Insurers who seek to rely on the fraud exclusion in a policy should bear in mind that the insurer bears the onus of proving the fraud. The question is always: can you prove the facts that establish the defence?
The onus is an ordinary civil one on a balance of probabilities but fraud will not easily be inferred.
Absence of reasonable grounds for belief in the truth of what is stated may prove that there was no such belief.
Fraud requires proof, for example, that material misrepresentations of fact were made to the insurer, upon which the insurer would rely, and which the insured knew were untrue.
An error, misunderstanding or oversight, however unreasonable, does not amount to fraud. It is not good enough to show that the beneficiary’s representations were incorrect.
The court in Guardrisk Insurance v Kentz (Pty) Ltd confirmed that where the insured makes a representation which is incorrect without an honest belief in the truth of the statement when it is made, then they act fraudulently. But the insurer has to show that the insured knew the facts to be incorrect and that the statements made or conduct engaged in was in bad faith. Absence of reasonable grounds for belief in the truth of what is stated may prove that there was in fact no such belief.
While the fraud exclusion is a necessary provision, insurers should carefully consider and interrogate reports which may infer fraud, having regard to the seriousness of the allegation and the difficulties in proving fraud, and the onus upon it.