Australian perspective: Proving insurance fraud

I.

INTRODUCTION

This article is about proving a crime in the civil court. More to the point, it is about the task confronting an insurer which seeks to prove a fraudulent claim on the part of its insured. Because arson is such a difficult crime to prove in both civil and criminal courts, the focus of this article is on the fraud of arson.

Different rules apply to proving that the insured is guilty of a crime in the civil court from those which would apply when the insured is prosecuted in the criminal court. In the criminal court, the prosecution must prove its case beyond reasonable doubt. In the civil court, the insurer must prove its case on the balance of probabilities.

Although the burdens of proof and other rules which apply in the civil court are different than those which apply in the criminal court, it should not be thought that the task of proving the crime in the civil court is "easier" than the task of proving it in the criminal court.

The weight which must be lifted by a weight lifter aspiring to win the Olympic gold medal in the featherweight division is significantly less than that which would be required to win the same medal in the heavyweight division. But that does not mean the competitor in the featherweight division is confronted with an "easier" task.

1 RIGHT TO REMAIN SILENT -- SELF-INCRIMINATION

There have been modifications to the rules relating to self-incrimination. For example, in certain circumstances the police may use reasonable force to obtain finger prints from a suspect.1 The court may require a suspect to provide blood or other tissue to the police for analysis.2 Nevertheless the right to remain silent remains. The suspect does not have to answer any police questions.

That is not the case when someone seeks insurance or to make a claim pursuant to an insurance policy. Before an insurance contract is entered into, the insured is under a duty to disclose all relevant matters.3 In pursuing a claim, the insured has an obligation to fully, frankly, and promptly disclose all relevant matters.

March Cabaret Club & Casino Ltd. v. The London Assurance4 was concerned with non-disclosure, but the court said something which is relevant to this discussion. A director of the insured company was arrested and charged by the police on June 14, 1969 with dishonestly handling stolen goods. He was committed for trial on November 28, 1969. The policy was renewed on April 20, 1970 and at the time of renewal there was no disclosure made of the fact of the charges and committal for trial. The director was convicted on June 22, 1970. The fire giving rise to the claim occurred on September 14, 1970. The court had no doubt that the director's arrest and being charged by the police and the fact that he had been committed for trial were matters which ought to have been disclosed at the time of renewal. The court ruled that the insurer was entitled to avoid the policy because of the failure to disclosure.

As an aside, the trial judge noted that even had the director been acquitted prior to the renewal of the policy in April, 1970, the insurers could nevertheless attempt to prove he had committed the offence and if they succeeded, notwithstanding the acquittal, the policy could be avoided. He went on to say:

No one has a right to a contract of insurance, and if a proposer has committed a criminal offence which is material and ought to be disclosed he must disclose it, despite the presumption of innocence, which is only a presumption, and despite the privilege of non-incrimination, which is only a privilege - or he must give up the idea of obtaining insurance at all.5

The rules against self-incrimination do not go so far as to provide that the criminal court can never take into account the fact that the accused did not give evidence. In restricted circumstances the failure of the accused to give evidence may be taken into account. So, as explained in Bridge v. The Queen6:

An accused person is never required to prove his innocence: his silence can never displace the onus that is on the prosecution to prove his guilt beyond reasonable doubt. A failure to offer an explanation does not of itself prove anything. Nor does it, in any strict sense, corroborate other evidence. But the failure of an accused person to contradict on oath evidence that to his knowledge must be true or untrue can logically be regarded as increasing the probability that it is true. That is to say a failure to deny or explain may make the evidence more convincing, but it does not supply its deficiencies.7

In Weissensteiner v. The Queen,8 Mason C.J., Deane and Dawson J.J. used different words to explain how the accused's failure to give evidence may be taken into account:

[I]t has never really been doubted that when a party to litigation fails to accept an opportunity to place before the court evidence of facts within his or her knowledge, which if they exist at all, would explain or contradict the evidence against that party, the court may more readily accept that evidence. It is not just because uncontradicted evidence is easier or safer to accept than contradicted evidence. That is almost a truism. It is because doubts about the reliability of witnesses or about the inferences to be drawn from the evidence may be more readily discounted in the absence of contradictory evidence from a party who might be expected to give or call it.9

But in the civil court the implications which may be drawn from the failure of the insured to give evidence are not so restricted. "But when circumstances are proved indicating a conclusion and the only party who can give direct evidence of the matter prefers the well of the court to the witness box a court is entitled to be bold."10

The failure of an insured to call a witness, or to testify (without explanation) does not entitle the court to speculate as to what that evidence may have been. But the court can infer that the evidence not called would not help the insured's case.11

III.

