Deterrence, human rights and illegality: the forfeiture rule in insurance contract law

Abstract

The forfeiture rule in insurance contract law was designed to be draconian in its effect. Such rules often generate hard cases. The challenge to the status quo in the litigation comes not only from consideration of the rule itself but also from its compatibility with the Human Rights Act 1998. The strict nature of the rule was viewed as necessary to deter insurance fraud, and to reflect the special nature of the insurance claims process. We show in this piece that both of these factors are misunderstood. First, the forfeiture rule is but a tiny piece in the market, administrative and legal processes that regulate the level of insurance fraud. Secondly, similar issues arise in other areas of contract law, and the responses there better reflect the complex interactions of contractual and non-contractual behaviours expected of sophisticated market participants. The picture that emerges of the forfeiture rule is one in which its benefits have been seriously over-estimated, without proper consideration of less intrusive approaches. I. INTRODUCTION The forfeiture rule in insurance contract law is of ancient origin and simply stated: an insured that is fraudulent in the presentation of its claim loses the entirety of the claim under an insurance policy, and not merely the dishonest part. Despite its antiquity, the limits of this principle have been the subject of considerable litigation since the turn of the millennium, with notable contributions from Lord Mance. The recent development of the forfeiture rule is an archetype in the remaking of modern commercial law. It is a mixture of law and policy, with the policy expressed dogmatically, but with relatively limited evidence for the assertions made. Moreover, the issue is a hybrid of public policy, contractual rules and broader public law principles emanating from human rights law. It asks questions about the generality of principles such as the law’s disdain for fraudulent conduct, and the role of private law in deterring such conduct. 1 * Professor of Insurance & Commercial Law, University of Southampton. The authors would like to thank Dr Cliona Kelly and the anonymous referee(s) for constructive criticism on an earlier draft. The usual caveat applies. † PhD Candidate, Cardiff Law School. 1. In addition to the policy factors that shape contractual rules considered in detail in this paper, the effect of fraudulent exaggeration of a tort claim was considered in Summers v Fairclough Homes [2012] UKSC 26; [2013] Lloyd’s Rep IR 159 ; [2012] 1 WLR 2004. We note this below (text to fn.44) but, for reasons of space, do not deal with this in detail. See W Norris QC, “Look out: I’ve got a power ... but I am not going to use it” (2012) JPI Law 169. Deterrence, human rights and illegality 315

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ORCID for James Davey: orcid.org/0000-0002-0748-1404

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