Clyde & Co: The truth about fundamental dishonesty

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As insurers get to grips with the implications of Section 57’s definition of fundamental dishonesty, Clyde & Co’s Damian Rourke shows how the legislation can halt exaggerated third-party claims early

Three years ago, new legislation in England and Wales filled a gap that has existed in third-party personal injury claims. In a first-party claim, the duty of utmost good faith has always meant that, in the event of a claimant behaving dishonestly, the claim could be dismissed. But in third-party claims, the potential to respond in this way did not exist—until Section 57 of the Criminal Justice and Courts Act (CJCA) 2015 introduced the concept of fundamental dishonesty. This legislation handed insurers a new weapon in the battle against dishonest claimants, but in the three years since its introduction, relatively few have sought to use it.

Until recently, the successful use of Section 57 to dismiss cases has generally been isolated to lower value claims. However, in light of further judicial guidance, defendants and their insurers are becoming increasingly confident in using these provisions. As a result, larger value claims are now finding their way before the courts, with successes for defendants being reported.

How section 57 differs from QOCS

The difference between a finding of fundamental dishonesty under the qualified one-way costs shifting (QOCS) regime and that under Section 57 of the CJCA is important. Broadly speaking, QOCS fundamental dishonesty under CPR 44.16 can be summarised as the claimant unsuccessfully bringing a fraudulent claim—usually entirely fraudulent—and losing QOCS protection as a consequence. Section 57 fundamental dishonesty is different. It addresses those claimants who dishonestly exaggerate a genuine claim, causing that claim, including genuine heads of loss, to be dismissed.

The decision in LOCOG v Sinfield [2018] EWHC 51 (QB) provides the most recent guidance for what conduct constitutes fundamental dishonesty under Section 57. In this case, the claimant had been injured as a volunteer worker at the 2012 Olympic Games. His claim included the cost of employing a gardener, which he asserted was necessary as a result of his injuries. However, during the trial, it became clear that the claimant had employed a gardener prior to his injury and the invoices for the gardening expenses had been created by him. The defendant argued that the claim should be dismissed in accordance with Section 57.

The trial judge took the view that the dishonesty, while fundamental to the claim for gardening expenses, was not fundamental to the claim as a whole, so the entire claim was not contaminated. This decision went to appeal and was reversed. The High Court held that the claimant had been fundamentally dishonest in pursuing the gardening expenses and, in its view, “the fact that the greater part of the claim might be honest is neither here nor there”. The entire claim was dismissed.

What can be taken from this decision is that as long as the head of loss is substantial, or substantially affects the presentation of the claim, then the dishonesty will be fundamental and the whole claim will be dismissed. In LOCOG v Sinfield, the gardening claim represented 28% of the overall pleaded value, or 42% of special damages.

Using Section 57

In the aftermath of LOCOG v Sinfield, defendants alleging that a claim is fundamentally dishonest can rely on this guidance to decide whether to pursue such an allegation or not. Eighteen months ago, our team at Clyde & Co launched an initiative to identify third-party personal injury claims of £50,000 to £350,000 in which Section 57 fundamental dishonesty was suspected.

Using a set of indicators developed in-house, we analyse claims and alert insurers to those that are red-flagged. If fundamental dishonesty is shown to be present, the court is duty bound to strike out the claim.

Prior to Section 57, exaggeration of a claim would be used by the defendant as leverage to gain a better deal. Post-Section 57, it is grounds for no deal at all. The challenge is to present the evidence of fundamental dishonesty in the most compelling way possible. Even after LOCOG v Sinfield, there remains a degree of ambiguity about how the courts respond.

Early intervention

Using insurers’ traditional approach, a successful dismissal or discontinuance of a dishonest claim was good news, but it had its drawbacks. If the claim proceeded to trial, this inevitably cost the insurer time and money. If it was discontinued with no order as to costs, then the defendant was unable to recover their costs. This is why our strategy is to place pressure on dishonest claimants at an early stage, and to seek findings of fundamental dishonesty from a court before trial.

Following the collection of evidence proving fraudulent exaggeration, a statement is filed setting out the evidence. An application is then filed seeking permission to amend the defence to plead fraud and fundamental dishonesty. This relies on the use of an electronic schedule specifically designed by our fraud team.

In Kona v Servest, we applied this strategy. The court approved the application and, having valued the genuine element of the claim at £10,000, dismissed the whole claim under Section 57. The claimant was ordered to pay the balance of our costs following deduction of the genuine element.

By presenting evidence of the claimant’s dishonesty as early in proceedings as possible, we were successful in obtaining the finding of fundamental dishonesty as a preliminary issue.  This was done without incurring further—and potentially irrecoverable—costs, which would have been the case had we waited for trial. We also recently concluded the claim of Eglington v Batchelor, in which the claimant agreed to discontinue the claim under the threat of fundamental dishonesty application. The claimant made a payment for costs equivalent to the sum that would likely have been awarded to us.

Our approach highlights the innovative manner in which the Section 57 process can be used to dismiss claims and recover monies for defendants. Other benefits include the freeing up of judicial time and, in the longer term, compelling claimant solicitors to properly assess schedules of loss on high value claims.

Insurers are continuing to wake up to the potential of Section 57. At Clyde & Co, we’re still in the process of educating claims teams to the possibilities, but the change is happening. The rules of the game have been rewritten. Those insurers that rethink their approach in the light of these changes stand to make real progress in the battle against fundamentally dishonest claimants.

Damian Rourke (pictured) is a legal director at Clyde & Co

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