Privy Council considers fraudulent devices and the need for dishonest intention

A (genuine) fire at the insured’s premises destroyed all its stock. Insurers repudiated liability on the ground that the insured had submitted false invoices (purportedly showing amounts paid by the insured for stock) in support of its claim (a condition in the policy expressly provided that all benefit under the policy would be forfeited if any false declarations were made, or fraudulent devices were used, in support of a claim). At first instance, the judge found that the insured had not used fraudulent devices. He held, broadly, that invoices had been altered but that there had been no fraudulent purpose (e.g. because the stock in question had genuinely been bought by the insured). The Court of Appeal allowed the insurers’ appeal from that decision and the Privy Council has now set aside the Court of Appeal’s decision.

The Privy Council noted the statement by Mance LJ in Agapitos v Agnew [2003] that “a fraudulent device is used if the insured believes he has suffered the loss claimed but seeks to improve or embellish the facts surrounding the claim by some lie” (the Board’s emphasis). Given that the trial judge had found that there had been no dishonest intent, it was held that he had been entitled to find that fraudulent devices had not been used. 

COMMENT: This case might be contrasted with that of Sharon’s Bakers v Axa (see Weekly Update 07/11), where the insured submitted a false invoice in support of its claim. The court held that all benefit under the policy should be 
forfeited, even though the insured did own the equipment in question (and the equipment was not of dubious provenance or worth less than the insured claimed) and the equipment had been genuinely destroyed. In that case, though, the judge may have been influenced by the fact that the same invoices had been used to obtain a loan which would not otherwise have been extended and that fact should have been disclosed to insurers since it fell within the “moral hazard” principle. Here, the Board was satisfied that there was no fraud at all, since the invoices had been altered only to record genuine purchases by the insured. Nevertheless, this might be seen as a generous decision for the insured since it is arguable that the false invoices (no matter why they were altered) were “some lie” and thus met the criteria laid down by Mance LJ in Agapitos: “any lie, directly related to the claim to which the fraudulent device relates, which is intended to improve the insured’s prospects of obtaining a settlement or winning the case, and which would, if believed, tend, objectively, prior to any final determination at trial of the parties’ rights, to yield a not insignificant improvement in the insured’s prospects”.