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DMC/INS/20/01
Direct Line Insurance Plc v. Khan & Another
English Court of Appeal: The Vice-Chancellor, Buxton LJ and Lady Justice
Arden: 11 October 2001
Mr. Andrew Nicol, instructed by Messrs Dass Jakhu, Birmingham, for the Khans
Mr. William Flenley, instructed by Messrs Beachcroft Wabsborough, London, for
Direct Line
HOUSE INSURANCE POLICY IN NAMES OF HUSBAND AND WIFE: CLAIM AGAINST
UNDERWRITERS FOR DAMAGE TO HOUSE AND CONTENTS CAUSED BY FIRE: ALSO FOR RENT OF
ALTERNATIVE ACCOMMODATION: RENTAL CLAIM FRAUDULENT: CLAIM MADE BY HUSBAND ON
WIFE’S BEHALF: CLAIM BY INSURERS FOR REPAYMENT OF ALL SUMS PAID IN RESPECT OF
FIRE: WHETHER POLICY JOINT OR SEVERAL: WHETHER WIFE’S CLAIM TAINTED BY HUSBAND’S
FRAUD
Summary
This case concerned the effect on a claim by one party to a policy of insurance
of the fraud of another party insured under the same policy. Mr and Mrs Khan had
insured their house with Direct Line. A fire had occurred and Direct Line had
paid the Khans for the damage to the house, the replacement of contents and for
the rent of alternative accommodation. The rental claim was fraudulent. Direct
Line discovered this, they claimed the return of all amounts paid in respect of
the fire claim. Mrs Khan defended the claim on the ground that her interest
under the policy was separable from that of her husband and was not therefore
tainted by his fraud, of which she was unaware. The Court of Appeal upheld the
decision of first instance; the fraud of Mr Khan, acting as agent for his wife,
was imputed to Mrs Khan. That fraud vitiated the policy and entitled the insurer
to recover all the elements of the fire claim, including those that were not
fraudulent. Although this might seem harsh, this was a rule of law, adopted in
the public interest to discourage the making of dishonest insurance claims.
DMC Category Rating: Confirmed
Facts
Mrs Khan owned a house jointly with her husband. In July 1999, Mrs Khan took
out insurance policy for the house and contents with Direct Line. Her husband
was named as a joint policyholder. In January 2000, during the currency of the
policy, a fire broke out and damaged the house and some contents. Mr. and Mrs.
Khan had to move out to alternative accommodation. Mr. Khan made the insurance
claims on behalf of them both, including a claim for rent, allegedly paid to a
friend, for alternative accommodation. In fact, Mr Khan owned the alternative
accommodation. He proffered a false rental agreement and forged a receipt for
rent and a deposit. The rent was duly reimbursed by Direct Line, together with
payment for the reinstatement of the property and replacement of the contents.
Having subsequently discovered the fraud, Direct Line brought these proceedings
seeking to recover not only the rental item but all other sums paid under the
policy in respect of the fire.
At first instance it was argued that Mrs Khan should be able to
recover on the basis that the fraud had been committed by her husband without
her knowledge. The judge rejected such argument. Leave to appeal was
sought and eventually granted, on the ground that it was arguable that the
policy covered Mr and Mrs Khan’s several (or distinct) interests. In such a
case, the fraud of Mr Khan would not disentitle Mrs Khan from recovering.
On appeal, Mrs Khan accepted that her husband had fraudulently
exaggerated the claim which he made on her behalf, and secondly, that the fraud
was sufficiently substantial to permit Direct Line to terminate from the outset
any contract between it and Mr Khan. The argument for Mrs Khan were, therefore,
that, even if the policy were a joint one, she should be able to recover for the
reinstatement of the property and the replacement of the contents firstly,
because she did not know that a dishonest claim had been submitted for the
rental element and secondly, because of the provisions of the Unfair Terms in
Consumer Contracts Regulations 1994.
Appeal Judgment
The leading judgment was given by Lady Justice Arden. The court found that
Mr. and Mrs Khan had a joint interest and not several interests in the policy.
In any event, Mr. Khan acted as agent of his wife in making the claims and, upon
agency principles, his dishonesty was imputed to her. The court distinguished
this case from that of Samuel & co v. Dumas [1924] AC 431. That case
concerned a policy of hull insurance, insuring both the owner and the mortgagee.
It held that the interest of the mortgagee and the interest of the owner of the
ship should be distinguished, so that the mortgagee should not be prejudiced by
the owner’s fraud in scuttling the ship.
Counsel had further argued that the policy of the law was
flawed, in that it inflicted a disproportionate penalty upon Mrs Khan, an
innocent party. The court held, however, that it was bound by the decision of
the Court of Appeal in Galloway v. Guardian Royal Exchange UK Ltd [1999]
Lloyd’s Rep (I.R) 209] in which it was held that the insured loses all right
to recover in respect of a policy if a material part of the claim is made
fraudulently.
The Court also referred to the dicta (aside remarks) of the
House of Lords in Manifest Shipping Co
Ltd v. Uni-Polaris Shipping Co Ltd [2001] 2 WLR 170, where it was
stated that the principle that a fraudulent claim enabled the insurer to bring
the policy to an end was a principle of law. This rule of law set out in the
above cases is directed, the court said, to deterrence, in furtherance of a
policy of discouraging fraudulent claims; it therefore takes precedence over any
perception of unfairness.
The argument based on the Unfair Terms in Consumer Contracts
Regulations was similarly dismissed. The court said that the Regulations did not
apply to a situation where a contract is affected by a rule of law.
For these reasons the appeal was dismissed and the judgment at
first instance in favour of Direct Line was upheld.
Comment
Any insurance policy holder should now be aware that the consequences of
presenting a fraudulent/exaggerated claim are severe. Even if the sums involved
in the fraud are not large by reference to the remainder of the claim, the whole
claim is tainted. That means that, if the claim is unpaid, it will not be
recoverable from the insurer and, if the claim has already been paid, it can be
recovered by the insurer.
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