Exemplary damages awarded following serious fraud against insurer

The High Court had previously awarded compensatory damages of around £25,000 to AXA, to reflect the value of the time it had spend uncovering the fraud. It had, however, dismissed the insurer's claim for exemplary damages, a term used to refer to damages over and above an individual's actual loss.

Insurance disputes expert Warren McIntosh of Pinsent Masons, the law firm behind Out-Law.com, said that the judgment was a "welcome victory for insurers", with potentially far-reaching implications.

"Where previously it was understood that for exemplary damages to be awarded the expected profit to the wrongdoer must exceed the amount of compensatory damages the victim might have been awarded, now the prospect of the level of actual recovery of a compensatory damages award must be taken into account," he said.

"Given that in almost every case of deliberate fraud it will be possible to argue that the fraudulently-obtained funds would have been dissipated, meaning that the fraudster's expected profit will inevitably exceed any expected recovery, claims for substantial exemplary damages awards in fraud and deceit cases - and perhaps others - may cease to be a rare exception, and rather become the norm. Whether future cases might limit the principle or the level of sums awarded on the basis of factors such as the degree of dishonestly, sophistication and/or collusion, and the method by which the fraud is perpetrated - such as, as in the present case, by impersonating solicitors, remains to be seen," he said.

The principles governing an award of exemplary damages were set out by Lord Devlin in Rookes v Barnard, a case heard by the House of Lords in 1964. In his judgment, Lord Devlin described the 'second category' of cases in which exemplary damages may be awarded as those "in which the defendant's conduct has been calculated by him to make a profit for himself which may well exceed the compensation payable to the plaintiff". The idea is to show that the law "cannot be broken with impunity", and to "teach a wrongdoer that tort does not pay", according to Lord Devlin.

The AXA case centred on fraudulent claims made in relation to two fictitious motor accidents alleged to have involved individuals it had insured. The fraudsters traded as 'Coelum Legal', a fictitious law firm purportedly regulated by the Ministry of Justice. The fraud was described by the court as "sophisticated, well-planned and brazen" and involving "serious abuse of the process of the court", as well as the criminal offence of acting as a firm of solicitors authorised to conduct litigation when not entitled to.

The fraudsters pursued proceedings against the insured parties in the first instance and then, once default judgments had been obtained, obtained further default judgments against AXA under section 151 of the Road Traffic Act. After uncovering the fraud, AXA brought part 20 proceedings against the fraudsters seeking both compensatory and exemplary damages against the respondents for the torts of deceit and unlawful means conspiracy.

In the High Court, the judge dismissed AXA's exemplary damages claim. He noted that the insurer, "through its diligence and investigations", had been able to avoid paying out on the fraudulent claims, which together were worth a little over £85,000. He said that, for this reason, paying out exemplary damages in the case would have extended the scope of Lord Devlin's second category. He also rejected the use of exemplary damages as "a vehicle for 'social policy'" better pursued through the criminal courts and contempt of court jurisdiction.

The Court of Appeal disagreed. While acknowledging that exemplary damages "remain anomalous and the exception to the general rule" of damages as compensation, Lord Justice Flaux said that the AXA case was a "paradigm" for the award. The case "clearly satisfied" Lord Devlin's second category of a case "where the defendant's conduct has been calculated to make a profit for himself which may well exceed the compensation payable to the claimant".

"This was a sophisticated and sustained fraud involving deceit and fraudulent misrepresentation from the outset," said Lord Justice Flaux, giving the court's unanimous judgment.

"The accidents were faked. False documentation, such as the hire agreements and medical reports, was created. The claimants themselves may not have existed. The first respondent conducted proceedings on the basis that it was authorised to do so as a firm of solicitors when it was not, thereby committing a criminal offence. Its conduct of those proceedings was cynical and abusive and through its dishonest manipulation and misuse of the court process, falsely representing that court documents had been served when they had not, the fraud very nearly succeeded," he said.

"Contrary to the view of the judge, it is nothing to the point that criminal proceedings could have been brought…Furthermore, I do not consider that the availability of contempt of court proceedings should adversely affect the award of exemplary damages if it is otherwise appropriate. Any contempt was in a narrower compass than the overall fraud and thus did not include the totality of the outrageous conduct," he said.

The judge noted that the amount of exemplary damages must be "principled and proportionate", in line with previous case law. Each of the three parties pursued by AXA was therefore ordered to pay £20,000, reflecting "the seriousness of their conduct" and the fact that they had not placed any evidence of their means before the court.

As well as being a victory for insurers, insurance disputes expert Warren McIntosh said that the decision was "also a victory for the general public, whose insurance premiums have inevitably risen to account for the sums lost to fraudulent claims".

"This decision has sent a clear message, in particular to organised groups conducting sophisticated and cynical fraudulent claim schemes, that in doing so they should expect to pay not just compensation for any loss suffered, but also an additional, potentially very substantial, penalty - in this case, an additional £60,000 in respect of a scheme which was only expected to net the fraudsters £85,000," he said.