AXA General Insurance Ltd. v Gottlieb & Anor

The appellants, Mr and Mrs Gottlieb, are householders at 99 Darenth Road, London N16, where they were for many years insured under a buildings policy with the respondents, Axa General Insurance Limited (“Axa”) renewable on 31^st August. During the policy year with effect from 31^st August 1993 four claims arose in respect of which dates and references were assigned, and payments were later made for repairs and alternative accommodation (“AA”), as follows:

These proceedings were brought by Axa to recover all the above payments, on the basis that Mrs Gottlieb, acting for herself and her husband, acted fraudulently in two separate respects in the pursuit of two of the claims: firstly, in pursuing a claim for alternative accommodation allegedly supplied by their builder, a Mr Galvin, as part of claim (1) and, secondly, in submitting a forged document purporting to be an electrician’s invoice from a Mr Reid for £1,200 in support of claim (2). By judgment and order dated 7^th May 2004, HHJ Bowers held that Mrs Gottlieb had been fraudulent in the first respect from late September or very early October 1999, and in the second respect from 20^th June 2000 when she knowingly presented the forged document for settlement by insurers under claim (2). He held that Axa were entitled as a result to recover from Mr and Mrs Gottlieb all sums paid – whether prior or subsequent to Mrs Gottlieb’s fraud - on claims (1) and (2), but he rejected Axa’s claim that they were as a result also entitled to recover the sums (totalling £14,150) that they had paid on claims (3) and (4) which were not the subject of any fraud. Mr and Mrs Gottlieb appeal the judge’s decision on the first point, on the ground that he should have held that a fraudulent claim has no effect on interim payments made, prior to any fraud, in respect of genuine loss, so that their liability to repay should be limited to the £25,480.25 shown in the last row relating to claim 1 in the above table. In response, Axa, while making clear that they would not have appealed had the Gottliebs not done so, appeal the judge’s decision on the second point, submitting that he should have held that the monies paid prior to the fraud in respect of genuine losses suffered by the Gottliebs on claims (3) and (4) were recoverable. In each case HHJ Bowers gave permission for the appeal.

These appeals were set down for a one-day hearing on 17^th or 18^th January 2005. By further notice dated 11^th January 2005, Mr and Mrs Gottlieb then sought permission to appeal against the judge’s findings of fraud and for an extension of time for such application. The only ground given for an extension was:

“because (i) the finding of fraud against the Defendants who are very religious people of otherwise impeccable character is most serious (ii) there has been a change of solicitors and counsel (at the beginning of January 2005) who have reconsidered the findings of the learned judge and consider that an appeal accepting the judge’s primary findings but challenging the inferences drawn (as to which there was no or no sufficient evidence) has a real prospect of success.”

In support, Mr Shapiro, a legal executive with the Gottliebs’ current solicitors Messrs GSC, recorded that his firm’s instructions had been received on 22^nd December 2004, that very shortly before that date Messrs. Hassans of Gibraltar had obtained a preliminary view from counsel, Mr Jacob, who now appears before us on Messrs GSC’s instructions and that prior to that the solicitors on the record had been Messrs Ingram Winter Green who acted at the trial. As to the previous history he said simply:

“7.

I believe that the view was taken by previous advisers of the Defendants that there was no real prospect of success in appealing the findings of fraud against the Defendants.

8.

I understand that counsel presently instructed considers that there is a real prospect of success on the basis that the inferences drawn by the judge from primary fact are open to challenge.

9.

The matter is obviously of the gravest concern from the point of view of the Defendants’ reputations.”

We heard the application for an extension of time, presented on behalf of the Gottliebs by Mr Jacob, and after retiring and considering the matter we announced our conclusion that it should be dismissed, saying that our reasons would appear in a written judgment dealing also with the appeals for which permission has been given. After the mid-day adjournment, Mr Jacob informed us that Mrs Gottlieb, who was in court throughout the appeal, wished to address us herself on the application for an extension of time to seek permission to appeal against the judge’s findings of fraud. The matter having been fully argued by counsel and disposed of, we refused that application. I now therefore give my reasons for refusing the extension of time.

In considering a late application of this nature, the court is bound to take into account “all the circumstances”, including any of the kind specifically indicated in CPR3.9. The interests of the administration of justice are ill served by a late application for as long an extension as that presently sought. If there were a good explanation for the lateness and an apparently good case on the merits, an argument that the interests of justice in enabling parties to have an opportunity to clear their names could counter-balance this consideration. For the reasons to which I will come this is not however the case.

