THE “RED FLAGS” OF FRAUD by gjjur4356


									                      THE “RED FLAGS” OF FRAUD

                                 Michael E. Bowlin
                 Assisted By: Andrea J. Hull and M. Deborah Hackett
                           Cox Hanson O’Reilly Matheson
                            Fredericton, New Brunswick


The Problem

Insurance fraud has been defined by the Canadian Coalition Against Insurance Fraud

             Any act or omission with a view to illegally obtaining a
             property and casualty insurance benefit. This definition
             encompasses the full range of fraudulent acts, from
             completely fabricated claims, to inflation and padding of
             legitimate claims, to false statements on insurance
             applications, to internal fraud.

The Coalition points out that a task force on insurance fraud had estimated that 10 to 15
cents of every premium dollar goes to pay fraudulent insurance claims.1

On the judicial side, it must be pointed out that not all misstatements or inaccuracies
put forward by insureds constitute fraud. One must distinguish between the “overly
enthusiastic” insured and the dishonest one. Mere exaggeration of a claim is not

      1      Canadian Coalition Against Insurance Fraud - Internet -

conclusive of fraud because value is frequently a matter of opinion.2 However,
exaggeration will be proof of fraud if it is made in a dishonest manner or if it is so
excessive that it could not have been made in good faith.

The Onus on the Insurer

It is not an easy matter to prove insurance fraud. The burden of proving that fraud has
been committed is upon the party who alleges the fraud. An insurer which alleges that
an insured has committed fraud must prove the allegation.3 Grave suspicion of fraud is
insufficient.4 There must be strong cogent evidence.

While the civil burden of proof - on “the balance of probabilities” applies, within this
standard the degree of proof must be commensurate with the occasion. The Supreme
Court of Canada in Continental Insurance Co. v. Dalton Cartage Ltd.                   5   approved of the
following passage from an English authority:

             It is true that by our law there is a higher standard of proof in
             criminal cases than in civil cases, but this is subject to the
             qualification that there is no absolute standard in either case. In
             criminal cases the charge must be proved beyond a reasonable
             doubt, but there may be degrees of proof within that standard.
             Many great judges have said that, in proportion as the crime is
             enormous, so ought the proof to be clear. So also in civil cases.
             The case may be proved by a preponderance of probability, but
             there may be degrees of probability within that standard. The

      2      Chapman v. Pole (1870), 22 L.T. 306.

      3      North Star Holdings Inc. v. Royal Ins. Co. of Can. (1984), 7 C.C.L.I. 140 (Ont. Dist. Ct.).

      4      Adams v. Glen Falls Insurance Co. (1916), 31 D.L.R. 166 (Ont. C.A.); affirmed (1916), 32
             D.L.R. 399 (S.C.C.).

      5      Continental Insurance Co. v. Dalton Cartage Ltd. [1982], 1 S.C.R. 164 at 170.

               degree depends on the subject-matter. A civil court, when
               considering a charge of fraud, will naturally require a higher
               degree of probability than that which it would require if
               considering whether negligence were established... (emphasis

Thus, the Courts have applied a standard of proof that is flexible and is dependent
upon the severity of the offence alleged to have been committed by the insured.6

When Does Fraud Vitiate a Claim?

A claim is vitiated if an insured wilfully or knowingly makes a fraudulent statement or
a misrepresentation that relates to a material aspect of a claim and causes prejudice to
the insurer in responding to the claim according to its rights.7 One Ontario court has
held that once fraud is established, no matter how slight the amount, the entire claim
under the proof of loss fails.8 In some situations, the courts have even held that a claim
is invalidated when an insured makes a false but immaterial statement in regards to the

In Swan Hills Emporium & Lumber Co. v. Royal General Insurance Co.(Alberta C.A.) 10, false
statements in the proof of loss as to inventory resulted in dismissal of the claim for both

          6    Adlem, Michael D., “Fraudulent Proofs of Loss and Arson” (1992) 3 C.I.L.R. 321.

          7    Kiritsis v. Northern Frontier General Insurance Co. (1987), 28 C.C.L.I. 117 (Ont. H.C.).

          8    Fotinos v. Pitts Insurance Company et al., [1981] I.L.R. 1-1377 (Ont. H.C.).

          9    Magnussen v. Insurance Corporation of British Columbia (1978), 6 B.C.L.R. 193 (Co. Ct.).

          10   Swan Hills Emporium & Lumber Co. v. Royal General Insurance Co., [1977] I.L.R. 1-844 (Alta.
               C.A.); reversing [1976] I.L.R. 1-739 (Alta.T.D.).

