Fraudulent claims and the consequences

The consequences of pursuing fraudulent claims have been shown on two recent motor cases. Both claimants have been committed to prison.

In Ewere, the claimant was at home and answered the door to a motorist who admitted that she had accidentally collided with his parked car whilst parking her own. The two went to look at their cars and discovered a mark on the claimant’s car, although it was later decided that the mark was there already. They exchanged details and went their separate ways. Some weeks later, the claimant began a personal injuries claim for neck and shoulder whiplash, saying that he had been in the car when the collision occurred. He then produced his GP records which recorded him as having said that he had hit his head on the steering wheel in the collision but made no mention of neck or shoulder pain. The claim was pursued to trial where it was dismissed.

The defendant’s insurers applied for the claimant to be committed to prison for contempt of court. Mr Justice Slade found that the claimant had had not been in the car and had not suffered any injuries in the collision and committed him to prison.

In Ahmed the claimant overtook on the inside lane, cut in front of the defendant’s car and then braked suddenly for no reason, causing the defendant to collide with him. The claimant alleged that he had been in the same lane all along, in slow moving traffic and that the defendant had driven into the back of his car. Unfortunately for the claimant, the incident was captured on CCTV. The claim was pursued to trial where it was dismissed and the District Judge found that the claim was fundamentally dishonest.

The defendant’s insurers applied for the claimant to be committed to prison. Mr Justice Spencer found that the claimant’s version of events was false and that he had made false statements that he could not have honestly believed were true and committed him to prison.

In contempt proceedings the applicant must prove beyond a reasonable doubt (one of the few exceptions to the usual test of balance of probabilities in civil proceedings[1]) that the respondent had made false statements, that the respondent had no honest belief in the truth of his statements, that the statements were likely to interfere with the course of justice and that the respondent knew that the statements were likely to interfere with the course of justice. Both claimants will now have an extended opportunity to reflect on whether the potential financial gain was really worth the risk of the loss of their liberty.

[1] The others are proceedings in the Election Court, sexual offences prevention orders and risk of sexual harm orders.


Motor insurer’s liability for damage caused by negligent DIY repairs.

In UK Insurance Limited and R&S Pilling t/as Phoenix Engineering [2017] EWCA Civ 259 the Court of Appeal held that motor insurers were liable to indemnify their insured against his liability when he negligently started a fire when repairing his car.

The policyholder was a mechanic employed in a garage. His car had failed its MOT due to corrosion on its underside and his employers agreed that he could use their loading bay and welding gear to do the necessary repairs. Unfortunately, however, sparks ignited flammable material inside the car. The fire spread and caused damage in excess of £2 million. Under their rights of subrogation, the employers’ insurers brought a claim against the mechanic who in turn sought an indemnity against his liability from his motor insurers.

The operative clause of the policy provided the insured with cover for his legal responsibility ‘if you have an accident in your vehicle’. The insurers also certified that the policy satisfied the requirements of the ‘relevant law applicable in Great Britain’, which was taken to be the  compulsory insurance requirements of section 143 of the Road Traffic Act 1988 and European Directive 2009/103/EC.

The motor insurers denied that they were liable to indemnify the mechanic on the grounds that their cover did not extend to circumstances where the car was immobilised and being repaired, and that the  that compulsory insurance requirements of the Road Traffic Act and the European Directive did not extend to the circumstances of the claim. At first instance the judge upheld the motor insurers’ defence, primarily because the mechanic was not ‘using’ the car at the time of the welding and consequent fire. The employers’ insurers appealed.


