INSURANCE COMPANY ENTITLED TO EXEMPLARY DAMAGES AGAINST FRAUDSTERS: COURT OF APPEAL DECISION TODAY

In Axa Insurance UK Plc v Financial Claims Solutions Ltd & Ors [2018] EWCA Civ 1330 the Court of Appeal held that an insurance company was entitled to exemplary damages against parties who had attempted to defraud it.

“the present case … is a paradigm case for the award of exemplary damages. This was a sophisticated and sustained fraud involving deceit and fraudulent misrepresentation from the outset. 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. There is little doubt that if the respondents had managed to enforce the judgments they obtained against Axa, Axa would never have seen its money again.”

THE CASE

Axa insurance was the (effective) defendant in two cases were there were fraudulent road traffic accidents.

The first respondent acted as if it were a firm of solicitors (which it was not) and issued proceedings. Those proceedings were not served on Axa and default judgments were obtained. The first respondent then issued enforcement proceedings against Axa under s151 of the Road Traffic Act.

Axa issued an application to strike out the claims and set aside the default judgment. In the interim:-

“Correspondence signed by Adam Khan continued to be offensive and hectoring.”

The proceedings were transferred to the High Court. An injunction was granted preventing the first respondent from conducting any litigation. Axa issued Part 20 proceedings.  This led to a judgment for Axa of “£24,954.31, comprising the value of time expended by Axa staff in unravelling the effects of the fraud and disbursements to counsel, investigators and solicitors in unravelling the fraud and setting aside the judgments obtained by the respondents. ”

The third respondent was subsequently convicted for a large number of frauds, including one of the false accidents in this case.

THE CLAIM FOR EXEMPLARY DAMAGES

The trial judge declined to make an award for exemplary damages. Axa appealed to the Court of Appeal.