contents and building. A false statement made in an application for fire insurance may
have the same result, if found to be material.11

       11     Anglo-American Fire Insurance Co. v. Hendry (1913), 48 S.C.R. 577 [On appeal from Ont.

The Key Stages

Simple economics place limits on the amount of time that can be expended on the
investigation of any given file. Therefore, the investigator must always be alert to
warning signs, that may raise the possibility of a fraudulent claim. Following
notification of loss, there are certain steps in the claims handling process that will
provide the careful investigator with the opportunity to recognize these signs:

1)     The review of the policy of insurance and the underwriting background;
2)     The active investigation - meeting with the insured and attendance at the scene
       of the loss;
3)     The production and review of records from the insured;
4)     The receipt of proof of loss from the insured.

The recommendations referred to below have been facilitated by the review of various
case law, insurance texts and, particularly, by material from the Defence Research

       12      See Insurance Fraud and Suspicious Claims Seminar, (September 29-30, 1994) sponsored
               by the Defence Research Institute, Inc. (Chicago, Illinois) and in particular two excellent
               a)      “How to Identify Economic Fraud” by Christopher Campos, CPA; Campos &
                       Stratis,Teaneck, N.J., and
               b)      “Lessons to be Learned and Status of Prosecution” by J. Thomas Nolan,
                       Continental Insurance, New York, New York.



Upon reporting of the claim, the policy must of course be immediately reviewed to
confirm coverages. The underwriting file should be examined - the application form,
the timing and type of changes to the policy should be considered. The broker always
has its own file - contact with it may reveal information such as coverage requested by
the insured as well as any conversations or correspondence between the agent and the
insured with respect to changes in the risk associated with the insured property.

The insured has a duty to provide the insurer with complete, truthful and accurate
information when applying for the insurance coverage and, when insurance is in place,
to disclose any material changes in the risk associated with the insured property. In
addition to raising a red flag that fraud could be involved, failure on the part of the
insured to provide such complete, accurate and updated information could be grounds
to void the coverage.

Examples of information that would cause further inquiry would include:

•     In the application for coverage, the insured:
         -      provided false or misleading information;
         -      failed to report any previous insurance claims;
         -      failed to disclose cancellations of policies by previous insurers;

•     The insurance was placed just before the loss.
•     Just prior to the loss, the insured contacted the agent to confirm that coverage was in

    place and/or to confirm its extent.

•   The insured made changes in the amount or nature of the insurance coverage just
    prior to the loss. For example, the insured:

       -      increased the amount of coverage;
-      reduced the amount of coverage (which could be an indication the
       insured was having financial difficulties or could be a means by the
       insured to avoid suspicion of fraud);
       -      expanded coverage on the property by obtaining an endorsement.

•   The insured failed to inform the underwriter or agent of material changes in the risk
    prior to the loss. For example, the insured:

       -      failed to advise the property had become vacant;
       -      failed to advise of a change in use in property;
       -      failed to advise that the condition of property was deteriorating;
       -      failed to advise of by-law or fire code violation in relation to the

•   The insured failed to advise of any changes in title to the property.

In Foucher v. Guardian Insurance Co. of Canada13, the plaintiffs' premises were damaged
by a fire. The plaintiffs had insured the premises as residential, when in fact, they were
operating a pizza business. As well, they failed to disclose that a previous insurance

       13     Foucher v. Guardian Insurance Co. of Canada, [1991] O.J. No. 901 (Ont. Gen. Div.).

policy had been cancelled and they included in their claim items which had previously
been removed from the premises. The Court found that the insurer could not prove
arson on the balance of probabilities. The Court also found that the insurer could not
rely on the misrepresentation about the use of the property since the insurer had been
told about it and had allowed the policy to remain in force when told the business use
was to be discontinued. However, the Court found the policy was void ab initio because
of the insureds' failure to disclose the details of the previous cancellation and because of
the false statements in relation to the contents.