The Court of Appeal agreed with the trial judge that the operative clause on the motor policy was not happily worded and that something had ‘gone wrong’ with the language of the clause. As written, it applied only to liability incurred if the policyholder was in the car when the accident occurred. Whereas the trial judge rule that the proper meaning of the clause was to cover liability for an accident resulting from the use of the car, the Court of Appeal rejected this meaning as unjustifiably narrowing the cover provided and instead found that the proper meaning of the clause was cover for accidents involving the policyholder’s vehicle. The appeal was therefore allowed on this issue and the insured was entitled to an indemnity

The Court of Appeal went on to rule, however, the requirements of the Road Traffic Act and European Directive extended to the circumstances of the fire. The legislative requirements refer to liability arising out of the ‘use’ of a vehicle and ‘use’ is of wider application than ‘driving’ or ‘operating’ which would have been used if the legislators had intended cover to be restricted to accidents whilst the vehicle was being driven. The earlier cases of Dunthorne v Bentley [1999] Lloyd’s Rep IR 560, Elliot v Grey [1960] and Pumbien v Vines [1996] were good authority that RTA cover extended to circumstances where a car was parked or even immobilised.

In Elliott the driver was held to be in breach of the requirement to hold insurance because his car, with its wheels raised off the road, missing its battery and self-starter and with an empty fuel tank, was being used on the road. Similarly, in Pumbien a car was being used on the road even though its brakes had seized, its tyres were deflated and the gearbox contained no oil. In Dunthorne, a motorist who ran out of petrol and got out of her car to cross the road in order to seek help was still using her car because the help she sought was to enable her to continue her journey.

The decision of the Court of Appeal may appear to be somewhat surprising. The operative clause of the policy was unfortunately drafted and cover that only applied to accidents occurring when the insured was in the vehicle was not the intention of the parties. It is unlikely, however, that underwriters would have intended cover to extend to the consequences of the negligent use of welding gear when the car was off the road and being repaired. Nevertheless, the Court of Appeal stressed that there were limits to which the policy would respond to accidents arising out of work being done on a car. If the car had not been driven for some time, or the work was reconstruction rather than repair, or the car was not to be used in the immediate or near future, then the policy might not apply.


Does an insured’s deliberate but honest and mistaken non-disclosure entitle the insurer to avoid a policy?

In Mutual Energy Limited and (1) Starr Underwriting Agents Ltd (2) Travellers Syndicate Management Ltd [2016] EWHC 590 (TCC) the court was asked to decide whether an insurer was entitled to avoid a policy on the grounds of deliberate non-disclosure if that non-disclosure was due to the insured’s honest but mistaken belief that the matters in question did not need to be disclosed.

The claim involved damage to undersea electricity cables between Northern Ireland and Scotland. The facts concerning the cause of the damage, and whether it was poor design, poor manufacture or poor installation, were disputed and the court considered the non-disclosure question as a preliminary issue.

The non-disclosure, misrepresentation and breach clause in the policy provided that the insurer would not avoid the insurance unless there was ‘deliberate or fraudulent’ non-disclosure or misrepresentation. The case predated the coming into force of the Insurance Act 2015 and the clause was recognised as modifying the more onerous disclosure requirements of sections 17 and 18 of the Marine Insurance Act 1906. The insurers did not contend that the insured had acted in bad faith or that they were guilty of any misrepresentation or deceit. Their case was that deliberate non-disclosure was distinct from fraudulent non-disclosure and would include an honest but mistaken decision not to disclose a document or fact. The insured contended that deliberate non-disclosure meant a conscious decision not to disclose something that they knew they should disclose and therefore included some element of dishonesty.

Both parties and the judge drew on examples of conduct that that is deliberate and dishonest but not fraudulent. The insurers argued that they should be entitled to avoid a policy where an insured made a misrepresentation that he knew to be inaccurate but in the belief that the inaccuracy did not matter. The insured showed the judge guidance from the Financial Ombudsman Service which said that a customer who withholds information because they are embarrassed about it is acting dishonestly and deliberately but not acting fraudulently because there is no deceitful intention to obtain an advantage.

