Case study — A flood and a dishonest insured

In the wake of the severe flooding event in Auckland on 27 January 2023, an insured dubbed "Mikey" by the Insurance and Financial Services Ombudsman (IFSO) (not his real name), made a fraudulent claim.

Mikey’s car needed repair to remedy the effects of wear and tear. After the flood, he made a claim upon his insurer for his mechanic’s quoted costs, claiming — falsely — that the repairs were required to remedy flood damage.

Caught out

Unfortunately for Mikey, he was found out. The insurer declared the car a total loss and advised that it would be notifying Waka Kotahi New Zealand Transport Agency to deregister it.

Hearing this, the insured asked to withdraw his claim, saying that he did not believe there was internal water damage and that he thought the car, which he needed for work, could be repaired.

At this stage, it would have been open to the insurer to allow Mikey to withdraw the claim, but it smelled a rat and investigated further. The investigation uncovered an obvious discrepancy with the claim.

The mechanic’s assessment was dated 13 January 2023, which predated the flooding event. Furthermore, upon reviewing the assessment, it was evident that the damage was inconsistent with flood damage and more likely resulted from wear and tear.

Out of the frying pan

The insurer declined the claim and advised Mikey that the outcome would be noted on the Insurance Claims Register (ICR). This was a disaster for him, because the ICR flag caused his home and contents insurer, which was a different insurer, to cancel his home and contents policy.

Matters then went from bad to worse. In an attempt to get the flag removed, Mikey admitted that he had lied about his car being damaged in the flood.

Unsurprisingly, instead of removing the flag, his insurer updated it, noting that the reason for the claim being declined was fraud. This would essentially bar Mikey from taking insurance in the future, as all major insurance providers in New Zealand are members of the ICR scheme and flagged claims remain on it indefinitely.

Mikey lodged a complaint with the IFSO, complaining that he could not obtain insurance for his house and arguing that his insurer lacked empathy.

The IFSO rejected the complaint, finding that Mikey’s deliberate misleading of his insurer justified it declining the claim and that the IFSO could not prevent the insurer from placing a flag on the ICR.

Be sure before flagging

Insurers will no doubt take the view that this case is a useful example of the ICR doing precisely what it is intended to do, and that Mikey was the author of his own misfortune. The case does, however, highlight several considerations that insurers may want to bear in mind.

An ICR notification may have dire consequences, so insurers must be sure of their ground. While Mikey admitted fraud, other circumstances may be less clear.

Insurers must be confident before placing a flag on the ICR and must be absolutely factual in doing so. Incorrectly flagging a claim or doing so in terms that cannot be substantiated — or even in terms that raise an implication that cannot be substantiated — may risk an aggrieved policyholder bringing a claim in defamation for resulting loss or damage.

While there are defences for statements made in an honest belief or for a proper purpose, these depend on the specific circumstances. Losses could be substantial if an insured holds or requires other policies such as a house policy or business insurance to obtain or retain finance.

Privacy rights

Policyholders may have other remedies: Privacy rights and obligations are becoming increasingly important and penalties for misusing private information are increasing.

As the ICR contains information “about” policyholders, it is subject to the Privacy Act 1993. Policyholders are entitled to request and, if necessary, correct their ICR records. Insurers may also be liable for any use of the ICR that constitutes a breach of the Act. 

ICR flags require consent in policy wordings: The consequences of a fraud flag on the ICR, while potentially disastrous for policyholders, are legitimate provided that the insured consents to their claims information being listed on the ICR.

Insurers should ensure that their policy wordings contain appropriate ICR consent clauses.

Policyholders should be made aware of the ICR and its consequences for them. It is in insurers’ interests that the existence of the ICR and the consequences of fraudulent or even dubious claims are widely known.

Insureds may be less inclined to risk making a less than truthful or even a downright fraudulent claim if they are aware that this may prevent them from raising funds to purchase a house or other property for which insurance will be required.

While ‘boilerplate’ ICR consent clauses are commonplace in insurance policies, many policyholders may be unaware of the ICR and the potential consequences of misleading their insurer.

Ensuring policyholders are informed of these risks could be an effective deterrent against fraudulent claims.

This article first appeared on the MinterEllisonRuddWatts website and is reproduced here with permission.