The application for an extension of time has not been made promptly. It is no answer that Mr and Mrs Gottlieb have in late 2004 or early 2005 decided to instruct solicitors and counsel, who consider that an appeal would have a real prospect of success. There is no explanation why they did not, immediately after the judgment and after trial solicitors’ adverse advice on the prospects of an appeal, go to other solicitors and counsel for a second view. When we put this to Mr Jacob, he said that they had gone to yet another firm in October 2004, who had also given unfavourable advice. That still does not explain the delay from 7^th May to October 2004. The seriousness of the judge’s findings of fact was clear from the outset, and, if it was believed that Mrs Gottlieb was innocent of fraud, both Mr and Mrs Gottlieb must have felt impelled to take every possible step to redress the situation from the outset. Their failure to do so is certainly not shown to have been unintentional. At all events they must have known that there is a time limit for any application to appeal and that it was incumbent on them to act speedily if they wished to investigate and pursue the possibility of an appeal, despite the unfavourable advice received from their trial lawyers. There is no good explanation for their failure to do so, and nothing to show that the failure was other than their own fault. The late notice itself contravenes CPR52.5.2 in failing to state “the reason for the delay and the steps taken prior to the application being made”. As a minor point, it also appears that the appeal bundle and authorities for the existing appeals were late.

As a result of the failure to apply for permission to appeal or seek an extension of time at an early stage, Axa has been entitled to treat the findings of fraud as final for over seven months, and to assume that the existing appeals would resolve the other outstanding matters in January 2005. The grant of relief would introduce new, factual issues, which, if raised at all, ought normally to be decided before the existing appeals. Axa’s trial counsel has left the bar, and Axa would seek and on the face of it be entitled to time to consider the new, factual issues, so that, if an appeal were allowed on them, there would either have to be an adjournment of all aspects under appeal to achieve the single hearing that would be the normal rule in such circumstances, or two appeal hearings taking place in the reverse order to the normal.

Mr and Mrs Gottlieb emphasise through Mr Jacob that a refusal of relief would preclude them ever challenging on appeal very serious findings against them. Brooke LJ said in Sayers v. Clarke Walker [2002] EWCA Civ 645; [2002] 1 WLR 3095, para. 34, that

“[I]n cases where the arguments for granting or refusing an extension of time were otherwise evenly balanced, a court will have to evaluate the merits of the proposed appeal in order to form a judgment on what the defendants will be losing if time is not extended. …. The consequences of the new requirement for permission to appeal is that if other factors militate towards the refusal of an extension of time, the likely prospects of success will have to be weighed in the balance. In other words the consequence of the appellants’ failure to comply with the rule will be more serious for them if the court thinks that it is more probable than not that their appeal will succeed if it is allowed to proceed than if its prospects of success are smaller, even though they just pass the threshold at which it can be said that they are “real” rather than fanciful.”

However, in this case, leaving aside any detailed evaluation of the merits, the arguments for and against an extension are in my view far from evenly balanced, and other factors do not militate towards a grant of relief. This is a case where we would therefore in my view be entitled to refuse the application for relief, even without going in detail into the merits. But, having said that, I have considered in detail the proposed grounds of appeal and the bundle lodged in their support, and in my view, far from throwing any doubt on the judge’s conclusions on fraud, they indicate their virtual inevitability.

As regards the alternative accommodation claim, it is said that there was no evidence, and no primary facts, supporting the judge’s “finding of involvement” by Mrs Gottlieb in a fraud by her builder, Mr Galvin; and that the judge drew unsupported inferences and resorted to speculation about what “must have happened”. But the facts are that no member of the Gottlieb family ever moved into alternative accommodation supplied by Mr Galvin. Yet a claim was to Mrs Gottlieb’s knowledge and with her support made on Axa for the costs of accommodation allegedly supplied by Mr Galvin. Mr Stead, Axa’s loss adjuster, made repeatedly clear to Mr and Mrs Gottlieb his understanding that the Gottliebs first would be, and later had been, moved into alternative accommodation. I refer, for example, to (a) his letter of 21^st July 1999 (including what Mr Stead considered to be “a fair and reasonable valuation” for costs which he understood would shortly become payable when the Gottliebs moved into alternative accommodation to be supplied by Mr Galvin); (b) the conversation about insurers’ liability for such accommodation which the judge found had occurred on about 11^th August 1999; and (c) Mr Stead’s letter of that date confirming this conversation. On 16^th September Mrs Gottlieb wrote chasing the payment which eventually came on 23^rd September. She claimed to him orally that alternative accommodation costs were rising because Mr Galvin was refusing to do further work pending receipt of that payment.

