Direct Line Insurance plc v Kenneth Ronald Fox
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In April 2007, a fire at the insured's house caused serious damage to the kitchen and hall and smoke damage to the remainder of the house and contents. The insured claimed under his home and contents policy and the insurer paid out various sums for alternative accommodation and damaged contents.
Tenders for the building repairs were obtained, but in the end the insurer's loss adjuster and the insured agreed that the insured would undertake the work himself using his own contractor.
Under a written agreement dated 7th June 2007, the insured agreed to accept £46,524 "in full settlement and discharge of all my buildings claims under your policy".
In return, the insurer agreed to make an interim payment of £42,412 followed by a final payment of £4,112.50 "subject to [the insured] providing invoices demonstrating [the insured's] outlay in respect of the VAT element of replacement bespoke kitchen which will be manufactured by Darren Brett Furniture Ltd".
The interim payment was duly made. In August 2007, the insured submitted a copy of an invoice dated 18th July from Darren Brett Furniture which stated that the kitchen had been replaced at a cost of £23,500 plus VAT of £4,112.50.
The insurer's suspicions were raised. On 4th September, it wrote to the insured to say it was instructing its loss adjuster to verify that the works had been completed. On 6th September, the insured rang the loss adjuster and withdrew his VAT claim.
When the insurer asked for an explanation, the insured said he had obtained the invoice in advance from Darren Brett Furniture but the firm had proved so unreliable that he had arranged and paid for the work himself, at greater cost. Because a cash settlement had been agreed, he had thought it was irrelevant who carried out the repairs, as long as the kitchen was brought back to its original standard.
The insurer sued, seeking to recover £72,428 already paid out on the fire claim.
The insurer relied primarily on the terms of the policy, which provided: "If any claim or part of a claim is made fraudulently or falsely, the policy shall become void and all benefit under this policy will be forfeited".
The insurer also cited the long-established principle that a person who makes a fraudulent claim under an insurance policy cannot be permitted to recover at all.
The insured argued that he had not advanced a fraudulent claim but had rather sought to use a misleading document to satisfy a condition precedent in the settlement agreement. The settlement agreement was a separate contract, to which the principle of utmost good faith did not apply. In any event, he had retracted the invoice before the insurer had decided whether or not to make a payment.
As for the policy condition, the insured claimed that it breached the Unfair Terms in Consumer Contracts Regulations 1999 because it purported to invalidate all previous claims made under the policy, even if wholly unconnected to the fraud.
The judge agreed with the insured that the false invoice related to a condition precedent in the settlement agreement, which was a separate contract from the insurance policy.
Depending on its terms, a settlement agreement compromising a contract claim either discharges or modifies the contract in relation to that claim.
Even if the settlement relates to an insurance claim, the settlement agreement itself is not a contract of insurance and so is not a contract of utmost good faith. The rules and principles that apply to fraudulent insurance claims are not called into play.
In this case, payment of the balance of the agreed sum was subject to a condition precedent in the settlement agreement – the provision of an invoice demonstrating that VAT had been paid to Darren Brett Furniture.
The invoice was not sent to establish an element of the claim under the policy, but to deceive the insurer into thinking the condition precedent had been met. Since the insured never satisfied that condition, the £4,112.50 never fell due. But the insured did not have to repay all the sums he had already received for the fire claim.
The insured's attempt to withdraw the invoice was immaterial. The judge could find no authority to suggest that a retraction can somehow mitigate an attempted fraud. In any event, any retraction would have to be made voluntarily, before any suspicions had been raised. In this case, the insured only changed his mind when he realised the insurer was going to investigate.
Had the express policy term applied, the judge thought it would operate so as to bring the policy to an end for the future, but not retroactively. It would not, therefore, have affected any previous claims made under the insurance. This mirrored the common law approach to fraudulent claims.
In these circumstances, the judge thought it was far from clear that the insured would have been able to rely on the Unfair Terms in Consumer Contracts Regulations, or that the term would be found to be unfair in any event.
There is still uncertainty as to whether a fraudulent insurance claim should be treated as a breach of the duty of utmost good faith, so as to render the policy void from the very beginning, or as a breach of a special common law rule that invalidates the insurance claim, but not the policy as a whole. Recently, courts have appeared to favour the common law approach.
The effect of this attempted fraud, however, was limited to the balance due under the terms of the settlement agreement, so these questions were ultimately left unresolved.
But this is not the first time that the unfair contract terms argument has been raised (and dismissed) in connection with a fraudulent insurance claim.
In Direct Line v Khan , the Court of Appeal took the view that it would be a "startling proposition" if the rule of law on fraudulent insurance claims could be reviewed under the regulations.
In any event, any question of unfairness would have to take into account the legitimate public policy of discouraging false claims that lies behind the rule of law.