Fraudulent claims case shows difficulties insurers face: Sgro v Australian Associated Motor Insurers Ltd [2015] NSWCA 262

The New South Wales Court of Appeal's judgment in Sgro v Australian Associated Motor Insurers Ltd [2015] NSWCA 262 emphasises the strict requirements for allegations of fraud to be clearly pleaded and properly particularised. Despite the insurer's success in denying the claim, the court was critical of the manner in which the allegations of fraud were pleaded in the insurer's defence.

First instance judge not satisfied on financial motive for fraud allegation

The appellant, Mr Sgro, was the owner of a red Ferrari 360 Modena motor vehicle which he insured with the respondent, Australian Associated Motor Insurers (AAMI). Mr Sgro alleged that his Ferrari was stolen from a suburban street and made a claim on his policy of insurance for the agreed value of the vehicle in the sum of $190,350 plus interest. AAMI refused Mr Sgro's insurance claim, alleging that the claim was fraudulent within the meaning of section 56 of the Insurance Contracts Act 1984 (Cth) (ICA).
 
At first instance, her Honour Olsson SC DCJ rejected Mr Sgro's claim on two bases. Firstly, her Honour was not satisfied to the requisite standard that the vehicle had been stolen. Secondly, her Honour held that AAMI was entitled to refuse the claim pursuant to section 56 of the ICA on the basis of inconsistencies in Mr Sgro's evidence as to his whereabouts and that of his vehicle on the day and time at which it was allegedly stolen.
 
Importantly, her Honour declined to make any finding of fraud in the absence of being satisfied that there was a financial motive for Mr Sgro to have been involved in the vehicle's disappearance. Rather, her Honour held that Mr Sgro "for whatever reason" was not honest and candid in the answers he had given to AAMI in relation to the claim.

AAMI alleges fraud but judge not satisfied on insurable event

AAMI alleged in its defence that Mr Sgro had made six false statements in relation to the insurance claim, but only two statements were relied upon at the hearing in support of the section 56 defence. These were Mr Sgro's statement as to his whereabouts and the route which he had told the insurer's investigator he had driven when last driving his vehicle.
 
Mr Sgro's case was that he had driven his vehicle straight home after work before subsequently taking it out to attend dinner and a movie in the evening. The vehicle was alleged to have been stolen at this time when it was taken from where it was parked in a suburban street.
 
CCTV footage adduced at trial revealed that the vehicle had not been driven along the road as Mr Sgro had claimed. Further, telephone records and the evidence of a local resident who had identified the vehicle in his street cast doubt on the version of events put forward by Mr Sgro.
 
Ultimately, her Honour at first instance considered that there were "mysteries and anomalies" in Mr Sgro's evidence such that she had "considerable hesitation in accepting it unless corroborated." (at [38]) On this basis, her Honour was not satisfied that Mr Sgro had left his home in his vehicle as he alleged in his claim and accordingly she was not satisfied that an insured event had occurred. Notwithstanding this, no findings of fraud were made. (at [40])

Court of Appeal agrees with non-insurable event finding

The Court of Appeal found no error in her Honour's finding that the vehicle had not been stolen. In coming to this determination, Beazley P (with Meagher JA and McDougall J agreeing) noted that in order to succeed in his claim, Mr Sgro was required to satisfy the court, on the balance of probabilities, that the insurable event had occurred. This meant that the court needed to be satisfied beyond a 50% chance that the vehicle had been stolen. Having made factual findings open to the court that the vehicle was not stolen, Mr Sgro's claim failed and the appeal was accordingly dismissed with costs. (at [44])

Fraud finding must be properly reasoned

The Court of Appeal noted that a finding of fraud, including for the purposes of section 56, involved a finding that a person had been deliberately untruthful with the intent of obtaining financial gain. If such a finding was to be made then it had to be made clearly with the reasons for the finding appropriately articulated.(at [57])
 
Her Honour's finding at first instance did not satisfy this fundamental requirement insofar as she had found that AAMI was entitled to refuse the claim pursuant to section 56 on the basis that Mr Sgro had "for whatever reason" not been honest. Accordingly, the Court of Appeal found that her Honour had erred in concluding that AAMI was entitled to refuse payment of the claim pursuant to section 56. (at [77])

Court of Appeal finds AAMI's section 56 defence pleading deficient

The Court of Appeal was critical of the manner in which AAMI had pleaded its section 56 defence. In particular the court referred to the High Court decision in Briginshaw v Briginshaw [1938] HCA 34 and rule 14.14 of the Uniform Civil Procedure Rules 2005 (NSW) noting that the seriousness of raising questions of fraud required that it be clearly pleaded and properly particularised. (NSWCA 262, at [54] to [55]).
 
AAMI's defence in relation to section 56 was that Mr Sgro had "made false statements in support of the claim" such that AAMI was entitled to refuse the claim pursuant to section 56 of the ICA. The pleadings did not go the extra step required and assert that the false statements were made with the intent to induce AAMI to pay the claim. In that respect the pleading was deficient. (NSWCA 262 per Beazley P at [65], per Meagher JA at [73])
 
The consequence of this deficiency was that the court at first instance neither addressed nor made findings as to Mr Sgro's alleged fraudulent purpose in making the false statements. (NSWCA 262 at [73]) In this respect AAMI was fortunate that the court was not satisfied the vehicle had been stolen. Had such a finding been made, and AAMI then forced to rely solely on the allegations of fraud, it is likely that its defence would have failed absent sufficient evidence going to Mr Sgro's motive.
 
The Court of Appeal also noted that AAMI's defence did not comply with the requirements of rule 14.14 of the Uniform Civil Procedure Rules insofar as it was intended to plead common law fraud and, accordingly, it should have been precluded from pursuing such a claim. Further, if the pleadings were simply intended to put Mr Sgro on notice of a claim for damages in the event the defence under section 56 succeeded, then such a claim should have been brought by way of cross-claim. (NSWCA 262 at [64])

Tips for insurers and solicitors in successfully pursuing a fraudulent claim

• Allegations of fraud must be clearly pleaded and properly particularised. If insurers intend to claim investigation or other costs, then such a claim must be clearly pleaded and should be brought by way of cross-claim.
• The obligation of procedural fairness requires that a person be put on notice of the suggestion that a case is false or fraudulent. A defence which does not adequately plead fraud may preclude the insurer from pursuing such a claim.
• In order to rely on a defence under section 56 of the ICA, an insurer needs to plead and prove that a false statement was knowingly made for the purposes of inducing it to pay the claim.
• Evidence of dishonest intent will need to be adduced in order to satisfy the threshold requirements to prove fraud.
• Importantly, a fraudulent statement need not be material to the insured's claim in order for section 56 to be engaged, provided all the necessary elements of fraud are satisfied.

• The insurer will need to establish fraud on the balance of probabilities in accordance with the Briginshaw test as codified in the Uniform Evidence Acts (e.g. Evidence Act 2008 (Vic) section 140(2)).

• Insurers and their solicitors must be mindful of the costs risks associated with making allegations of fraud. Where allegations of fraud are made speculatively, the courts' jurisdiction to award indemnity costs or personal costs orders may be enlivened, notwithstanding that the party may have won the case overall. (Refer to Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397; Australian Transport Insurance Pty Ltd v Graeme Phillips Road Transport Insurance Pty Ltd (1986) 71 ALR 287; Chen & Ors v Chan & Ors [2009] VSCA 233; NIML Ltd v Man Financial Australia Ltd (no. 2) [2004] VSC 510)