The recent case of Joseph Fielding Properties (Blackpool) Ltd ("JFP") v Aviva Insurance Ltd ("Aviva") comes as a reminder of the unsympathetic response that can be expected from an English court in the event of a fraudulent claim and the strict nature of the non-disclosure rule. It also highlights some of the complexities of the law in this area at a time when they are being considered by the Law Commission and Scottish Law Commission as part of their consultation on insurance law reform in the UK.
The claimant, JFP, owned property at Hoo Hill Industrial Estate, Blackpool. Its principal shareholder and director was Mr Peter Leonard. On 26 November 2008 there was a fire at Hoo Hill and property was damaged. JFP sought an indemnity from its insurer, Aviva, for an amount in excess of £2 million under an insurance policy that it had in place at the material time (the "Policy"). Aviva denied liability not on the basis of any defect in the claim itself but on three other grounds, namely that:
- During the currency of the Policy JFP had made a fraudulent claim in respect of damage to a drain at Hoo Hill in September 2008 (the "Drainage Claim") for which Aviva had paid it £9,870; and/or
- JFP failed to disclose to Aviva prior to inception of the Policy that Mr and Mrs Leonard had made a fraudulent claim against a prior insurer, National Insurance & Guarantee Corporation ("NIG") in respect of water damage to a lodge owned by them at Whitecross Bay Leisure Park and Marina, Windermere in February 2007 (the "Lodge Claim"); and/or
- JFP had failed to disclose to Aviva prior to inception of the Policy that on numerous occasions previously Mr Leonard or his businesses had made false statements to other insurers (the "Non-Disclosure Defence").
JFP denied all three of the allegations.
The Drainage Claim
Around 10 September 2008 there was a problem with the drains at Hoo Hill. Mr Salthouse, a contractor, gave a verbal quote to JFP that it would cost £8,400 plus VAT for work to be undertaken to replace a drainage pipe. JFP notified Aviva of the problem and Aviva investigated. An invoice (the "Main Invoice") which purported to be from Mr Salthouse and on which was written in manuscript "paid in full with thanks" was submitted by JFP to Aviva around 10 October 2008 for £9,870 (including VAT). Aviva subsequently paid this amount to JFP in full.
Following the November 2008 fire Aviva carried out further investigations into the Drainage Claim, as a result of which it came to contend that the Main Invoice was bogus, alternatively that parts of it were fraudulent and/or the amount claimed was exaggerated.
The court found that by submitting the invoice to Aviva in the form that it had, JFP had represented to it that it had owed Mr Salthouse £9,870 and that it had paid him that sum. On the facts, however, it was found that JFP had not paid more than about £6,700 to anyone for work undertaken in replacing the drainage pipe and that the claim had therefore been both fraudulently stated and fraudulently exaggerated.
The Policy contained a fraudulent claims clause which provided that:
"We will at our option avoid the policy from the inception of this insurance or from the date of the claim or alleged claim or avoid the claim:
- if a claim made by you or anyone acting on your behalf to obtain a policy benefit is fraudulent or intentionally exaggerated, whether ultimately material or not; or
- a false declaration or statement is made or fraudulent device put forward in support of a claim".
Aviva contended that to the extent that the Main Invoice was fraudulent in part or in whole or the amount claimed had been exaggerated then, under the fraudulent claims clause, it was entitled to avoid the Policy in its entirety from inception with the effect that: (1) it was not liable to indemnify JFP for the fire in November 2008; (2) that it was entitled to recoup from JFP the £9,870 that it had paid to it in respect of the Drainage Claim; and (3) that it was also entitled to recoup from JFP £37,624 that it had paid to it in respect of a previous claim following a fire at Hoo Hill in June 2008.
A lesser genuine claim?
Part of the Drainage Claim had been genuine. The court therefore had to consider whether the whole of the Drainage Claim was forfeit in light of the fraud, or only that part of it which was fraudulently made.
His Honour Judge Waksman QC stated that the terms of the fraudulent claims clause in the Policy were entirely clear and, in his view, it was no defence to its operation for JFP to say that a lesser genuine claim could have been made in a non-fraudulent manner. He went on to state that such a defence would not have been available to JFP at common law either, as it is clear at common law that if a claim has been dishonestly exaggerated or tainted by fraud then the insurer can avoid liability for the whole of that claim.1
As a caveat to the forfeiture rule, an insurer can only avoid a claim if it can show that the insured's fraud was a substantial and not a trivial part of the total claim made. Determining what is and what is not trivial is not always straightforward. In Tonkin v UK Insurance Ltd  EWHC 1120 (TCC) an amount of £2,000 was considered trivial. In that case the court relied on the fact that the fraudulent element of the claim amounted to less that 1% of the total claim made. However, as Millet LJ commented in Galloway v Guardian Royal Exchange (UK) Ltd  Lloyd's Rep I.R. 209, the problem with adopting a "proportional approach" to determining whether the fraud is trivial or not is that: "this would lead to the absurd conclusion that the greater the genuine loss, the larger the fraudulent claim which may be made at the same time without penalty". Millet LJ went on to state that in his judgment: "the size of the genuine claim is irrelevant. The policy is avoided by breach of the duty of good faith which rests upon the insured in all his dealing with the insurer".
