Fraud by indemnity insurers

If you type “fraud by insurers” into a search engine, the results are overwhelmingly about fraud against insurers. Insured persons who inflate their claim, report fictitious thefts, stage fires. That fraud exists, and I do not wish to play it down. The Dutch Association of Insurers devotes a great deal of attention to it each year, and in some lines of business it is rightly a focus point.

But there is another side to the story that is systematically underexposed: the practices on the side of the insurers themselves. Practices that are not all “fraud” in the legal sense, but which in their effects are sometimes just as damaging for insured persons. In this piece I name three. Not in order to tar all insurers with the same brush — I have worked for years with some employees of major insurers who are wholly courteous and correct — but to bring some balance to a debate that is currently conducted too one-sidedly.

1. Unfounded suspicions of fraud as a means of pressure

In my practice I regularly see insurers deploy the word “fraud” or “suspected intent” at a moment when the evidence is anything but conclusive. The effect on the insured is severe: a suspicion of fraud means not only refusal of the claim, but also placement on a sector-wide warning list, registration with CIS (Central Information System), and in some cases termination of cover by other insurers who consult that same list.

The problem is that, in practice, the distinction between suspicion and proof is shrunk. An investigation report whose conclusion is “probable intentional conduct” on the basis of four weak indicators is often read by claims handlers as conclusive proof. The insured then finds himself in a position where he has to prove that he did not commit fraud — a reversal of the burden of proof which has no basis in law.

A judge in The Hague held as long ago as 2017 that a suspicion of fraud is insufficient to defeat an entire claim. Even so, we see that insurers largely continue this practice. For insured persons it is often cheaper to accept a lower settlement than to litigate for years against a deeply funded counterparty. That insurers know this — and factor it into their calculations — is, in my view, a structural problem.

2. Underinsurance as an escape route

“Sir, madam, you are underinsured.” It is a sentence I encounter daily in my work. The reasoning: your sum insured does not cover the actual value of your contents or buildings, so we apply a pro rata reduction. With 30% underinsurance, 30% of your loss goes unpaid.

In itself, underinsurance is a legitimate doctrine. But in practice I see two things that concern me.

First: the calculation of actual value is often made generously on the high side, with contents lists based on replacement values, average Dutch household expenditure and items that in reality should not have been included. The more generously actual value is estimated, the greater the underinsurance — and the greater the reduction.

Second: insurers’ policies often contain warranty conditions (for example a contents calculator with which you have determined your sum insured) that ought to prevent this whole discussion. Where an insurer agrees a sum insured with you on the basis of its own calculation tool, and then, when a claim arises, invokes underinsurance because that sum was too low — that is, at the very least, legally arguable. In practice, many underinsurance discussions fall apart on this point as soon as a judge looks at them.

3. Selective application of exclusions

Insurance policies contain hundreds of exclusions and clauses. When a claim is made, handlers look at the exclusions that may apply — and sometimes read them very broadly. “Gradually occurring damage”, “deferred maintenance”, “you ought to have known that…”, “insufficiently secured” — these are standard defences invoked on the basis of minimal evidence.

The problem is that many such clauses, when tested in court, do not hold up or only hold up in part. The Dutch Supreme Court and lower courts have ruled in dozens of decisions that unreasonably onerous conditions are voidable, that causation must be proved, and that the burden of proof in principle rests on the insurer when it invokes an exclusion. In first-line claim handling this nuance is often not reflected.

I regularly come across files in which an insurer rejects a claim on the basis of an exclusion that — when tested — does not hold up. The insured appeals, the insurer’s position softens, a settlement is reached that should never have been necessary if the initial assessment had been correct.

What is to be done

This is not a polemic against insurance or against insurers as an institution. Insurance is a useful and necessary social invention. It is, however, a plea for a balance in the relationship between insurer and insured which, in my view, is currently structurally tilted in the insurer’s favour.

Three things would help.

Stricter standards for investigation reports. A report that supports a suspicion of fraud should, at a minimum, comply with international investigation standards (NFPA 921 for fire, structured cause-and-origin investigation for other damage). Insurers should not be permitted to invoke a suspicion of intent on the basis of a report that does not meet these standards.

A reversal of the burden of proof where fraud is alleged. When an insurer alleges fraud, it must substantiate it — not on appeal, but at first instance.

Faster access to an independent counter-expert. Insured persons are often unaware that they are entitled to their own expert, and that the costs are payable by the insurer. Insurers should be required, in their first claim letter, actively to draw attention to this right.

Until then, the work we do — independently assessing the facts, scrutinising the policy, taking the discussion with the insurer up to expert level — remains a bitter necessity. Not because all insurers are untrustworthy, but because in any individual claim the asymmetry of power is great and, without a counterweight, things regularly go wrong that should not.

Eric Horssius