The case of Malhotra Leisure Ltd v Aviva Insurance Ltd [2025] EWHC 1090 (Comm) concerned allegations of a fraudulent insurance claim following water damage at a hotel. The insurer denied the insurance claim, citing a breach of the policy's fraud condition, alleging deliberate damage and false evidence/statements by the Claimant insured. The Court ultimately found the evidence insufficient to support the insurer's fraud allegations, emphasising the need for cogent evidence to eliminate other plausible and innocent explanations.
The judgment provides valuable insights into the burden of proof for fraud, the assessment of witness credibility, and the construction of fraud conditions in insurance policies.
BACKGROUND
The insured owned and operated a number of hotels, including the New Northumbria Hotel in Jesmond, Newcastle-upon-Tyne (the Hotel). On 11 July 2020, in the midst of the UK's COVID-19 lockdowns, the Hotel suffered significant water damage as a result of an escape from one of a number of cold-water storage tanks located in the attic voids of the premises.
The insured had the benefit of a combined commercial liability policy (which included cover for property damage and business interruption) which covered the Hotel at the relevant time (the Policy). The Policy was underwritten by the Defendant insurer and contained the following condition:
"If a claim made by You or anyone acting on your behalf is fraudulent or fraudulently exaggerated or supported by a false statement or fraudulent means or fraudulent evidence is provided to support the claim, We may:
(1) refuse to pay the claim
(2) recover from You any sums paid by Us to You in respect of the claim,
(3) by notice to You cancel the policy with effect from the date of the fraudulent act without any return of premium."
(the Fraud Condition)
Following the water escape a number of parties were involved (including plumbers, individuals undertaking remedial work, and the insurer's appointed loss adjusters and investigators). After several months of engagement between the various parties, the insurer declined the insured's claim on the basis that the Fraud Condition had been breached – effectively alleging that the insured had caused the overflow deliberately and/or given false statements/evidence to support its claim for indemnity.
The insured brought proceedings seeking a declaration that the Policy responded to the property damage and business interruption losses. The case was heard by Nigel Cooper KC (sitting as a Judge of the High Court) in the Commercial Court.
DECISION
Given the nature of the allegations raised by the insurer in its defence, and specific difficulties encountered at the time by virtue of the Covid-19 lockdowns, the factual matrix underlying the dispute is very complex. The case involved a large number of factual witnesses (whose evidence varied wildly in quality and credibility), competing experts from different backgrounds/specialties, and the loss of important physical evidence during the immediate remedial work.
Burden and standard of proof for fraud
The core question for the Court was whether the water overflow had been fortuitous or caused deliberately. It was not in dispute that the insured bore the evidential burden to prove that the 'event' occurred fortuitously, and the burden of proof was on the insurer to show that the overflow had been caused by an intentional act carried out by or at the direction of the insured. (While the Judge accepted the insurer's position that it was not required to show exactly how or by whom that fraudulent act was done, he was largely dismissive of allegations made by the insurer which were merely conjecture and unsupported by any evidence.)
The judgment provides a useful reminder of the courts' approach when an allegedly fraudulent loss is presented as fortuitous by an insured:
- the insurer must prove its case on the balance of probabilities (as reiterated in Jones v Birmingham City Council [2023] UKSC 27);
- in assessing the balance of probabilities, the inherent unlikelihood of an insured deliberately damaging its own property (and the gravity of a fraud allegation on the point) must be borne in mind (The Atlantik Confidence [2016] 2 Lloyd's Rep 525). In particular, for a case of fraud to be made out, "the cogency of the evidence must eliminate any other plausible explanation" for the event having happened fortuitiously/innocently (The Brillante Virtuoso [2019] EWHC 2599 (Comm));
- factors which are not conclusive but may assist the court include evidence of any plausible motive for the insured to damage its own property, and evidence of other wrong-doing by the insured (albeit that instances of less wrong-doing may not be probative of an allegation of defrauding insurers).
In applying all of the above, the Judge found that:
- There were two possible causes of the loss: (i) a fortuitous leak caused by a combination of circumstances (namely a failure of a valve and two partial blockages); or (ii) a deliberate act.
- On the evidence, the fortuitous explanation for the leak remained wholly plausible (notwithstanding flaws in the witness evidence, absences in the physical evidence and disagreement between the two experts).
