Aviva Insurance Limited v Roger George Brown
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In 1989 and again in 1996, the insured made a subsidence claim on his home insurance for No 13 Friern Barnet Lane.
The claim was subject to considerable delays. In particular, there was a long-running dispute about whether the insured was entitled to alternative accommodation for himself and his wife and, if so, what would be equivalent accommodation.
On 11th July 2007, the insured wrote to the property agent instructed by the loss adjuster enclosing details of a property at No 38 Lyonsdown Avenue, which he said would be suitable as alternative accommodation. The letter said he could not be sure that it would remain available if an approval from the insurer was not obtained without undue delay.
In fact, No 38 was owned by the insured. The move did not go ahead, however, as the insured's wife refused to move into the property. Instead, they both decided it would be a good idea to move next door into No 15, which had been empty for some time.
No 15 was owned by a company in which the insured and his wife were the directors and majority shareholders. The insured obtained tax advice which suggested the transaction must be at arm's length.
In October 2007, the insured wrote to the loss adjusters stating that he had heard from the owners' solicitors confirming they were willing to let No 15. At some point a tenancy agreement was signed by the insured and his wife as directors of the company and by the insured as tenant.
In March 2008, the insured telephoned the loss adjusters with regards to the March payment, which had not yet been received, saying he was being chased by the landlord.
Repair works to No 13 were carried out in 2008. In all, the insurer paid just under £177,000 for repairs and £58,500 for alternative accommodation.
But in July 2008, the insurer noted that the insured owned No 38 and that he and his wife were directors of the company that owned No 13 so the insured was effectively renting from himself. All further payments were suspended.
It now claimed repayment of alternative accommodation and repair costs and discharge from any further liability on the grounds that the insured had presented a fraudulent claim or otherwise used fraudulent means or devices to promote his claim.
A fraudulent device is used if the insured believes that he has suffered the loss claimed but seeks to improve or embellish the facts surrounding the claim by some lie.
The insured denied any fraud and counterclaimed further sums for repairs and alternative accommodation.
Whether it relies on an express condition in the policy or on the common law, it is for the insurer to establish fraud on the part of the insured. The standard of proof is the balance of probabilities, but since fraud is such a serious allegation, the evidence before the court must be that much stronger.
The traditional test is that it must be shown that a false representation has been made (1) knowingly or (2) without belief in its truth or (3) recklessly, careless whether it be true or false (Derry v Peek ). The third instance is generally recognised to be an instance of the second. The motive behind the fraud is immaterial.
In 2002, a "combined" objective and subjective test for dishonesty was established in the case of Twinsectra Limited v Yardley. Before there can be a finding of dishonesty, it must be established that the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest.
The insured, who strongly denied any fraud, argued that the insurer had to show dishonesty according to the Twinsectra test. In any event, a claim should only fail if it is "substantially fraudulent". Even if the insurer succeeded in recovering the cost of the alternative accommodation, this should not affect the repair claim.
The insurer made numerous allegations of fraud relating to the alternative accommodation claim, some of which were dropped before the trial.
On the evidence, however, the judge concluded that the insured had been fraudulent in only two respects; in the letter dated 11th July 2007 which in effect represented that No 38 was available to rent and that the owner was someone other than the insured, and, secondly, when the insured telephoned the loss adjusters in March 2008 and said he was being chased for rent by the landlord of No 15.
The judge rejected the idea that the court had to carry out some sort of value judgment about the seriousness of the breach. At most, the law states that the fraudulent element must be "not immaterial" or, in the case of a fraudulent device, yield a not significant improvement in the insured's prospects.
In this case the judge said he was satisfied "to a high degree of probability" that, as regards the representations made in the letter of 11th July, the insured realised that what he was saying was dishonest by the standards of reasonable and honest people. The judge was also satisfied that the fraudulent conduct was more than immaterial.
He said it was no excuse that, as a result of the protracted subsidence claim, the insured felt he had been treated badly by the insurer. The fact that the insured did not pursue No 38 as possible alternative accommodation was also irrelevant.
But he also concluded that the insured had not acted fraudulently in relation to No 15, save for the statement made in the telephone call that the landlord was chasing for rent.
The judge accepted that, based on the tax advice he had received, the insured was trying to ensure that the transaction was at arm's length and viewed his role as director as different from his personal capacity. He was under no duty to disclose that he was the majority shareholder in the company. In any event, the insured thought, correctly, that he had at some point over the years told the insurer he had an interest in No 15. This was confirmed by the insurer's and loss adjusters' files.
The statement about the landlord chasing for rent was, however, untrue and dishonest but taken in isolation, the judge did not consider it "substantial".
Nevertheless, as a result of his conduct in relation to No 38, the insured's claim for alternative accommodation was forfeited and the insurer was entitled to recover £58,500 paid in that regard.
The judge also held that the insurer was entitled to recover the cost of repairs. The repairs and alternative accommodation were part of the same claim arising out of the subsidence at No 13 and there was no proper basis for dealing with them separately.
"I recognise that this conclusion may seem harsh," the judge said, "but it seems to me that it is the inevitable result of the conclusions I have reached on the facts and the well-established policy of the law set out in the authorities I have already cited."
The case demonstrates the very strict approach the court takes once it decides that the insured has acted fraudulently. The fact that the insured felt he had been treated badly by the insurer did not mean he was justified in acting as he did.
The judge applied the "combined" test for dishonesty and required the insurer to show, not only that the July 2007 letter was dishonest by the ordinary standards of reasonable and honest people but also that the insured realised that by those standards his conduct was dishonest.
This appears to be a departure from the more traditional test of showing that the false representation was made (1) knowingly or (2) without belief in its truth or (3) recklessly, careless whether it is true or false. The judge, however, agreed that a person who makes an untrue statement recklessly, careless whether it is true or false, would understand that, by the ordinary standards of reasonable and honest people, his conduct was dishonest.