PROOF: CRIMINAL AND CIVIL STANDARDS

For present purposes it is sufficient to say that in the criminal court, the task of the prosecution is to prove the guilt of the accused beyond reasonable doubt. The accused has to prove nothing. The onus of proof is on the prosecution and the standard of proof is beyond reasonable doubt.

If an insurance company disputes the entitlement of an insured to make a claim, then the insured has the onus of proving the circumstances to establish that a loss falling within the scope of the policy has occurred and the extent of that loss. However, if in its defense to the claim the insurance company alleges it is not obliged to pay the claim because the insured has committed a crime, for instance the fire was an arson, then the insurance company has the onus, or the burden of proving the crime. But the standard of proof required to establish the commission of a crime in the civil court is different from that which applies in the criminal court.

The classical starting point is what was said in Briginshaw v. Briginshaw & Anor12 by Dixon J.:

The truth is that, when the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found. It cannot be found as a result of a mere mechanical comparison of probabilities independently of any belief in its reality. No doubt an opinion that a state of facts exists may be held according to indefinite gradations of certainty; and this has led to attempts to define exactly the certainty required by the law for various purposes. Fortunately, however, at common law no third standard of persuasion was definitely developed. Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters "reasonable satisfaction" should not be produced by inexact proofs, indefinite testimony or indirect inferences.13

Later, in Rejfek v. McElroy,14 the High Court said:

But the standard of proof to be applied in a case and the relationship between the degree of persuasion of the mind according to the balance of probabilities and the gravity or otherwise of the fact of whose existence the mind is to be persuaded are not to be confused. The difference between the criminal standard of proof and the civil standard of proof is no mere matter of words: it is a matter of critical substance. No matter how grave the fact which is to be found in a civil case, the mind has only to be reasonably satisfied and has not with respect to any matter in issue in such a proceeding to attain that degree of certainty which is indispensable to the support of a conviction upon a criminal charge[.]15

The High Court, in Neat Holdings Party Ltd. v. Karajan Holdings Party Ltd.,16 said:

The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities. That remains so even where the matter to be proved involves criminal conduct or fraud. . . the trial judge should be conscious of the gravity of the allegations made on both sides when reaching his or her conclusion. Ultimately, however, it remains incumbent upon the trial judge to determine the issue by reference to the balance of probabilities.17

So much for the law, but how does the difference work in practice? A house is damaged by incendiary fire. The insured gives a less than convincing account of his movements at the time of the fire. This includes a denial of being anywhere near the house. There are two eyewitnesses who, independently, say that they saw a person who could have been the insured at the house at about the time the fire broke out. They know the insured, but could not positively identify him as the person they saw. It looked like him, but it was nighttime and the visibility was not particularly good.

If there was no other evidence placing the insured at the scene, the evidence of those two witnesses surely would give rise to a reasonable doubt as to whether it was the insured at the scene. However, in the civil case that evidence in conjunction with all of the other evidence which was available can be taken into account in determining whether the insured was responsible for the fire. The fact that the evidence did not positively identify the insured does not mean that it would not be open to the court to conclude, in the light of all the other evidence, that on the probabilities the person who the witnesses saw was the insured.

IV.

THE CIRCUMSTANTIAL CASE

"Cases involving alleged insurance fraud by arson, which are by no means uncommon, invariably rely for their proof upon circumstantial evidence. Very few insurers have enjoyed the luxury of being able to prove by direct evidence that their insured has been responsible for incinerating the insured property."18 So said Mr. Justice Winneke, President of the Victorian Court of Appeal, at the beginning of his judgment in Transport Industries Insurance Co. v. Longmuir.19 The court was deciding an appeal against a decision of Mr. Justice Smith who had found that an insurer failed to prove its allegation that the insured was responsible for a fire. The three judges of the Court of Appeal were all of the view that the trial judge was in error and it was ordered that the appeal be allowed and judgment be entered for the insurer. In the course of its decision, the Court of Appeal considered the law relating to circumstantial evidence in the civil case.

For present purposes it is unnecessary to detail the facts which were either admitted or found to be proved by the trial judge. They did point strongly to the insured being the person responsible for lighting the fire, there being no cogent evidence of someone else being at the premises at the same time as the insured.