On the basis of a proportional approach, the fraud in JFP was substantial in any event (the claim being worth at least £2,500 less that the sum claimed of £9,870). Millet LJ's rejection of the proportional approach was, however, quoted by HHJ Waksman at length and with approval. This may suggest that even if the total claim had been far larger, the court might have been prepared to look to the circumstances of the fraud and the duty of good faith, rather than just the monetary value of the fraud, when determining whether it was trivial or substantial for the purposes of the forfeiture rule.
The court accepted that under the terms of the fraudulent claims clause in the Policy, Aviva was entitled to recoup from JFP monies that it had paid to it previously in relation to the June 2008 fire. This was because the fraudulent claims clause allowed Aviva to avoid the Policy in its entirety from inception in the event of a fraudulent claim.
In contrast, at common law it was uncertain for a period of time whether an insurer was entitled to avoid a policy in its entirety in the event of a fraudulent claim. This was because of conflicting judicial opinion as to whether the common law rule fell within the scope of section 17 of the Marine Insurance Act 1906,2 such that a fraudulent claim could be viewed as a breach of the duty of utmost good faith entitling the insurer to avoid the insurance contract in its entirety from inception. Following the decision of the Court of Appeal in Agapitos v Agnew  Q.B. 556, however, the prevailing view now is that the common law rule on forfeiture does not fall within the scope of section 17 of the Marine Insurance Act but exists independently. It was later confirmed in Axa General Insurance Ltd v Gottleib  1 All E.R. (Comm) 445 that, in the event of a fraudulent claim, an insured does not, at common law, forfeit monies already paid out to it in respect of prior honest claims. Consequently, Aviva would not have been entitled to recoup, at common law, the monies it had paid out to JFP in respect of the June 2008 fire.
If an insurer does wish to avoid an insurance contract in its entirety from inception in the event of a fraudulent claim it will have to rely on any fraudulent claims clause in the policy that provides for such a remedy, or seek to rely specifically on section 17 of the Marine Insurance Act. Following the decision of the Court of Appeal in The Mercandian Continent  2 Lloyd's Rep. 563, the right of an insurer to avoid an insurance contract in its entirety under section 17 remained open to it but was restricted to cases where: (1) the fraud would have an effect upon the insurer's ultimate liability; and (2) the gravity of the fraud or its consequences would entitle the insurer, if it wished to do so, to terminate the policy for breach of contract. There is some uncertainty, however, post-Agapitos, as to whether this form of redress is still available to an insurer in the event of a fraudulent claim. Whether Aviva would have been entitled to rely on section 17 of the Marine Insurance Act in JFP, had it sought to do so, was not discussed by Waksman HHJ in his judgment.
A further point that remains outstanding following the decisions in Gottleib and Agapitos is whether, in the event of a fraudulent claim, an insurer is limited to avoiding liability for that claim alone under the common law rule, or whether it is also entitled to treat itself as discharged from all future performance of the contract.
The uncertainty as to the future performance of the contract is attributable to conflicting opinion as to the juridical basis of the common law rule itself. In Orakpo v Barclays Insurance Services  L.R.L.R. 443 the Court of Appeal analysed the common law rule as being an implied term of an insurance contract incorporated by operation of law to give effect to the over-riding principle of utmost good faith. Breach of the implied term would go to the root of the contract, thereby discharging an insurer from future performance. This analysis was not, however, followed by the House of Lords in The Star Sea  1 All E.R. (Comm) 193, and cannot now be considered as good law.
If the common law forfeiture rule is not based on principles of contract law or on the duty of utmost good faith, then the only alternative is that it exists independently as a rule of public policy. However, in the absence of express authority as to the ambit of the rule, there is scope for uncertainty as to its limitations.
In Gottleib Mance LJ said that:
"... there seems to be 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 [including, by reference, repudiation of the contract]".
Although these comments were made obiter, they suggest that an insurer may be entitled to terminate a contract of insurance if a fraudulent claim from an insured amounts to a repudiatory breach of that contract. Such an interpretation would be consistent with general principles of contract law and was assumed to be the position in the recent issues paper produced by the Law Commission and the Scottish Law Commission on the insured's post-contract duty of good faith.3 As to when a fraudulent claim will amount to a repudiation of a contract of insurance, there are some indications in the judgment of Mance LJ in Agapitos that this will only be when the fraud is serious (for example, fabricating or exaggerating a claim but not promoting a genuine claim by the use of a fraudulent device) although this point remains uncertain.
In the event that a contract of insurance is repudiated and the repudiation is accepted then, applying normal contractual principles, the insurer will be entitled to terminate the contract from the date of the repudiation (i.e. when the fraud was committed) and the insured will not be covered under the contract for any loss that it incurs after the date the contract is terminated.