In Shakoor v. United States Fidelity and Guaranty Co. et al14, the insured property was the
subject of three prior claims. The insured was told by his previous insurer the policy
would be cancelled. The insured then made an application to the defendant insurance
company without disclosing the prior claims or the cancellation of the policy by the
previous insurer. After a fire destroyed the building, the insured claimed inflated
expenses for the demolition of the building. The Court dismissed the action, holding
that the policy was void from the beginning because of the failure of the insured to
disclose material facts and because of the insured's inflation of the claim.

Fraud was also found in the case of Watkins & Davies Ltd. v. Legal and General Assurance
Co. Ltd.15. One red flag, among many others, was the fact that only seven weeks before
the fire the insurance coverage on stock had been tripled.


       14     Shakoor v. United States Fidelity and Guaranty Co. et al, [1994] I.L.R. 1-3052 (Ont. Gen. Div.).

       15     Watkins & Davies Ltd. v. Legal and General Assurance Co. Ltd., [1981] 1 Lloyd’s Rep 674.

A careful and well-planned interview with the insured and physical examination of the
scene of the loss is, of course, the basis of any investigation. This stage will often reveal
the indicators of fraud.

(a)      Questioning the Insured:

An abundance of information can be obtained, in terms of discovering potential fraud,
by making contact with the insured and conducting an interview in relation to the
claim. During the interview, a number of factors may raise one’s suspicions that the
insured’s claim is fraudulent. Potential warning signs that might alert the adjuster
during this phase include the following:

•     The insured is abnormally familiar with insurance terminology and procedures.

•     The insured cannot be directly contacted, is difficult to contact by mail or telephone,
      or will not provide a telephone number.

•     The insured refuses to provide a statement, or refuses to discuss particulars of the

•     The insured threatens to involve a lawyer or has already consulted one regarding
      his/her claim.

•     The insured threatens to contact the Superintendent of Insurance or other

•     The insured has a history of prior or habitual claims, perhaps similar to the claim in


•   The insured is overly eager for a quick settlement and is willing to accept an amount
    in settlement significantly less than the amount originally claimed.

•   The insured is quick to complain of “bad faith” or lack of “good faith” on the part of
    the insurer.

•   The insured has been experiencing financial problems related to such areas as
    marital problems and divorce, unemployment, gambling or other similar habits,
    business declines or defaults, medical or legal expenses unrelated to the claim, or
    outstanding debts.

•   The insured is involved in a depressed industry or is located in a depressed
    geographical area.

•   The insured provides either uncommonly detailed or vague information and
    documents in relation to the loss.

•   The insured is overly helpful and cooperative.

•   The insured is very calm about the loss.

•   The insured had changed his/her usual routine prior to or at the time of the loss.

•   The insured, family members or pets were coincidentally absent at the time of the

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•   The insured departed the premises shortly before the loss.

The case of Chiasson v. Royal Insurance Company16, demonstrates possible red flags that
should be noticed when questioning the insured about a loss. In this case, the insured
claimed under a fire policy. Evidence revealed that the insured and his family were
experiencing financial difficulties at the time of the fire: The insured had been out of
work for a month, he was late on his mortgage payment, his last two assessments were
unpaid and the electric commission had threatened to cut the supply of power.
Another suspicious factor was that at the time of the fire, the insured’s children were
sleeping on the floor and couch and not in their rooms, thus allowing for a hasty exit.
These facts, along with other evidence, led the court to conclude on a balance of
probabilities, that the fire had been deliberately set.

The insured’s income, income tax returns and evasion of financial responsibilities to his
estranged wife raised initial suspicions of fraud in the case of Thompson v. Non-Marine
Underwriters, Lloyd’s London17. In this case, the insured sued to recover the value of his
tools which he alleged had been stolen. The insured had not earned enough in the
years when the tools were said to have been purchased to have been able to buy them,
as evidenced by his income tax returns.               As well, the insured and his wife had
commenced divorce proceedings prior to the alleged theft loss and it was apparent from
discussions with the insured’s wife, that the insured had been evading his financial
responsibilities to her.