- While the insurer did not have to prove how the dishonest 'act' was undertaken, there was insufficient evidence to suggest this explanation was more likely, and there was no evidence to support any of the hypothesised mechanisms of the act. In addition:
- Evidence of unrelated alleged wrongdoing by the insured (relating to breaches of the furlough regime and misleading statements provided to the insured's bank) did not have a probative effect; and
- Evidence of financial pressures facing the Hotel, the insured and its group was not sufficient to suggest a cogent motive for the insured to destroy its own property (not least as the indemnity would only cover the damage caused), nor was the insured's early request for an interim indemnity payment sufficient to suggest the same.
Approach to witness evidence
The immediate timeline following the overflow event was busy, with the site visited by multiple individuals from multiple companies. The recollection of key individuals (both from the insured and from external third-party companies) was patchy and in some cases inconsistent and unreliable. Details of what individuals saw or said, and when they took particular actions, were heavily contested in the proceedings.
The Judge helpfully summarised the guidance of the courts when considering witness evidence which is of crucial importance in cases of alleged fraud. In doing so he citedLeggatt J (as he then was) in Gestmin SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 and the principle of placing "little if any reliance at all on witnesses' recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts."
In any event, and despite the shortcomings in the credibility of some of the witness evidence, the Judge found that there was insufficient evidence of the insured's witnesses giving fraudulent evidence and/or lying, and/or performing the deliberate act of sabotage on the water tank as was alleged.
Construction of fraud conditions
The judgment includes obiter commentary on the proper approach to the construction of fraud conditions following the Supreme Court's ruling in Versloot Dredging BV v HDI Gerling Industrie Versicherung [2017] 1 AC 1. Our article on Versloot can be seen here on the Insurance Blog.
In Versloot, the Supreme Court held that policyholders who advance otherwise valid insurance claims by lies which are irrelevant to their rights to recover do not forfeit their claims under the policy: "the lie is dishonest but the claim is not". In doing so, the Supreme Court overruled the decision of the Court of Appeal ([2015] QB 608), and rejected the analysis of the law by Mance LJ (as he then was) in The Aegeon [2003] QB 556 (on which the Court of Appeal decision in Versloot had been based) that an insured who supports a valid claim with a lie forfeits his claim. The doctrine of fraudulent devices/collateral lies was effectively abolished at common law.
The Policy's Fraud Condition sought to allow the insurer to decline claims based on a 'fraudulent device' or 'collateral lie', in addition to circumstances where the claim itself is fraudulent.
The insured argued - and the Court agreed - that such fraud conditions (including the Fraud Condition under consideration) should be read as being subject to the common law qualifications set out in The Aegeon as modified by Lord Mance who gave the dissenting judgment in Versloot. In other words, for an insurer to decline a claim under a relevant fraud condition, the relevant fraudulent device/collateral lie must:
- directly relate to the claim;
- be intended to improve the insured's prospects in its claim; and
- be objectively capable (if believed) of yielding a significant improvement in the insured's prospects.
COMMENT
The case stands as a helpful example of the Court's approach to fraud allegations in the making and pursuing of insurance claims. It remains to be seen how the obiter commentary around 'collateral lies' will be developed in future case law. However, the proposal of the Court in this case (of applying the The Aegeon criteria as modified by Lord Mance's dissenting judgment in Versloot) would appear to be consistent with the thrust of the preceding common law and seem to offer misguided policyholders some limited protection in the event they unwisely seek to embellish or falsify matters in presenting their claim.
The case also illustrates some of the core risks of witness evidence (including credibility, the fallibility of human memory, and the risk of witnesses seeking to reflect themselves in a better light) – all risks which were magnified in the face of allegations of fraud against the witnesses in this matter.
While ultimately successful, the insured faced challenges arising from how the matter was conducted at the time of the loss and subsequently. When a policyholder discovers a loss, it is important to have in mind a potential insurance recovery. This will include understanding and complying with immediate policy conditions (such as notification, which the insured in this claim did promptly), but also thinking further ahead. The insured should make sure that decisions and steps that are taken are properly documented, that insurers are involved in relevant decisions to the extent required by the policy conditions, and that appropriate steps are taken to mitigate the loss.
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.
