DMC Category Rating: Developed

This case note is based on an Article in the January 2006 Edition of the ‘(Re) Insurance Bulletin’, published by the Insurance and Reinsurance teams at the international firm of lawyers, DLA Piper Rudnick Gray Cary. DLA Piper is an International Contributor to this website

Background
This insurance claim arose out of a fire on 13 June 2001, which damaged a property divided into 13 flats. The property was insured by the defendant for up to GBP£650,000 and included cover for lost rent of up to GBP£130,000.

General condition 3 of the policy provided that "if the Insured shall make any claim knowing the same to be false or fraudulent as regards amount or otherwise, this policy shall become void and all claims thereunder shall be forfeited".

The insured claimed against the insurer for the cost of reinstatement/repair and for lost rent. The reinstatement/repair claim was settled in August 2001 for GBP£83,000 and GBP£25,000 was paid on account. The rent claim of over GBP£50,000 was calculated on the basis that all the flats except one had been vacant since the fire.

In December 2001, however, the insurer relied on general condition 3 to avoid all liability and reclaim the interim payment on the grounds of fraud.

The reinstatement/repair claim
It was an express terms of the August 2001 settlement agreement that the repairs would be carried out by Titchfield Construction and that the insurer would conduct approximately three site visits to check the work. Later that month the insurer paid GBP£25,000 to the property management company on account. But instead of appointing Titchfield, the management company engaged a company called Gulf Falcon, with whom it had close links.

In September, Gulf Falcon produced two invoices: one for the first interim payment of GBP£25,000 and the other for a second interim payment of GBP£35,000. In fact, only a few thousand pounds' worth of work had been done.

The insurer's loss adjuster objected and the insured promptly appointed Titchfield Construction to complete the work, which they did, producing a final account of GBP£58,000. Consequently, the total amount paid by the insurer for the reinstatement/repair was GBP£83,000, as per the settlement. The insurer, however, alleged fraud on the basis of the two invoices presented by Gulf Falcon.

The loss of rent claim
The rent claim was based on the assumption that all the flats except one had been vacated on the day of the fire. But on numerous occasions when he visited the property, the insurer's loss adjuster saw evidence of continued occupation. The management company suggested those tenants just happened to be at the premises at the time and, despite the loss adjuster's repeated requests, failed to provide any proper figures for actual rent receipts for the period following the fire.

Were these claims fraudulent, such that the insurer was entitled to rely on general condition 3 to avoid the policy?

Fraud and exaggeration
A fraudulent claim is made when the insured knows he has suffered no loss or a smaller loss (or is reckless as to whether that is the case). A fraudulent device is used if the insured believes he has suffered a loss but seeks to improve or embellish the facts surrounding the claim (Agapitos v Agnew [2002] EWCA Civ 247).

The fraud must be substantial - that is, more than trivial (or "de minimis") (Galloway v Guardian Royal Exchange [ 1999] Lloyd’s Rep I R 209), although where the court will draw the line is not clear. In Galloway, a fraudulent claim of GBP£2000 added to a genuine claim of GBP£16,000 was regarded as sufficient to invalidate the whole claim.

The court, however, recognises that insureds sometimes put forward a claim larger than the amount they expect to recover, on the basis that there will inevitably be some "horse trading" over the figures. In such circumstances, the court will not generally conclude the insured has acted fraudulently (Orakpo v Barclays Insurance Services [1999] LRLR 443). As long as nothing is misrepresented or concealed and the insurer's loss adjuster is in as good a position as the insured to form a view of the validity of the claim, the court will generally accept that the insured was merely putting forward a starting figure for negotiation.

But exaggeration which is wilful or which is accompanied by misrepresentation or concealment is much more likely to be fraudulent, particularly where the information on which it is based is wholly within the control of the insured.

The two claimed losses in this case provided an example of both these situations.

Judgment
The reinstatement/repair claim
In the judge's view, the reinstatement/repair claim was a try-on but was not materially fraudulent.

The fact that the insured had appointed a different contractor was a breach of the settlement agreement, but did not alter the insurer's basic liability to pay the reasonable costs of reinstatement and repair.

The evidence showed that the insured's loss assessor was aware that Gulf Falcon had been appointed but chose not to tell the loss adjuster. Although there was an element of deceit here, it was not material, as the whole issue was bound to come to light (and did so) as soon as an invoice was submitted.

As for the invoices, the judge was satisfied that very little work had been done by the time they were presented. But this ultimately made no difference. There is always a relatively wide margin for error in the calculation of interim payments in the construction industry. Without compelling evidence, it would be wrong to find that a claim for interim payment (as opposed to a claim for final payment) was made fraudulently.

In any event, the settlement agreement specifically provided that the insurer would inspect the works on a regular basis. Although the two Gulf Falcon invoices were "at the very edge of credibility", the loss adjuster was always going to check any claim for payment. Consequently any such fraud could not be material.

In fact, when the work was eventually completed by Titchfield Construction, the overall figure was in accordance with the settlement agreement.

Loss of rent
The claim for loss of rent was a different matter. Firstly, irrespective of fraud, the insured had failed to prove its claim by providing any proper supporting evidence. But even if this was not the case, the judge was satisfied the claim was fraudulent.

On numerous occasions the loss adjuster had seen evidence of occupation, but the insured did not alter its claim in any significant respect. There were also inaccuracies in the figures provided - for instance, no allowance was made for the fact that, at the time of the fire, rent had been paid in advance.

The overwhelming impression was of a claim advanced in a deliberate way regardless of the true position.

Not only was the claim grossly exaggerated, but the exaggeration was material and substantial. The difference between this and the claim for reinstatement/repair was that the repair works would be checked and verified by the loss adjuster. The loss of rent claim depended entirely on documents provided and controlled by the insured. The insured knew or should have known that the claim was unjustified.

The effect of the loss of rent claim on the reinstatement/repair claim
Did the fraudulent claim for loss of rent claim prevent the insured from recovering the reinstatement/repair claim?

The insured argued that there were two separate claims. Fraud in respect of one of them should not affect the other, genuine claim.

The judge disagreed. The insured was making a single claim under the policy based on one insured event - the fire. The claim broke down into two heads of loss, but given that it was one claim, fraud in respect of one of those heads invalidated the claim as a whole. Since the entire claim was forfeit, the insurer was entitled to recover the interim payment (Axa General Assurance v Gottlieb [2005] CWCA Civ 112).

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