Exemplary damages are a narrow exception to the rule that damages are compensatory, not punitive. This case is a paradigm example of when they are appropriate.
Axa found bailiffs at its door, instructed by solicitors to enforce default judgments under s.151 RTA amounting to £85,000. How had this happened?
The “solicitors” (the respondents) were not solicitors; the claimants, accidents, medico-legal expert and credit-hire company were all fictitious. Service of documents had consisted of sending bundles of junk mail by registered post, to create evidence of “service”.
Once the fraud was unraveled, Axa claimed the costs of defeating it (£25,000), and exemplary damages. At first instance, the costs were recovered, but the claim for exemplary damages was dismissed.
Exemplary damages are appropriate when:
“...the defendant’s conduct has been calculated by him to make a profit for himself which may well exceed the compensation payable to the plaintiff ...” Rookes v Barnard  AC 1129.
The court had interpreted this to say that exemplary damages were:
“available for the case where compensatory damages are inadequate to remove the wrongful gain achieved by the tort - where paying compensation in accordance with the normal principle would leave the tortfeasor ‘up on the deal’.”
In this case, the looked-for profit (the £85,000) would all come from Axa; and if successful, the fraudsters would have been liable to Axa for the full amount. There would have been, therefore, no “unreachable” profits, and so exemplary damages were inappropriate.
The Court of Appeal disagreed.
The test was not whether there would have been unreachable profits had the fraud succeeded. Rather:
“What is necessary is that the tortious act must be done with guilty knowledge for the motive that the chances of economic advantage outweigh the chances of economic, or perhaps physical, penalty.” Broome v Cassell  AC 1027
In other words, the hoped-for profit if successful must outweigh the potential cost if unsuccessful.
This was a paradigm case for exemplary damages. The cost at risk was far less than the hoped-for profit; the fraud was sophisticated and sustained; and there is a need to deter insurance fraudsters. Each respondent was ordered to pay exemplary damages of £20,000.
Insurance companies will note the Court of Appeal’s clear green light to claims for exemplary damages against insurance fraudsters.
David Willink / 1st Aug 2018
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