       16     Chiasson v. Royal Insurance Company, [1982] I.L.R. 1-1462 (N.B.Q.B.).

       17     Thompson v. Non-Marine Underwriters, Lloyd’s London, [1985] B.C.J. No. 1494 (B.C.S.C.).

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(b)      Examination of Physical Evidence and Related Inquiries

When conducting the physical investigation, a variety of clues might put the insurer on
guard. For example, while attending at the premises of the insured property, in relation
to a theft or fire loss, it is important to observe the size of the building, the existence or
total lack of debris from contents that were insured under the property, evidence of
flammable products, and indications of forcible entry. Immediate and comprehensive
photographing of the scene is invaluable. Often, the physical evidence has long since
disappeared when many of the warning signs are recognized.

The following are some of the red flags that will alert the careful investigator on a fire

•     Prior to the insurance adjuster having the opportunity to examine the property, the
      insured discarded property claimed to have been damaged.
•     There is a lack of physical debris after the fire.
•     There is evidence of intense and rapid spread of file.
•     The fire occurs during off hours, or when insured is away on vacation.
•     The insured departed from the premises shortly prior to discovery of the fire.
•     The fire occurs at a time of day when it is likely to go undetected for a long period.
•     There are indications of low level burning, especially with “splash” patterns of
      flammable liquid.
•     The sprinkler/alarm system was not functioning.
•     Flammable liquid containers are present in unusual places.
•     Burned newspapers are found near point of origin.
•     The cause of the fire is listed as unknown by public authorities.
•     The loss occurs near the end of seasonal cycle of business.

                                           - 12 -
•   A decrease in the value of the property occurred due to surrounding changes, such
    as changes in neighbouring uses and highway access.
•   The property is listed for sale and the insured has no plans to replace or rebuild.
•   The insured replaces or repairs contents and/or building with items of lesser value.
•   The property is more valuable without the building.
•   There was need for renovations prior to date of loss; equipment and machinery were
    out moded.
•   The stock is obsolete.
•   Coverage carried by the insured is greater than the value of the loss.
•   Vehicles were not parked in their usual place, e.g. close to building.
•   Contents/equipment/inventory were removed prior to the date of loss.

When the claim is for damage to real property, the insurer or claims adjuster should be
cognizant of additional matters with respect to the status of the property prior to the
date of loss:

•   Was the property well maintained?
•   Was the property vacant and for how long?
•   Were there recurrent changes of tenants or owners?
•   Was the property for sale?
•   Was the property in a desirable location?
•   Was the neighborhood in which the property is located stable or is it deteriorating?

Removal of contents from the insured property, prior to the date of the loss, is a
significant evidentiary sign. In the case of Lazy K & T Cattle Enterprises Ltd. v. British

                                        - 13 -
America Assurance Co.18, the insured claimed under a policy insuring a house and the
contents against loss by fire. The insured stated the house and the contents were totally
destroyed except for a few articles. However, the insurer showed that almost all the
contents were saved and removed by the insured’s son.                        The court held that the
insured’s whole claim was vitiated based on the fraud relating to the contents.

In the case of Scali v. Fireman’s Fund Insurance Co. of Canada19, the plaintiff claimed a loss
of $80,000. The defendant insurer claimed the loss was grossly overstated and at least
$30,000 worth of goods were not in the building. The plaintiff attempted to explain this
inconsistency by arguing that the missing stock was in the area of severe damage, and
was therefore unidentifiable. Some of the factors considered by the Ontario Supreme
Court in making a determination of fraud included: (1) the area of severe damage was
too small to contain the alleged missing goods; (2) the remains showed no traces of the
goods; and (3) the plaintiff failed to testify and had financial losses.

In Tumbers Video Ltd. v. I.N.A. Insurance Company of Canada20, after the adjuster attended
at the scene, it was very obvious that the insured’s claim was fraudulent. The sign
hanging outside the premises was not damaged, the furniture in the office was not
damaged and was simply covered in soot, and certain claimed items, such as tools, the
vacuum cleaner and kitchen items, were actually undamaged by the fire. As well, a
friend of the insured had purchased gasoline on the day of the fire and the burglar
alarm had been incorrectly set.

       18     Lazy K & T Cattle Enterprises Ltd. v. British America Assurance Co., [1977] I.L.R. 1-881

       19     Scali v. Fireman’s Fund Insurance Co. of Canada, unreported, March 22, 1983 (Ont. S.C.).

       20     Tumbers Video Ltd. v. I.N.A. Insurance Company. of Canada, [1989] I.L.R. 1-2511 (B.C.S.C.);
              affirmed, [1992] 2 W.W.R. 66 (C.A.).

