Joseph Fielding Properties (Blackpool) Limited v Aviva Insurance Limited
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In November 2008, a serious fire damaged tenanted units on the insured company's industrial estate. The insurer denied liability for the claim and sought to avoid the policy on three grounds.
It alleged the insured had made a fraudulent claim for damage to a drain on the property in September 2008, for which the insurer had paid £9,870. It claimed the damage was not covered by the policy and that, in any event, the insured had submitted a false invoice in order to exaggerate the cost of the repairs.
Secondly, the insurer claimed the insured had failed to disclose that its director and his wife had made a fraudulent claim against a previous insurer for water damage at another property in 2007. Thirdly, it alleged that on numerous occasions going back to 2001 the director had made misrepresentations and/or non disclosures to other insurers.
Some of these concerned false statements about prior losses, others concerned the director's conviction for criminal damage in November 2000, for which he was given a 12-month conditional discharge. Under the Rehabilitation of Offenders Act 1974, the conviction became spent on 5th November 2001.
The insurer argued that, if it succeeded on any one of these three grounds, it was entitled, not only to refuse the current claim, but also to recover the £9,870 paid for the September 2008 drainage claim and a further £37,624 it had paid for a fire which took place in June 2008.
Under condition 7 of the policy, the insurer was entitled, at its option, to avoid the policy from inception, or from the date of the claim, or avoid the claim if a claim made by the insured was "fraudulent or intentionally exaggerated, whether ultimately material or not" or if a false declaration or statement was made or fraudulent device put forward in support of claim.
The judge held that the insurer succeeded on each of the three defences.
Having heard the evidence, he was satisfied that the September 2008 drainage claim had been covered by the policy but that the insured had fraudulently exaggerated the amount by about £2500.
This meant that, under condition 7, the insurer had the right to avoid the policy from inception. As a result, it was not liable to pay the November claim and it could recoup the money it paid out for the June fire claim and the £9,870 paid for the September claim.
That was enough to dispose of the matter entirely. Nevertheless, the judge considered what the position would have been had there been no contract term.
Under common law, if a claim has been dishonestly exaggerated or is tainted by fraud, the insurer can avoid the claim, but not the policy. Valid claims made before the fraud are unaffected.
Applying the common law, the insurer would have been able to recover the money paid for the fraudulent drainage claim. It would not have been liable for the November fire claim, as the fraudulent act (sending the false invoice to the insurer) pre-dated the fire. But it would not have been able to recoup the money paid for the June 2008 fire as this was an earlier, genuine claim.
The judge also found that the 2007 claim for water damage was fraudulent. This claim was made by the insured's director and his wife against another insurer. But the fact that they had made a fraudulent claim was a material fact that had not been disclosed to the present insurer before this policy incepted.
This, on its own, was a breach of the insured's duty of utmost good faith that would have entitled the insurer to avoid the policy from inception and, as a result, recover sums already paid for the June fire and September drainage claims.
The judge also considered the various false statements and non-disclosures to other insurers going back to 2001. For these to amount to a breach of the insured's duty of utmost good faith, the insurer had to show that they were material (in that they would influence the judgment of a prudent underwriter) and that they induced the insurer to enter into the contract on the terms it did.
Under the Rehabilitation of Offenders Act, a prospective insured is not obliged to disclose a spent conviction to an insurer and any questions asked about previous convictions are taken not to refer to spent convictions.
In this case, however, the issue was not the conviction itself (which was relatively minor), but the failure to disclose that the director had knowingly made false statements about having no previous convictions at a time when the conviction was still unspent.
The judge rejected the insured's contention that, if individual statements or non-disclosures were immaterial, then collectively they could not be material.
Taken in isolation, the subject matter of an individual false statement might be relatively insignificant but, in the judge's view, it could become material as part of a collection of facts not disclosed. The court had to consider the statements collectively when assessing materiality and inducement.
In any event, the judge was satisfied on the evidence that the individual false statements were material. Taken as a whole, they were clearly material. All of them were relevant to "moral hazard" – the desirability of insuring a person, company or business at all. Where a proposer had not been truthful in his dealings with a previous insurer, this would influence any prudent underwriter.
As for inducement, while some of the individual statements on their own might not have caused the underwriter to refuse the risk, the bigger picture would have been sufficient to dissuade him from writing the cover.
The decision demonstrates the advantages for insurers in having a clear contractual term dealing with fraudulent claims rather than relying on the common law.
In the absence of a contract term, the courts have in recent years preferred to turn to the common law rather than rely on the more problematic post-contractual duty of utmost good faith, where the only available remedy is avoidance of the policy as a whole. Under common law, fraud will defeat the claim, but not any earlier, genuine claims made under the same policy.
The Law Commissions recently proposed tidying up this legal area so that it would be a breach of the duty of good faith to make a fraudulent claim but the remedy would be to forfeit the claim, not the whole contract (see Law Commissions tackle 'confused' law on fraudulent insurance claims, OUT-LAW News, 14/07/2010).
The case is also a reminder that issues relating to moral hazard take on a particular significance, even when the underlying facts are themselves relatively minor. Once the credibility of a prospective insured is called into question, most underwriters will not be inclined to take on the risk at all.