The Lodge Claim
Although Aviva was successful on the Drainage Claim alone, the court went on to consider the second and third grounds of Aviva's defence (being the Lodge Claim and the Non-Disclosure Defence).
In relation to the Lodge Claim, Aviva contended that Mr and Mrs Leonard had taken out a policy underwritten by NIG to cover the Lodge after they had already discovered that it had been affected by flood damage and that they then made a claim representing that the damage had occurred after inception of the policy. It was accepted by JFP that, if Mr and Mrs Leonard had made a fraudulent claim against NIG then this should have been disclosed to Aviva prior to inception of the Policy and as it had not Aviva would then be entitled to avoid the Policy in its entirety from inception.
On the facts the court found that Mr and Mrs Leonard had made a fraudulent claim in relation to the Lodge, this ought to have been disclosed prior to inception of the Policy and that Aviva was therefore entitled to avoid the Policy from inception.
The Non-Disclosure Defence
Aviva also contended that, prior to inception of the Policy, JFP made material non-disclosures, as follows:
- It failed to disclose that Mr and Mrs Leonard had previously made a fraudulent claim upon NIG in relation to the Lodge (as discussed above).
- It failed to disclose that Mr Leonard and/or his businesses had made false statements to other insurers in the past when seeking insurance from them or when making a claim under a policy/policies with them.
- It failed to disclose to Aviva when, in December 2007, the Lodge had been added to another policy held by Mr and Mrs Leonard, that the Lodge had suffered the water damage in February 2007.
JFP accepted in relation to points 1 and 3 that if the court was to find, as it did, that the NIG claim had been fraudulent, then this should have been disclosed to Aviva prior to inception of the Policy. Consequently, Aviva was entitled to avoid the Policy from inception on these points alone.
Aviva also put forward ten instances under point 2 from March 2001 through to February 2007 where it alleged that Mr Leonard and/or his businesses had previously made false statements to insurers prior to inception of policies or in support of claims. Aviva, of course, had to prove that the non-disclosure of which it complained was material and induced it to write the Policy on the terms it did. In determining materiality and inducement the court said the false statements had to be considered in the round: just because a false statement was immaterial to, or did not induce an insurer to enter into, a prior policy on the terms that it did, this did not mean necessarily that it was immaterial to Aviva when considered alongside other false statements that had previously been made.
On the facts the court concluded that JFP had failed to disclose to Aviva that Mr Leonard had made a series of false statements to insurers in previous years. It was found that the combination of false statements, taken in the round, would have resulted in Aviva not writing the risk. In other cases some of the non-disclosures taken individually would have had this result (particularly those that went to moral hazard).
One point of interest was that the court determined that for the purposes of the Policy (taken out in 2008) it was material that JFP had not disclosed to Aviva that Mr Leonard had made false statements on insurance proposals in 2001 relating to a conviction he had received for criminal damage. This was despite the fact that the conviction became spent on 5 November 2001 and since that date Mr Leonard had not been under any obligation to inform insurers of it (even when asked about prior criminal convictions on proposal forms) pursuant to the Rehabilitation of Offenders Act 1974.
The JFP case was very fact specific. Nonetheless, there are some interesting points that can be taken from it.
The first of these points is the effect that a broadly worded fraudulent claims clause in a policy can have. The fraudulent claims clause in the Aviva Policy meant that once Aviva was able to prove, on the facts, that the claim had been tainted by fraud, there was little doubt that it would be entitled to avoid the Policy in its entirety from inception. The effect of this was that it could recoup from JFP monies that it had paid out to it in respect of previous claims made under the Policy. If a fraudulent claims clause had not been included in the Policy, Aviva would not have been entitled, under the common law forfeiture rule, to recoup such monies.
The Law Commissions in their recent issues paper on the post-contract duty of good faith have confirmed that in their view the law on remedies for fraudulent claims in the UK is unduly convoluted and should be clarified by means of reform to section 17 of the Marine Insurance Act. The Law Commissions do not, however, favour a right at common law for an insurer to avoid a contract of insurance in its entirety from inception in the event of a fraudulent claim. Accordingly, insurers are likely to continue to include broadly worded fraudulent claims clauses in policies.
Of further interest from the JFP decision are the comments of HHJ Waksman on the question of whether the fraudulent element of the Drainage Claim was trivial or substantial. The fraudulent element of the claim was "at least £2,500" out of a total claim of £9,870. Nonetheless, the comments of the judge suggest that even if the total claim had been for a far larger amount, the nature of the fraud committed might have been sufficient for it to be regarded as "substantial" rather than "trivial" in any event.
A final point to take away is a reminder of the strict nature of the non-disclosure rule in English law. Aviva was entitled to avoid the Policy in its entirety because JFP had not disclosed to it that it had made false statements to previous insurers. In particular, it was entitled to avoid the Policy on the basis JFP had not disclosed to it that Mr Leonard had made false statements to previous insurers about a criminal conviction received in 2001 even though Mr Leonard had been under no obligation to inform insurers of that conviction (even when asked about prior criminal convictions on proposal forms) since November 2001 pursuant to the Rehabilitation of Offenders Act 1974.