An Insurance Working Example - Inflated Claim
Probably the most common form of fraudulent claim is through the inflation of loss of profits under a business interruption extension of the property policy.
The speculative nature of profit-making lends itself ideally to an exaggerated claim.
Perhaps many assureds would not consider such exaggeration to be fraud, but as indicated above in relation to the extension of the duty of utmost good faith, insurers may take a different attitude to exaggerated claims.
Where previously insurers would have merely paid the reduced amount, they may now reject the claim in its entirety or, perhaps, avoid the policy.
Clearly, in the case of a loss of profits claim, the first step to be taken by the insurer is the instruction of a forensic accountant.
However, if the insurer already has suspicions that the claim is inflated it would be wise to instruct the accountant through its solicitors.
This will enable it to maintain privilege and to advise on strength of evidence and the alternatives available to it.
This is particularly important now that the extension of the doctrine of utmost good faith may allow the insurer to avoid the contract if the assured has misled the insurer in the course of presenting the claim.
The forensic accountant will be looking for motives for fraud, which may be cash flow problems, overstocking, cancellation of orders or, as below, spontaneous greed! In this example a biscuit and cereal distributor serviced customers throughout the UK from eight warehouses.
One of the warehouses as destroyed by fire, resulting in a loss of stock and reduced ability of the remaining distribution centres to cope with supply and some customers were certainly lost.
A £5 million loss of profits claim was made by the assured, a figure which seemed excessive to the insurance company.
Solicitors were instructed who in turn instructed forensic scientists.
The main inquiry centred around a review of the company records backing up the assured's budget projections.
The inquiry also required a complete review of the assured's performance over the past five years, noting particularly whether or not the assured had met previous budget figures.
Documents investigated included management accounts, budgets, minutes of board meetings, ledger accounts, profit plans, cash flow, projections etc.
Further investigations were undertaken in respect of competitors in the same market and it was shown not only that the assured had been habitually over-optimistic in its budget projections, but also that sales in the particular products had declined during the period in which the assured had been unable to find alternative warehousing facilities.
As a result of this work, the loss of profits claim was reduced to £1 million.
The extent of the over-estimation tended to suggest fraud rather than optimism and certainly the insurer may be justified in rejecting the entire claim in those circumstances
The speculative nature of profit-making lends itself ideally to an exaggerated claim.
Perhaps many assureds would not consider such exaggeration to be fraud, but as indicated above in relation to the extension of the duty of utmost good faith, insurers may take a different attitude to exaggerated claims.
Where previously insurers would have merely paid the reduced amount, they may now reject the claim in its entirety or, perhaps, avoid the policy.
Clearly, in the case of a loss of profits claim, the first step to be taken by the insurer is the instruction of a forensic accountant.
However, if the insurer already has suspicions that the claim is inflated it would be wise to instruct the accountant through its solicitors.
This will enable it to maintain privilege and to advise on strength of evidence and the alternatives available to it.
This is particularly important now that the extension of the doctrine of utmost good faith may allow the insurer to avoid the contract if the assured has misled the insurer in the course of presenting the claim.
The forensic accountant will be looking for motives for fraud, which may be cash flow problems, overstocking, cancellation of orders or, as below, spontaneous greed! In this example a biscuit and cereal distributor serviced customers throughout the UK from eight warehouses.
One of the warehouses as destroyed by fire, resulting in a loss of stock and reduced ability of the remaining distribution centres to cope with supply and some customers were certainly lost.
A £5 million loss of profits claim was made by the assured, a figure which seemed excessive to the insurance company.
Solicitors were instructed who in turn instructed forensic scientists.
The main inquiry centred around a review of the company records backing up the assured's budget projections.
The inquiry also required a complete review of the assured's performance over the past five years, noting particularly whether or not the assured had met previous budget figures.
Documents investigated included management accounts, budgets, minutes of board meetings, ledger accounts, profit plans, cash flow, projections etc.
Further investigations were undertaken in respect of competitors in the same market and it was shown not only that the assured had been habitually over-optimistic in its budget projections, but also that sales in the particular products had declined during the period in which the assured had been unable to find alternative warehousing facilities.
As a result of this work, the loss of profits claim was reduced to £1 million.
The extent of the over-estimation tended to suggest fraud rather than optimism and certainly the insurer may be justified in rejecting the entire claim in those circumstances
Source...