UK: Fraudulent Claims And Avoidance

Moral Hazard and the use of a "fraudulent device"

Sharon's Bakery (Europe) Ltd v. Axa Insurance & Anor [2011]1
Commercial Court, 9 February 2011

This case represents the latest in a serious of recent High Court decisions involving dishonesty in the presentation of claims2.

The insured ("Sharon") operated a wholesale bakery in North London, owned by its two directors, Mr Bension Nassim and Mr Ali Caplin. Prior to the formation of Sharon, Mr Nassim had run his own business, Sharon's Bakery (Wholesale and Retail) Ltd ("SBWR") but in 2007 he had had agreed to go in to business with Mr Caplin, with the formation of Sharon. Mr Caplin provided the premises for the new bakery, and Mr Nassim the equipment, which he brought from his former company, SBWR.

The new company also obtained finance for its operations from Lombard North Central Plc ("Lombard"), in the course of which it provided to Lombard a copy of an invoice from SBWR for the equipment that was being contributed by Mr Nassim. As SBWR and Sharon were related entitles, however, Lombard demanded sight of an invoice from the ultimate supplier, so that it could verify the relevant valuation. Lombard was duly given what purported to be an invoice, made out to SBWR by a company called Bakequip (UK) Ltd ("Bakequip"), apparently evidencing the sale of the equipment to SBWR. It was marked "paid in full with thanks". In fact, so it turned out, the invoice was false. Although there was no suggestion that the equipment had come into the possession of Sharon by any illegitimate means, the fact was it had not been acquired by means of the sale from Bakequip purportedly evidenced by the invoice.

On 8 June 2008 a serious fire took place at the bakery, for which Sharon sought to pursue a claim against the defendant all risks property insurers. In the course of presentation of the claim, the insureds also procured a second, identical, invoice from Bakequip for the same equipment, this time made out not to SBWR but to Sharon directly. The second invoice was tendered to insurers.

Upon discovering that there had been no such sale by Bakequip, whether to SBWR or Sharon, the insurers denied the claim and sought to avoid the policy on two grounds:

i) non-disclosure of the fact that a false invoice had been used in the course of securing a finance transaction with Lombard, constituting a moral hazard about which it was material for an underwriter to know;

ii) the presentation of a fraudulent device, namely the second invoice, in the pursuit of the policy claim.

For its part, Sharon contended that the invoice provided to Lombard was only ever designed to act as a valuation, and there was no criticism about the valuation per se. There was never any registered concern on Lombard's part as to whether, or how, Sharon had acquired title to the equipment. It simply wanted to know what it was worth. There was, therefore, no fraud as between Sharon and Lombard, and hence no fraudulent activity warranting disclosure to insurers.

As to the invoice provided in pursuit of the policy claim, it was common ground that this was not a fraudulent claim as such. The loss was genuine and the insured was not seeking to pursue a claim for a greater sum than that to which it was entitled. The only basis of the insurer's defence was the use of a "fraudulent device" in the pursuit of an otherwise valid claim, but such a defence could only succeed if it could be shown that the insured had used the false device to seek to improve or embellish the facts surrounding the claim3.

In reality, that was not the case here, argued the insured. Where they had passed on the document to insurers describing it as an "invoice" this was an oversight, as it was only ever intended to be tendered as a valuation. Moreover, the contrary inference made no sense. There was a perfectly valid set of documentation showing how the insured had acquired the equipment, and how Lombard had provided finance. It was wholly implausible, argued Sharon, that it would have committed a fraud in pursuit of its policy claim simply because it was more "convenient".

Insurers succeeded in their defence on both grounds. On moral hazard, the court concluded that the invoice provided to Lombard was designed to do more than merely evidence valuation. It purported to be evidence of a true sale and purchase agreement between Bakequip and SBWR, and in that it was a false document. It was used for a dishonest purpose, namely in furtherance of a finance application, and that would have been so even if a valuation was all that Lombard had required. On any view, the insured's conduct in furnishing the document to Lombard represented a moral hazard warranting disclosure to insurers.

As to the second invoice, the court again held that it was intended to be tendered as an invoice, and not merely as a statement of valuation. It amounted to a representation that there had been a supply of equipment from Bakequip to Sharon, when the insured knew there was no such transaction. While the policy claim might still have succeeded without it, the lie conveyed by the false invoice would have tended to "yield a significant improvement in the insured's prospects of obtaining a settlement". In short, it was tendered as a necessary step towards having the claim accepted, and hence the insureds were guilty of using a fraudulent means or device to obtain benefit under the policy. Consequently, all benefit under the policy was forfeited.

Result: Judgment for the insurer.


1. [2011] EWHC 210 (Comm)

2. See also Direct Line Insurance Plc v. Fox [2009] EWHC 866 (see Taylor Wessing Insurance and Reinsurance Review of 2009; page 1); Yeganeh v. Zurich Insurance Co [2010] EWHC 1185; Joseph Fielding Properties (Blackpool) Ltd v. Aviva Insurance Ltd [2010] EWHC 2192 (see Taylor Wessing Insurance and Reinsurance Review of 2010, pages 2 and 22).

3.See Agapitos v Agnew [2002] EWCA Civ 247; [2003] QB 556.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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