THE JUDGMENT OF THE COURT OF APPEAL

The Court of Appeal allowed Axa’s appeal and ordered that each respondent pay £20,000 exemplary damages.
    1. It is important to keep in mind that exemplary damages remain anomalous and the exception to the general rule. It would therefore be inappropriate to extend the circumstances in which they can be awarded beyond the three categories of case identified by Lord Devlin. As the passage from his speech which I have cited above makes clear, the second category only encompasses cases where the defendant’s conduct has been calculated to make a profit for himself which may well exceed the compensation payable to the claimant. If that criterion is satisfied, exemplary damages may be awarded to deter and punish such cynical and outrageous conduct.
    2. In my judgment that criterion is clearly satisfied here, as in other similar fraudulent insurance claims which have come before the Courts where exemplary damages have been awarded. The respondents’ object was to extract large sums from the insurers through fraudulent insurance claims in circumstances where if the fraud was discovered before it succeeded, any compensatory damages would be limited to the costs of investigating the fraud, which would in all probability be a much lesser sum, as proved to be the case.
    3. The judge’s analysis that the profit and the compensation would be identical looks at the matter through the wrong end of the telescope and overlooks that the second category requires the Court to analyse the position prospectively when the tort is committed, at which time the tortfeasor may or may not ultimately achieve the profit it seeks to achieve. Hence Lord Hailsham’s references to “the chances of economic advantage” outweighing “the chances of economic penalty”, reflecting what Lord Devlin had said about the wrongdoer calculating that the profit “will probably exceed the damages at risk”. In any event, as Sharp LJ pointed out during the course of argument, if the fraud had been successful, Axa would have paid the claims and the monies would have disappeared, so that even if the fraud had been subsequently uncovered, the compensation Axa would be likely to have recovered would be nothing like the profit the wrongdoers had achieved.
    4. I also agree with Mr McCluggage that, to the extent that the judge appears to have thought that exemplary damages in the second category would only be awarded when the profit made by the wrongdoer cannot be fully recovered by the victim through an award of compensatory damages, that is to impose an unjustified limitation on the second category of case. The judge’s approach is inconsistent with the decision of this Court in Ramzan v Brookwide, that it was inappropriate to award exemplary damages by reference to the profits made by the wrongdoer for which compensatory damages could have been but had not been claimed by the victim of the tortious conduct (see [80]-[81] of the judgment of Arden LJ).
    5. Furthermore, I do not read Sedley LJ at [26] of his judgment in the Borders case as saying that the second category is limited to such cases of “unreachable” damages, but even if he were, the wider analysis of Rix LJ is to be preferred. It is clear from [47] of the judgment of May LJ in that case that he too did not consider that the availability of an award of exemplary damages was affected by whether the claimant could have claimed the disgorgement of the tortfeasor’s profit as compensatory damages.
    6. At [43] of his judgment, Rix LJ said:
“Exemplary damages no doubt remain a controversial topic (see McGregor at paras 11-001/8). In my judgment, however, Kuddusindicates, if anything, that, controversial as they are, they are not to be contained in a form of straight-jacket, but can be awarded, ultimately in the interests of justice, to punish and deter outrageous conduct on the part of a defendant. As long therefore as the power to award exemplary damages remains, it is not inappropriate in a case such as this, where the claimants have been persistently and cynically targeted, that they, rather than the state, should be the beneficiaries of the court’s judgment that a defendant’s outrageous conduct should be marked as it has been here. They are truly victims, and, for the reasons given by Master Leslie himself, there is no question at all of the award becoming a mere windfall in their hands.”
  1. Provided that it is recognised that the criterion which Lord Devlin identified, that the wrongdoer has calculated that the profit to be made from the wrongdoing may well exceed any compensation he has to pay the claimant, must have been satisfied for exemplary damages in the second category to be available, this seems to me to be an appropriate statement of the approach to be adopted to the award of exemplary damages in this category.
  2. Applying that approach, in my judgment the present case (in which, as I have stated, the criterion which Lord Devlin identified is satisfied) is a paradigm case for the award of exemplary damages. This was a sophisticated and sustained fraud involving deceit and fraudulent misrepresentation from the outset. 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. There is little doubt that if the respondents had managed to enforce the judgments they obtained against Axa, Axa would never have seen its money again.
  3. Contrary to the view of the judge, it is nothing to the point that criminal proceedings could have been brought (and indeed were brought against the third respondent). That was precisely what had occurred in the Borders case, where the appellant had been tried and convicted of fraud and sentenced to 30 months imprisonment. There had also been an application in the criminal proceedings for a compensation order under section 130 of the Powers of the Criminal Courts Act 2000, although that was withdrawn after Master Leslie awarded damages. As in the present case, confiscation proceedings were pending at the time of the hearing in this Court. The existence of the criminal proceedings and, in particular, the confiscation proceedings was not considered by this Court to affect the award of exemplary damages if appropriate and the argument of double jeopardy was rejected (see [16]-[17] per Sedley LJ, [41] per Rix LJ and [46] per May LJ).
  4. 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, quite apart from the fact that contempt would have to be proved to the criminal standard of proof.
  5. As I have said, this case is a paradigm one for the award of exemplary damages. As to the amount of such damages, as was stated by Arden LJ in Ramzan v Brookwide at [82], the sum must be principled and proportionate. As in that case, given the need to deter and punish the outrageous conduct and abusive behaviour in the present context, the principled basis is to make a punitive award. The respondents have chosen not to place before the court any evidence as to their means so that it is not appropriate to limit the amount of any award by reference to ability or inability to pay (see [16] of my judgment in Direct Line v Akramzadeh (2016) unreported). Given the seriousness of the conduct of the respondents and the need to deter them and others from engaging in this form of “cash for crash” fraud, which has become far too prevalent and which adversely affects all those in society who are policyholders who face increased insurance premiums, I consider that the appropriate award of exemplary damages is that each of the first, second and third respondents should be liable to pay £20,000.
  6. Accordingly, I would allow the appeal and award exemplary damages of £20,000 against each of the respondents.