him from living at the property. On the day of the fire, multiple persons held keys to the property and numerous unidentified others may have begrudged the fact that the parole order had been lifted.
Importantly, Rolleston was unemployed as he had been deregistered as a medical practitioner, and had only had a few hundred dollars in his bank.
IAL argued that the plaintiff had a clear motive for starting the fire which was to collect the sum insured and relieve himself of severe financial hardship. Rolleston submitted that on the contrary, he had a motive for finishing the building work so that he could sell the property and pay off his debts, leaving some money for his own use.
The Supreme Court judge preferred the plaintiff’s account, and IAL was ordered to pay the plaintiff $991,946 with interest.
So how can insurers prove fraud?
A wealth of favourable evidence is the key.
As in any circumstantial case, the defendants in this instance needed more evidence in their favour. Once a claim is made, the onus is on the insurer to prove that it is more probable than not that the insured has made a fraudulent claim.
Under s56 of the Act, a claim can properly be described as one “made fraudulently” if the insured made knowingly false statements to the insurer to induce it to pay the claim.
Factors to consider when trying to prove fraud include that:
- The relevant fraud concerned is the fraud in the making of the claim, that is, fraud in the formulation and presentation of the claim;
- The relevant mental element is an intention to deceive; and
- There must be more than conflicting inferences of equal degrees of probability.
A judge will look at any inferences to be made in light of all the evidence put forward, bearing in mind the gravity of the allegation of fraud and weighing them up with the conventional perception that members of society do not ordinarily engage in fraudulent or criminal conduct.
What can insurers take away from this?
To prove fraud, defendants must show, on the balance of probabilities, that it is more likely than not the insured has made a fraudulent claim.
While the insurer in this case did not have to negate the possibility that all of the people with keys to the property started the fire, there had to be some reason for inferring that it was probably the plaintiff.
For insurers, proving that that where there’s smoke, there’s fraudulent fire, isn’t as easy as it might seem.