The recent case of Joseph Fielding Properties (Blackpool) Limited v Aviva1 highlights the draconian remedies available to insurers in circumstances where an insured fraudulently exaggerates a claim and/or fails to disclose material facts to its current insurer such as (i) details of a fraudulent claim made to a previous insurer and (ii) details of a criminal conviction (which was not spent at the time he completed a proposal with a previous insurer (or disclosed to that insurer) but which was spent by the time he completed the proposal form for his current insurer).
The claimant was Joseph Fielding Properties (Blackpool) Limited (JFP), a company whose principal shareholder is Mr Leonard. The defendant was Aviva, who was JFP's Insurer at the material time between 28 March 2008 to 27 March 2009 (the policy). The policy contained the following fraudulent claims clause:
"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 is put forward in support of a claim."
On 26 November 2008, a fire occurred at JFP's property at Hoo Hill Industrial Estate, Blackpool (Hoo Hill). JFP notified a claim to Aviva for over £2m. Aviva refused to pay the claim on three grounds:
- During the currency of the policy (September 2008) JFP made a fraudulent claim in respect of damage to a drain at Hoo Hill, for which Aviva paid them £9,870, (the drainage claim); and/or
- JFP failed to disclose to Aviva at inception that Mr & Mrs Leonard had made a fraudulent claim against a prior Insurer, National Insurance and Guarantee Corporation (NIG) in respect of water damage to a lodge owned by them at White Cross Bay Leisure Park and Arena, Windermere in February 2007; and/or
- The failure by JFP to disclose to Aviva at inception the fact that on numerous occasions previously Mr Leonard had made misrepresentations and/or non-disclosures when presenting to other Insurers in the past.
Aviva sought to avoid the policy on all three grounds based on its fraud clause and to recover from JFP (i) £9,870 paid in respect of the drainage claim and (ii) £37,624 paid in respect of an earlier fire at Hoo Hill in June 2008. The court agreed with Aviva.
The drainage claim
On around 10 September 2008, there was a problem with the drains at Hoo Hill. Investigations revealed that the drain had collapsed in the area between units 8 and 11. The cause of the collapse was thought to be lorries running over the concrete above the drain. JFP notified Aviva and the claim was investigated. Mr Salthouse, a contractor (who Mr Leonard used often), gave a verbal quote of £8,000 plus VAT to repair the drain. He later submitted an invoice for the repairs in the sum of £8,400 plus VAT (total of £9,870 including VAT).
Aviva failed with its argument that the drainage claim itself was false.
However, Aviva alleged that the main invoice in support of the drainage claim was bogus, alternatively parts of it were fraudulent and/or the amount claimed was exaggerated as a result of which Aviva was entitled to and did avoid the whole policy from inception once it became aware of these facts. Aviva alleged the effect of avoidance was (i) the £9,870 paid for the drainage claim and (ii) the £37,624 paid in respect of the June 2008 fire claim should be repaid and (iii) Aviva be absolved from any liability to pay the November 2008 claim.
The court agreed with Aviva that the drainage claim was fraudulent because the insured had made an exaggerated claim for damage to the drains by submitting an invoice for £9,870 of which he had paid no more than about £6,700 to anyone, yet alone Mr Salthouse. An exaggerated claim of over £2,500 was clearly sufficient to constitute fraud. In previous case law £2,000 (Galloway v GRE2) and £3,000 (Baghbadrani3) had been sufficient but in Tonkin v UK insurance4 £2,000 was not sufficient because it represented only 0.3% of the total claim made. The court concluded a fraudulent device of the type defined in Agapitos v Agnew5 had been used to press the claim and that under the fraudulent claims clause the entire claim was lost and the policy could be avoided ab initio with the result that Aviva could recover the sums at (i) – (iii) above.
Whilst Aviva had been successful on the drainage claim alone, the court went on to rule on the non-disclosure of the previous fraudulent claim made to NIG at 2 above and the other nondisclosures/ misrepresentations made to other insurers at 3 above.
Fraudulent NIG claim
Aviva argued that JFP took out a policy with Park Home Insurance Services Limited (Park Home), which was underwritten by NIG, to cover the JFP's lodge after they had discovered that it had been affected by flood damage. JFP then made a claim representing that the damage had occurred after inception. On 15 February 2007, Mrs Leonard telephoned Park Home to obtain a quote for insuring the lodge. The cover note effective from 16 February 2007 to 16 February 2008 was duly sent out. On the 26 February Mr Leonard telephoned Park Home to report that the lodge had been flooded.
Aviva argued that the leak was first discovered at the lodge on 14 February 2007. The court concluded that the evidence available pointed clearly to a pre-inception telephone call on 14 February as having been made to notify Mr and Mrs Leonard of the flood damage and a decision by them both following this call to try and get cover in place post event and make a claim.
The court ruled that Aviva was entitled to avoid the policy on the grounds that this false claim to NIG was not disclosed to it preinception and recover the sums paid out on the earlier fire and the drainage claim.
Non-disclosures/Misrepresentations to other Insurers
Aviva contended that when presenting to Aviva for the policy, JFP made material non-disclosures/misrepresentations as follows:
- They failed to disclose that they had made a fraudulent claim upon NIG (as above).
- They failed to disclose Mr Leonard or one of his businesses had made false statements to other Insurers in the past either when seeking insurance from them or when making a claim under a policy with them. Aviva cited 10 such instances.
- They failed to disclose to Aviva when adding the lodge to another policy held by Mr & Mrs Leonard in December 2007 that it had suffered the water damage in February 2007 (as above).
In relation to a and c, these were dealt with quickly because JFP accepted that if the court were to find, as they did, that the lodged NIG claim was fraudulent, that fact should have been disclosed to Aviva but was not. Therefore, Aviva was entitled to avoid on this ground alone.
In relation to b, the court said the case law is clear; namely that Aviva must prove that the non-disclosures made are material and must have induced it to write the policy on the terms provided.
The court concluded that the insured had failed to disclose that Mr Leonard had made a series of false statements, or had failed to disclose material facts to other insurers in previous years. In particular, that Mr Leonard had failed to mention a criminal conviction. The court held that the non-disclosure of that criminal conviction to an earlier underwriter of a different insurer remained a material fact for Aviva even though the conviction itself was spent at the time the insured took out the policy with Aviva and did not itself have to be disclosed to Aviva under the Rehabilitation of Offenders Act 1974.
As to inducement the court preferred Aviva's expert evidence, which made it clear that one did have to look at the entire picture on the question of whether or not the policy would be written in relation to a moral hazard. Given the selection of nondisclosures in this case, some items combined with others would have caused Aviva not to write the risk. In others, the individual items themselves would have had this result. Therefore, the court ruled that inducement was clearly made out.