The Honourable Mr Justice Coulson presented his own example of what he described as the absurd consequences of the insurers’ approach. Two employees are each given a file to review and decide which of the documents in them must be disclosed. Employee A conscientiously reviews each document in his file and concludes that about half should be disclosed and half should not. In reaching that conclusion he makes an honest mistake on one of the non-disclosed documents. The insurers content that they would be entitled to avoid the policy. Employee B meanwhile buries his file beneath some other papers and never gets round to reviewing it and it is not disclosed before it is swept away for recycling. That would be inadvertent, non-deliberate, non-disclosure and the insurer would not be entitled to avoid the policy. The insured would be penalised for A’s honesty but not for B’s inefficiency.

The judge concluded that deliberate or fraudulent non-disclosure means a deliberate decision not to disclose something which the insured knows should be disclosed and does not extend to an honest mistake. A failure to disclose something which is the result of an honest but mistaken belief that the fact or document does not need to be disclosed is not enough for the insurer to avoid the policy.

It should be noted that the case concerned the wording of the non-disclosure clause in the policy. Without knowing the detail of the non-disclosed information, it is impossible to say whether the insured would have been in breach of the fair presentation requirement of the section 3 of the Insurance Act 2015 or what remedy the insurers might have been entitled to if there was a breach.

The interpretation of exclusion clauses in insurance policies

In Crowden & Crowden v QBE Insurance [2017] EWHC 2597 the court looked at the construction and interpretation of exclusion clauses in insurance policies and distinguished between such terms in insurance policies and other contracts.

The claim arose out of the collapse of Lehman Brothers. The claimants allegation of negligent investment advice was brought against their financial adviser’s professional indemnity insurers under the Third Party (Rights against Insurers) Act 1930. The professional indemnity policy excluded claims “arising out of or relating directly or indirectly to the insolvency or bankruptcy of the Insured or any…other business, firm or company with whom the Insured has arranged directly or indirectly any insurances, investments or deposits”. The insurers contended that as they were not liable to indemnify their insured against any liability it might have to the claimants, they were not liable to the claimants under the Act.

Dismissing the claimants’ claim, the court applied the approach of Lord Hodge in Impact Funding Solutions v Barrington Support Services Ltd [2016] UKSC 57 where he said “An exclusion clause must be read in the context of the contract of insurance as a whole … it must be construed in a manner which is consistent with and not repugnant to the purpose of the insurance contract”.

A clear distinction was drawn between clauses in non-insurance contracts which seek to limit or exclude liability in the event of a breach, and clauses in insurance contracts which are intended to limit the cover provided by the policy and define the risk. In non-insurance contracts, the court adopts a narrow approach to the interpretation of limitation and exclusion clauses, applying the contra proferentem rule and consistency with business common sense. In an insurance contract, however, the court must adopt a broader approach which is sensitive to the purpose and place of the clause in the insurance contract. Only if there is a genuine ambiguity in the meaning of the exclusion clause, and the effect of one of the constructions would be to exclude all or most of the cover that the insurance was intended to provide, will the court apply the narrower approach as with non-insurance contracts.

There are some things that even a QC can’t do…

If a lawyer ever gives the impression (perish the thought) that they know everything and can do anything, here’s a case to quote in response.

In Tonicstar and Allianz Insurance [2017] EWHC 2753 (Comm) a party in arbitration proceedings obtained a court order requiring the removal of a QC as an arbitrator. The arbitration clause in the Joint Excess Loss Committee, Excess Loss Clauses provided that arbitrators must have “not less than ten years’ experience of insurance or reinsurance”. A distinguished QC with well in excess of ten years’ experience of insurance and reinsurance as a lawyer was appointed. Mr Justice Teare followed an earlier unreported decision of Mr Justice Morison in Company X v Company Y (2000) that arbitrators had to be persons from the “trade or business of insurance”. Accordingly, and despite the QC’s undoubted experience of insurance and reinsurance as a lawyer, he lacked the necessary experience in the business of insurance and reinsurance and so was not qualified to be an arbitrator and had to be removed.