The President went on to say:

In cases of circumstantial evidence each proven fact may gain support from the others and, although each, considered in isolation, might not provide a sound basis for inferring the ultimate fact to be proved, a combination of all facts might provide a compelling basis from which to draw that inference.20

He then went on to refer to what Gibbs C.J. and Mason J., said in Chamberlain v. The Queen (No. 2)21 was the task of a jury in a criminal case involving circumstantial evidence:

[I]n a case depending upon circumstantial evidence, the jury should not reject one circumstance because, considered alone, no inference of guilt can be drawn from it. It is well established that the jury must consider "the weight which is to be given to the united force of all the circumstances put together" . . .

It follows from what we have said that the jury should decide whether they accept the evidence of a particular fact, not by considering the evidence directly relating to that fact in isolation, but in the light of the whole evidence, and that they can draw an inference of guilt from a combination of facts, none of which viewed alone would support that inference . . . When the evidence is circumstantial, the jury, whether in a civil or criminal case, are required to draw an inference from the circumstances of the case; in a civil case the circumstances must raise a more probable inference in favour of what is alleged; and in a criminal case the circumstances must exclude any reasonable hypothesis consistent with innocence.22

Instead of considering whether the combined weight of the evidence led to the inference that the insured, as a matter of probability, started the fire, the trial judge in Longmuir's case analyzed each fact to determine whether the insurer had discharged the burden of demonstrating that it was consistent with the insured's complicity in starting the fire. This had the effect of imposing a requirement on the insurer to exclude even remote possibilities which might be consistent with the insured's innocence, a process which imposed a standard of proof upon the insurer which, in the view of the President, ". . . approached, if not went beyond, the criminal standard."23

As the High Court said in the unreported case of Bradshaw v. McEwans Party Ltd.24:

We are concerned with probabilities, not with possibilities. The difference between the criminal standard of proof in its application to circumstantial evidence and the civil is that in the former the facts must be such as to exclude reasonable hypotheses consistent with innocence, while in the latter you need only circumstances raising a more probable inference in favour of what is alleged.25

In applying those principles, the Court of Appeal in Longmuir concluded that from the facts found by the trial judge - namely the fire had been deliberately started, the insured was at and in the house at or very shortly prior to the time when the fire commenced, he had access to the accelerant which had been used to propagate the fire, and that he was involved in a matrimonial property dispute in the course of which he had expressed his intention to depreciate the value of the property - and the absence of any evidence pointing to the presence of some other person at the property at the time of the fire, the trial judge should have been driven to draw an inference, based on probabilities, that the insured was responsible for the fire.

V.

CONCLUSION

Longmuir is an example of how the different standards and rules in the criminal and civil courts operate. Longmuir had earlier been charged by the police with arson but was acquitted of the criminal charge. The fact of that acquittal did not prevent the insurer from alleging arson in the civil case. By reason of the operation of the relevant civil rules the insurance company was able to satisfy the court that Longmuir indeed was responsible for the fire.

1 Crimes Act, 1958, Vic. 464K (Austl.).

21d. 464T.

3Insurance Contracts Act, 1995, 21 (Austl.).

41 Lloyd's Rep. 169 (Q.B. 1975).

5 Id. at 177.

6(1964) 118 C.L.R. 600.

7 Id. at 615.

8(1993) 178 C.L.R. 217.

91d. at 227.

10 Insurance Commissioner v. Joyce (1948) 77 C.L.R. 39, 49.

11 O'Donnell v. Reichard, 1975 VR 916, 1975 Vic LEXIS 119, *17-18 (Apr. 14, 1975). 12(1938) 60 C.L.R. 336.

13Id. at 361.

'(1965) 112 C.L.R. 517. '51d. at 521 (citations omitted). '6(1992) 110 A.L.R. 449.

17 Id at 450.

18 Transport Indus. Ins. Co. v. Longmuir, No. 1 VR 125, 1996 Vic LEXIS 727, *3 (Aug. 9, 1996).

19 Id.

20Id. at * 10.

21(1984) 153 C.L.R. 521.

22Id. at 536.

3Longmuir, 1996 Vic LEXIS at *16. 24(High Ct. Apr. 27, 1951). 25id.

Peter Coldbeck graduated in Law at the University of Melbourne and is admitted to practice as a barrister and solicitor of the Supreme Court of Victoria and the High Court of Australia. He retired, after thirty-three years, as a partner in the Melbourne firm of Hall & Wilcox on June 30, 1997, but remains in active practice with that firm as a consultant. Mr. Coldbeck is a member of the Defense Research Institute, Federation of Insurance & Corporate Counsel, and is the current National President of the Australian Insurance Law Association.

Copyright Federation of Insurance & Corporate Counsel Fall 1997
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