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Physical evidence played a significant role in determining that an insured’s claim after a
fire was fraudulent in the case of Parasidis v. Wawanesa Mutual Insurance Co.21 During
investigation of the insured’s claim, witnesses said they had never seen many of the
items claimed. There was no trace of many of the items in the debris left after the fire.
The insured had moved to another city, leaving his family behind, and while he claimed
to have taken only one suitcase with him, a witness stated that the insured had actually
taken an entire van-load of contents.

Fraud was also found in the case of Watkins & Davies Ltd. v. Legal and General Assurance
Co. Ltd.22, based partially upon the physical evidence. The court held that the heavy
onus placed upon insurers to prove a claim is fraudulent is not discharged merely by
providing evidence of suspicious circumstances. Scientific evidence is also required to
add weight to an allegation of fraud. The “red flags of fraud” in this case included
expert evidence which proved that the fire was deliberately started using a substantial
quantity of flammable liquid which was directly ignited. It was also established that an
intruder could not have gained access into the building because the steel front doors
had been securely locked.


After an insured has submitted an insurance claim, it is essential to carefully review any
documentation provided by the insured in support of the claim as well as to seek out
other relevant and helpful documents.               Documentation of significant importance

      21     Parasidis v. Wawanesa Mutual Insurance Co. (1988), 53 Man. R. (2d) 194 (Q.B.); affirmed, 15
             A.C.W.S. (3d) 300 (C.A.).

      22     See footnote 15.

                                           - 15 -
includes receipts and invoices relating to items located in the insured premises, lists of
stolen items provided to the police and to the insurer, financial records of the insured
business, or inventory lists.    Such documents, if examined carefully, may raise
suspicions of fraud:

•   Lack of Documents
       -     Insured claims that transactions were in cash.
       -     Insured claims that all documents were lost in fire or theft.
       -     Inability of insured to recall where/when items were purchased.

•   Quality of Documents
       -     Only photocopies of receipts are available.
       -     It appears the receipts were altered.
       -     The receipts/invoices are all consecutively numbered.
       -     The receipts/invoices are on plain stationary, rather than official

•   Inconsistencies in Documents
       -     The dates on invoices do not match the dates on financial records.
       -     Round numbers are used for claim amounts.
       -     The list given to the insurer does not match the list given to police.
       -     Sales/GST taxes on invoices are inconsistent/incorrect.
       -     It is impossible to trace a document to the financial records of a
       -     Different invoices have similar handwriting or typing fonts.
       -     Invoices exist for low-priced items but not for high-priced items.
       -     Documents produced cannot be verified directly with vendors.

                                       - 16 -
•   Inventory Claims

In addition to the above, suspicious claims for inventory loss are often revealed when:

       -     The claim is largely for seasonal inventory and the season has now
       -     The inventory has exceeded the “best before” date.
       -     The amount claimed is not consistent with annual sales and a reasonable
             turn over rate of inventory.
       -     There was slow or insignificant movement of inventory prior to the date
             of loss.
       -     The amount claimed is not consistent with the historical amount of
             inventory shown in the accounting records and financial statements.
       -     The majority of purchases are from one vendor or related companies.

In Short v. Guardian Insurance Company of Canada.23, an insured made a claim when
thieves stole items of personal property and vandalized the insured property. The
insured gave a list of stolen items and values to the police. She also submitted a proof
of loss using replacement costs from various stores and expert evaluations of antique
items. However, these values differed from those given to the police. The Court found
this fact to be important although the trial court’s finding of fraud was reversed on

       23    Short v. Guardian Insurance Company of Canada, [1984] I.L.R. 1-1770 (N.S.C.A.).

                                           - 17 -
Differing lists also served as the red flag in McQueen v. Economical Mutual Insurance
Co.24, wherein the plaintiff claimed for the theft of electronic equipment. He gave
different lists of missing items to the police and to the insurer. This court dismissed the
insured’s claim, holding that the false statements were made wilfully.