The Insurer’s duty to their Insured

In Ted Baker v AXA Insurance UK [2017] EWCA Civ 4097 the Court of Appeal considered the insurer’s duty to the insured during the claim process.

The claim was for business interruption following a theft by an employee. The insurers did not admit liability and, as part of their investigations, requested sight of various classes of documents, including stock records and accounts. The policy included cover for accountancy charges incurred in producing documents required by the insurers but this cover did not extend to the production of management accounts which were readily obtainable and could be produced at no or minimal cost. The insurers agreed to allow the insured to await a decision on liability before producing those documents that necessitated the incurrence of accountancy charges but did not explicitly state that the management accounts were required. When the insured failed to produce the management accounts, the insurer rejected the claim on the grounds of breach of a claims co-operation condition.

The Court of Appeal upheld the High Court’s decision that the insurer was entitled to reject the claim, but not on the grounds of breach of the claims co-operation condition. Sir Christopher Clarke found that there was no authority for proposition that an insurer owes the insured a duty to take reasonable care to make appropriate enquiries before avoiding the policy and no justification for requiring the very high degree of openness at the formation of an insurance contract to continue once the contract has been made. Furthermore, an insurer is under no general duty to warn insured as to the need to comply with policy conditions.
Nevertheless, Sir Christopher decided that the insurer was not entitled to reject the policy on the grounds that the insured’s failure to produce the management accounts was a breach of the claims co-operation condition. He considered that the insurers were estopped from relying on the clause as it would be unjust and unconscionable to allow them to escape liability on grounds of insured’s failure to supply documentation.

Estoppel can be described as the rule against humbug, preventing a party from going back on a promise or an assurance, made either expressly or by implication even though that promise or assurance is not contractually binding. In this case, the estoppel arose because a  reasonable insured would expect the insurer acting honestly and responsibly to take steps to make its position plain and specifically request the management accounts before a decision on liability was made. Sir Christopher found that the insurers acting honestly and responsibly should have said that provision of management accounts were required immediately even if production of the other documents could be deferred.

The case is a reminder of the care required when drafting letters on contentious and disputed claims, ensuring that the insured is provided with clear guidance on what he is required to do. It is likely that any ambiguity or failure to mention important requirements may prejudice any subsequent decision by the insurer.

The measure of indemnity: rebuilding cost or loss of value?

In Great Lakes Reinsurance UK v SE and Western Trading Ltd [2016] EWCA 1003 an empty shell of a listed building was destroyed by fire. It was insured for the rebuilding cost of £2,121,300 although its value immediately prior to the fire was £75,000. There was a reinstatement memorandum in the policy under which the insurers would pay the cost of reinstatement if that reinstatement was carried out with reasonable despatch and the cost actually incurred, in default of which the insured was entitled to an indemnity as if the memorandum had not been incorporated.

The insurers repudiated liability on the grounds of no insurable interest, misrepresentation and non-disclosure and breach of warranty, but these grounds were rejected by the court. At the time of trial reinstatement had not begun and costs has not been incurred. The trial judge gave a declaration that the insured was, or may be, entitled to an indemnity consisting of the cost of reinstatement. The insurers appealed.
The Court of Appeal considered the well-known (to loss adjusters at least) cases of Castellain v Preston [1883] 11 QBD 380, Reynolds v Phoenix Assurance Co Ltd [1978] 2 Lloyd’s Rep 440, and Leppard v Excess Insurance [1979] 1 WLR 512, and ruled that the measure of indemnity depends on (1) the terms of the policy (in particular the wording of the indemnity clause), (2) the interest of the insured in the property (in particular where the insured is under an obligation to reinstate) and (3) the facts of the case and the intention of the inured. In respect of the second part of (3), the intentions of the insured, Lord Justice Christopher Clarke ruled that the insured’s intention must be fixed and settled, and that what he intends must be something which there is a reasonable prospect of him bringing about (at any rate if the insurance money is paid). If the insurance money is paid out, however, and the insured then does not reinstate, the insurers have no right of redress