In the recent case of Sharon's Bakery (Europe) Ltd v (1) AXA Insurance UK PLC (2) Aviva Insurance Ltd [2011] EWHC 210 (Comm), the High Court was asked to consider whether the defendant insurers were entitled to avoid an insurance policy on the grounds of material non-disclosure by the claimant, Sharon's Bakery, and whether all benefit under the policy had been forfeited due to the use of fraudulent means or devices to promote the claim.

The claimant, a kosher bakery company, sought an indemnity from its insurers in respect of loss and damage caused by a fire at its bakery premises. The acquisition of the equipment in the bakery, which came from a company owned by one of the directors of the claimant, had been financed by Lombard, by way of a finance leasing agreement. The claimant submitted two invoices to Lombard to demonstrate how it had obtained title to the equipment. The claimant knew that the second invoice was false. The claimant submitted another false invoice to its insurers after the fire showing how it had acquired the equipment from a company called Bakequip, when in fact no such supply had taken place.

The insurers argued that they were entitled to avoid the policy on two grounds: (1) that there was a non-disclosure of material facts relating not to the insurance itself but to the financial leasing transaction entered into by the claimant with Lombard which constituted a "moral hazard" which was material for insurers to know; and (2) the invoice submitted to the insurers after the fire amounted to "fraudulent means or devices" in aid of its claim which discharged the insurers from liability. The claimant contended that its directors had acted honestly and the invoices it had submitted had been put forward only as valuations of the equipment.

Mr Justice Blair held that:

  1. The false invoice had not been put forward to Lombard as a valuation but as evidence of a true sale and purchase transaction. The claimant had put forward the invoice for a dishonest purpose and that was a material fact to be disclosed to the insurers. Therefore, the insurers made good their defence of "moral hazard" on the basis of a failure to disclose the dishonest use of the invoice. On the evidence, the non-disclosure of this material fact had induced the insurers to enter the transaction. The insurers were therefore entitled to avoid the policy.
  2. The false invoice provided to the insurers after the fire was presented as evidence of a true sale and purchase agreement between Bakequip and the claimant in support of the claim on the insurance. The claimant knew that there had been no such transaction and therefore it had adopted the lie by providing the invoice. This had embellished the facts surrounding the claim. The lie would, if believed, have tended objectively to yield a not insignificant improvement in the insured's prospects of obtaining a settlement. Therefore, fraudulent means or devices had been used by or on behalf of the claimant to obtain benefit under the policy, and consequently all benefit under the policy was forfeited.