Anastasov et al. v. Halifax Insurance Co.25 illustrates why receipts should not always be
taken at face value.     In this case, the insurance policy carried a replacement cost
endorsement which required the insured to replace the property before the insurer
made payment. The insured submitted “receipts” for various items, claiming that she
had actually purchased the replacement goods.                      The store which supplied the
“receipts” said the goods had only been set aside and not purchased by the insured. The
Court of Appeal held the statements given were false and material, thus vitiating the
insured’s claim.

In Ramias v. Guardian Insurance Co.26, a list of inventory with corresponding values
served as a warning sign for the court. The insured’s business property was damaged
by fire. The plaintiff submitted an inventory showing the value of the merchandise at
the time of loss to be the same as the cost to purchase it. Evidence indicated that
seasonal stock would have little or no value, and that the value of distressed goods,
such as those past their “best before” date, would depreciate by 50% to 75%. Most of
the stock was well over one year past the “best before” date and the court calculated the
value of the merchandise to be only $22,463.87 and not $305,289.98 as claimed.
Evidence also showed the insured paid less than half of what he claimed to have paid

      24     McQueen v. Economical Mutual Insurance Co., [1997] I.L.R. 1-3412 (Ont. Gen. Div.).

      25     Anastasov et al. v. Halifax Insurance Co., [1987] B.C.J. No. 1437 (C.A.).

      26     Ramias v. Guardian Insurance Co., [1994] A.J. No. 359 (Q.B.).

                                             - 18 -
for the stock, and that he had lied in denying that invoices existed for the purchases.
The court determined that the insured had knowingly and fraudulently exaggerated the
value of the loss and, therefore, dismissed the claim.

In Brittner v. Saskatchewan Government Insurance Office27, a careful review of invoices
revealed a fraudulent claim.          The insured submitted 63 invoices for labour and
materials concerning renovations that had been done on a building prior to its
destruction by fire, for the purpose of supporting the value claimed. Review of the
invoices by an experienced contractor showed that many of the labour charges on the
invoices were greatly inflated. Some of the invoices had been prepared after the date of
loss and for a different building. The court found a deliberate attempt to inflate the
claim, which was dismissed.


The proof of loss completed by the insured is a very important document. The insured
is swearing to the truth of the information in the document with respect to the loss
claimed. Fraud on the part of the insured through false or misleading statements in the
proof of loss may void the claim.

It is crucial to ensure that the proof of loss is completed in full and is sworn by the
insured, and that it contains details about the items claimed for, such as when, where
and for what amount they were purchased, and the condition of the items just prior to
the loss. The adjuster should not prepare the proof of loss or schedules for the insured -

       27     Brittner v. Saskatchewan Government Insurance Office (1985), 20 C.C.L.I. 90 (Sask. Q.B.).

                                             - 19 -
if questions arise later, the Court may be willing to overlook misstatements if the
insured pleads confusion and reliance on the adjuster.

Having obtained and reviewed the underwriter's file, the application for insurance and
the agent's file, if available, and having investigated the scene of the loss and reviewed
the records produced by the insured in support of the claim, the claims adjuster or
examiner will be ready to pick up on indications of possible fraud when reviewing the
proof of loss, including the following:

•   The insured makes false or misleading statements in the proof of loss. For example:
-      The claim is overstated and exaggerated (although some carelessness or
       mistaken overvaluation on the part of the insured as to the claim may not
       be grounds to vitiate the claim).
       -      The amount of inventory claimed to be lost could not have been held in
              the area where the loss occurred.
       -      The insured is claiming for property not owned by the insured.
       -      The insured is claiming for non-existent property.
       -      The insured is making a claim for items that were not damaged.
       -      The items claimed for were not purchased when and where the insured
              says they were.
       -      There is evidence the items claimed for had never been in the possession
              of the insured.
       -      The insured is making a claim for equipment as if it was a total loss when
              in fact it was repairable.
       -      The proof of loss contains a claim for new items when the policy only
              covers the depreciated value of items.

                                           - 20 -
•   Some other possible indications of fraud to look out for include:

       -      The list of lost items given to the police is not the same as the list of items
              claimed for in the proof of loss;
       -      The items claimed for were allegedly purchased when the insured was in
              significant financial difficulty;
       -      The insured does not accurately show what his or her interest in the
              property was (i.e. the insured fails to disclose any mortgages, liens or
              other encumbrances or charges on the property);

In Robichaud v. Fidelity Insurance Company of Canada28, the insured's claim for a fire loss
was denied on the basis that the proof of loss was defective and that the fire had been
started by the insured. The Court found the defective proof of loss was due to the fault
of the lawyer who prepared it.           The Court held it could relieve against imperfect
compliance with respect to the requirements for the proof of loss and also found that
the insurer had failed to prove the insured had started the fire. However, the action on
the insurance policy was dismissed as the insured had submitted false receipts and
invoices in proving the value of the lost goods.

