There has been much judicial and academic debate in recent years on the scope and effect of the common law rule relating to fraudulent insurance claims. The latest two cases Axa General Insurance Ltd -v- Gottlieb and Danepoint Ltd -v- Allied Underwriting Insurance Ltd add to the body of established case law and follow what now appear to be established principles.
In the case of Manifest Shipping Co -v- Uni-Polaris Insurance Co Ltd , better known as the “Star Sea”, the House of Lords confirmed that the duty of utmost good faith does apply after placement but that, in the claims context, the duty is limited to an obligation not to make a fraudulent claim. The question that was left undecided was whether that duty was imposed by Section 17 of the Marine Insurance Act 1906, thereby entitling Insurers to avoid the policy “ab initio” and recoup payments made in satisfaction of previous untainted claims.
Lord Justice Mance considered that issue in Agapitos -v- Agnew . He took the view that the common law principle governing fraudulent claims had a separate origin to Section 17 of the 1906 Act and the remedy of avoidance “ab initio” was not therefore available for its breach. Rather, the remedy was for forfeiture of the relevant (and perhaps any future) claim, rather than avoidance of the whole contract.
Lord Justice Mance applied this reasoning once again in the recent case of Axa General Insurance Ltd -v- Gottlieb. The Defendant householders were insured under a buildings’ policy with the Claimant Insurers. During the period of cover the Defendant made four claims under the policy and payments were made. The Defendant acted fraudulently in pursuing a bogus claim for alternative accommodation in respect of one claim and submitted a forged document in support of another. The remaining claims were untainted by fraud. The Insurers subsequently brought proceedings to recover all payments made, on the basis that the Defendant acted fraudulently in two separate respects in pursuit of two of the claims. It was found as a matter of fact that the Defendant’s fraud arose in respect of the first claim from late September 1999 and, as to the second claim, from 20 June 2000, that is after the two untainted claims were paid.
At first instance, the judge held that the Claimant was entitled to recover from the Defendant Insured all sums paid in respect of those claims tainted by fraud, but rejected the Insurers’ claim that they were also entitled to recover the sums they had paid on the claims which were not the subject of fraud. The Court of Appeal upheld these findings. Lord Justice Mance concluded that there was no basis or reason for giving the common law rule relating to fraudulent claims a retrospective effect on prior, separate claims which had already been settled under the same policy before any fraud occurred. He concluded “there seems to me some force in the argument that the common law rule relating to fraudulent claims should be confined to the particular claim to which any fraud relates, while the potential scope and operation of more general contractual principles might in some circumstances also require consideration”.
On 20th October 2005, his Honour Judge Coulson delivered judgment in Danepoint Ltd -v- Allied Underwriting Insurance Ltd, which also considered a number of fraudulent claims. The facts of the case were relatively straightforward. On 13 June 2001, there was a fire at the Claimant’s premises, a large property that had been divided into a number of rented flats. The Claimant made a claim under its policy with the Defendant Insurers, claiming for reinstatement costs and loss of rent. In respect of the reinstatement costs, loss adjusters acting on behalf of both parties agreed costs at £83,000 and that the works would be carried out by a company called Titchfield Construction. The Defendant Insurers paid £25,000 on account and then received interim invoices totalling £60,000 from a company called Gulf Falcon. (The Judge later found as a matter of fact that only about £25,000 of work and materials had been performed or provided when the interim invoices were received.) The Claimant also submitted a loss of rent claim for approximately £53,000, which was based on grounds that the entire premises were vacated from the date of the fire.
On discovering the above, the Defendant Insurers notified the Claimants that it considered the policy void, for breach of the fraud general condition which purported to void the policy if a fraudulent claim was made. Subsequently, they averred that the reinstatement and loss of rent claims were fraudulent.
The most serious allegation concerning fraud was that Gulf Falcon claimed £60,000 when only £25,000 worth of work and materials had been provided. The Judge agreed that the two invoices were wholly overstated and “stood at the very edge of credibility”. However, the Judge found that the exaggerated claims were not material. This was on the basis that the payment of the additional sums over and above the £25,000 already paid would have always depended on the Defendant loss adjuster’s site inspections. The inflated invoices were a “try-on which could not hope to get past [the Defendant’s] scrutiny”. The Judge also took into account previous authority that said that wherever appropriate fraudsters should be given the benefit of the doubt. In this regard, he followed the guidelines articulated by Lord Hoffman in Orakpo to the effect that it is less probable that disputes over valuation which depended on opinion will or can be fraudulent.
Loss of rent
The loss of rent claim was framed on the basis that all tenants moved out of the property straight after the fire i.e. on 13 June 2001. However, the Judge found on the evidence that this contention “was demonstrably false”. Many of the flats were not vacated at all. The Judge was prepared to infer that the tenants must have been paying rent since the Claimant failed to produce any accounts supporting their position that they were not. Further, the judge was not persuaded that the errors in the loss of rent calculation were honest mistakes. The claims were grossly exaggerated, deliberate, material and substantial.
The Judge went on to consider the impact of this fraud on the reinstatement claim. He found that since the reinstatement and loss of rent claims amounted to one claim on the policy, albeit for two different heads of loss, the entire claim was forfeit and the interim payment of £25,000 had to be returned. This decision follows Gottlieb.
The following principles can be derived from these cases and other case law in this area – remember the parties can agree to alter the impact of these common law principles by using appropriate wording in the policy:
- Where all or part of the claim is fraudulent, or where fraudulent devices are used to promote a genuine claim, the Insured cannot thereafter recover in respect of any part of the claim.
- The rule applies to a claim which is initially honest, but later fraudulently exaggerated or supported by fraudulent devices.
- The rule enables the recovery from a fraudulent Insured of all sums paid out in respect of a claim in ignorance of the fraud subsequent to its commission, including any such sums relating to genuine loss in respect of which the Insured was entitled to indemnity apart from the effect of the fraud.
- The rule does not enable the insurer to void the policy “ab initio”.
- The onus of proving fraud is on the party alleging it.
- The fraud must be material in that it must have a decisive effect on the readiness of the Insurers to pay.
- The fraud must be substantial i.e. greater than de minimis - mere exaggeration of an insurance claim will not in itself be fraud. Exaggeration which is wilful or which is allied to misrepresentation or concealment will in all probability be fraudulent.
It should be noted however, that the court in these cases did not have to decide (and thus left unanswered) whether a fraudulent claim bought the policy to an end. Thus, it is still not clear whether insurers can refuse to pay a legitimate claim that is made after a claim tainted by fraud.