Mistaken payments: How to recover overpayments made to the insured

James Joyce once said that, “mistakes are the portals of discovery,” and this is certainly true in terms of claims for unjust enrichment. As insurers process and make thousands of payments a year, you could almost say that some errors are bound to occur. One example of this may be the mistaken payment of a sum of money to an insured, and we are often instructed to advise on just this issue.

This may occur, for example, where an insured is indemnified in respect of a property damage claim and several interim payments are made to the insured via a loss adjuster as contractors undertake various stages of repair works. Clearly the greater the losses to be indemnified and the greater the number of interim payments and payment requests from a loss adjuster, the greater the potential for error. However, in the event that a payment is made to an insured by mistake, there are steps which insurers can take to recover this money. It is unusual for policy terms to contain a clause which provides insurers with an obvious contractual right to recover any mistaken payments to an insured.

However, confirmation of the contractual position ought to be insurers’ first port of call. If such a contractual term does exist, then insurers can show that they have a contractual cause of action against the insured to recover any mistaken payments and need not jump through the hoops of establishing grounds for restitution. In the absence of a contractual right of recovery, an insurer’s claim to recover any mistaken payment would have to be based on the law of unjust enrichment. If successful, the insurer’s remedy would be restitution of the overpaid amount.

To succeed with a claim for unjust enrichment, the insurer would have to show the following:

• That the overpayment was made by mistake
• That the mistake was one of fact, not law
• That the mistake was ‘essential’ and
• That the mistake was ‘excusable’

Firstly, and somewhat obviously, insurers must be able to evidence that there has in fact been a mistaken payment to the insured which ought not to have been made, i.e. the insured was not entitled to this particular payment under the insurance contract or under any agreement. Often this will involve evidencing the total adjusted sum agreed with the insured in respect of their losses versus the actual total sum paid - the difference representing the mistaken payment.

In most cases, this hurdle should be easily overcome with reference to print outs of payment system details and loss adjuster reports and notes. In an ideal world, the insured will have acknowledged receipt of the mistaken payment. The test as to whether the mistake was ‘essential’ does not appear to be a particularly strict one and case law suggests that it would be enough that the insurer would not paid with knowledge of the truth, i.e. it is enough that ‘but for’ the mistake, the insurer would not have paid.

Cases include:

• Mistakes about entitlement, such as payment to the wrong person
• Payment on a policy that has lapsed for non-payment of premium
• Payment in the mistaken belief that the loss was covered by the insurance
• That the insured had an insurable interest
• That the insured event has occurred
• Mistakes about the extent of loss and in calculating the benefit payable

Therefore, there are a number of scenarios where mistaken overpayments can occur. In terms of whether a mistake is ‘excusable’ or not, the test again does not appear to be particularly strict and case law has supported that a mistake will be excusable even if careless or forgetful. If the four tests above are met, an insurer will have a good prima facie case for recovery of money paid on the basis of unjust enrichment. However, possessing a good prima facie case can often not be enough as a number of court decisions have barred recovery in these circumstances if the insured has changed his or her position in good faith and it would be inequitable to require repayment. This ‘change of position’ must be causally related to the payment however, and the House of Lords has confirmed that the mere fact that an insured has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay.

Despite this, there appears to be some sympathy toward insureds who find themselves as defendants against a claim for unjust enrichment and it has been suggested that the court, “ought not to apply too demanding a standard of proof when an honest defendant says that he has spent an overpayment by improving his lifestyle, but cannot produce any accounting.” It is clear, that as with all equitable defences, this ‘change of position’ defence accords a considerable degree of discretion to the judge hearing the case on the day at court. As such, the court is likely to take into account a number of factors, including the financial standing of a defendant and any explanation they provide as to why they are unable to repay the money to the insurer.

It is clear from this short discussion that the law relating to unjust enrichment requires some careful navigation and the prospect of succeeding in a claim for unjust enrichment remains heavily dependent upon the facts of each case. In any case it is key, however, for insurers to identify, collate and preserve evidence of the mistaken payment as soon as possible after it was made as any delays in doing so may be used against the insurer if the proposed defendant seeks to establish that they have changed their position. Thereafter, we recommend identifying the facts of the specific overpayment and seeking legal advice as to the prospects of recovery.