In National Development Corporation Limited v. The Halifax Insurance Company et al.29, the
insured submitted a proof of loss after a fire. The Nova Scotia Court of Appeal upheld
the trial judge’s decision that the claim was voided by fraud and wilfully false
statements in the proof of loss. In making this determination, the court considered the
following as indications of fraud: (1) the insured failed to refer to other insurance; (2)

       28     Robichaud v. Fidelity Insurance Company of Canada, (1980), 30 N.B.R. (2d) 399 (Q.B.).

       29     National Development Corporation Limited v. The Halifax Insurance Company et al., [1985]
              I.L.R. 1-1909 (N.S. C.A.).

                                            - 21 -
the value of stock was overstated; (3) claims were made for property not owned by the
insured; (4) claims were made for equipment as if it was a total loss when it was, in fact,
repairable; and (5) claims for storage and damage to leasehold improvements were

A claim for coverage for stolen electronic equipment was dismissed in McQueen v.
Economical Mutual Insurance Co.30, where (1) the proof of loss was full of false statements
about the amount of equipment allegedly lost, the place where the equipment was
purchased, the ownership of the equipment and the method of payment for it and (2)
the insured gave different lists of missing items to the police and the insurer.

As noted above, while it may appear an insured has overstated or inflated the claim in
the proof of loss, and as a result, one may suspect fraud on the part of the insured, the
Courts will look at the facts of the case and differentiate between fraudulent,
overinflated claims and carelessness, genuine mistake or "mere puffery" on the part of
the insured in completing the proof of loss.

For example, in the case Daver v. Chubb Insurance Co. of Canada31, the Ontario Court of
Appeal upheld a dismissal of a claim by the insured for loss arising out of theft. While
there were some suspicious features surrounding the loss, there was insufficient
evidence to disprove the loss. Among the items claimed by the insured was television
and sound equipment which the insured said he had purchased from his ex-wife's
business at a cost of $23,000.00. The Court found that if the insured had purchased

       30     See footnote 24

       31     Daver v. Chubb Insurance Co. of Canada, [1996] O.J. No. 3164 (Ont. C.A.) affirming,
              unreported, July 20, 1994 (Gen. Div.) [Action No. 92-CU-60728].

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these items at all, they would have been purchased at a much lower price than that
claimed. The Court dismissed the action on the basis that the insured had
substantially misrepresented the amount of the loss and that the fraudulent claim did
not amount to "mere puffery or carelessness".

On the other hand, in Laurie v. Aetna Casualty Company of Canada32, where there were
false statements in the proof of loss form completed by the insured, the Court found on
the evidence that the insured had not fraudulently or wilfully made false statements.
The Court held that while the insured had been careless or negligent in completing the
proof of loss, this did not void the policy.

Motivation for Fraud in the Commercial Context

Overall, there are a number of factors that may suggest an incentive for a commercial
entity to commit fraud. Some of these include:

1)     Company is operating at a loss.
2)     Problems exist between the directors/officers/partners.
3)     Suppliers are not being paid on time.
4)     Tardiness in payments to public authorities - sales tax submissions, income tax
       payments, payroll taxes, workers compensation premiums.
5)     Overdrafts on accounts/continuous operation on line of credit.
6)     Owner’s equity is in a negative position.
7)     Failure of company to collect receivables promptly.
8)     Slow sales/high inventory levels.

       32     Laurie v. Aetna Casualty Company of Canada (1982), 51 N.S.R. (2d) 323 (S.C.).

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9)    Obsolete equipment.
10)   Desire of key partners to retire.


The above is intended to be only a general list of some of the “red flags” or clues to the
discovery of possible fraud. Not all claims can bear the time or expense of covering all
of these steps. However, constant awareness of the obvious factors by those of us who
work in the insurance industry will increase our chances of spotting those claims that
merit increased attention and follow up.

March, 1999

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