On 19^th January 2000 Mr Stead wrote a letter to Mr Galvin, with a copy to Mr and Mrs Gottlieb, asking why Mr Galvin was claiming to have supplied accommodation for 13 weeks, when it was originally considered that 4-5 weeks would be required. Mr Stead refused in the meantime to recommend payments. On 24^th January and 1^st February 2000 Mrs Gottlieb telephoned Mr Stead saying that she had not received Mr Galvin’s invoices. Mr Stead confirmed by a letter of 31^st January to Mr Galvin, copied to the Gottliebs, that these were required “the most pertinent being the accommodation issue”. On 1^st February 2000 Mrs Gottlieb asked whether payment could be made without invoices, which Mr Stead confirmed was impossible. On 2^nd February 2000 Mr Galvin faxed to Mr Stead and to Mrs Gottlieb invoices, including one “to supply temporary accommodation to Mrs Gottlieb of 99 Darenth Road London N16 13 weeks @ £1,250” totalling £16,250 plus VAT and another for removal charges for her of £1,260 plus VAT. Mr Stead, having received them, wrote to Axa recommending the payments which were then made in February 2000. Mrs Gottlieb received a copy of this letter from, the judge found, Mr Galvin. Mrs Gottlieb’s evidence was that in a meeting on 24^th February 2000 she then told Mr Stead that she and her husband had not used any alternative accommodation supplied by Mr Galvin. That evidence the judge found to be a “total fabrication” – it had never even been put to Mr Stead, when he gave evidence. On 25^th September 2000 Mrs Gottlieb untruthfully told a new adjuster, Mr Harder, that the Gottliebs had been in alternative accommodation arranged by Mr Galvin for 12-13 weeks, and had not applied for a rebate on their own house. She said that she did not remember the address. In another conversation on 7^th November 2000 she purported to describe, “but not precisely” the type of property, as being “down a private road, a detached modern house with a small driveway, with a kitchen downstairs and 4 bedrooms …. near to riding stables and in a good area”. Asked “how long she stayed there”, her reply, as recorded in Mr Harder’s subsequent note, was that her children were in Spain, and her husband had to go out to Israel most of the time to see his sick father and that she also stayed with her mother from time to time. Mr Harder prepared a statement for her to sign, which further recorded the gist of what he understood from her as follows:

“Mr Galvin arranged the alternative accommodation for us, and removal of furniture into store. I don’t remember when it was that we moved into accommodation. I didn’t see the property we were to move to beforehand. Mr Galvin told me that it was in a Jewish area or near a Jewish area. We stayed in the accommodation for about 12 weeks, that is everybody from our family, although some of them for only a short space of time. My husband did have to go to Israel to see his father during this period and was at the house only for a few weeks. It was sudden as his father was dangerously ill.”

The draft statement went on to give an address for the house, which by the time of its preparation Mr Harder must have been given by Mr Galvin or Mrs Gottlieb.

Mrs Gottlieb prevaricated in dealing with the statement, finally writing on 18^th December 2000 that “it is impossible for me to be fully confident of the complete accuracy of such a lengthy statement”. But her attached notes took no issue with the passage recording what she had said about the alternative accommodation. In relation to the relevant paragraph quoted above, she merely noted:

“It was available for duration of first stage of works.

It was sudden as his father was dangerously ill.

Newish house.”

She must have seen, but took no issue with, the statements regarding her family’s actual occupation of the accommodation.

Meanwhile, Mr Harder had investigated the address and been told by its occupier that he had lived in it since November 1977, although it had at some prior date been owned by Mr Galvin. Finally, in a further conversation on 20^th February 2001, Mrs Gottlieb then admitted that her family had never been to the alternative accommodation, but suggested that it had been made available for them, and that she knew what it looked like because she had been to see it, “possibly” being taken by Mr Galvin.

The judge did not believe any of Mrs Gottlieb’s attempts in the witness box to exculpate herself from the obvious implications of this evidence. Her oral evidence covering the period between August 1999 and January 2000 was that she knew that insurers were paying rent for this period, but that Mr Galvin would not “let me move in”. The judge understandably found this evidence “extraordinary and unbelievable”. This is not a case of the judge treating denials as positive evidence of the contrary. The evidence spoke loud and clear in only one direction. It is true that Mr Galvin was also dishonest (and was in fact convicted of submitting further false accommodation invoices for early 2000, after Mrs Gottlieb had given Axa authority to settle any invoices for such accommodation with him direct). But the overwhelming inference is that he and Mrs Gottlieb were in cahoots in respect of the first accommodation invoices. Actual proof of the precise motive would have been relevant, but was not a pre-condition to a finding such as the judge reached. It is, as the judge said, not difficult to see how and why Mrs Gottlieb might have lent herself to such a fraud, even though the whole picture cannot be shown or known. The fact that she and Mr Galvin also spent much of the five-hour meeting on 19^th January 2000 shouting at each other does not undermine the judge’s conclusions.

The purported electrical invoice on Mr Reid’s purported letter-paper for “Carrying out electrical work as per specification £1,200” was a forgery, carrying the word “Electical” (rather than “Electrical”) in the printed heading. It bore the same date as another (genuine) invoice for different work done by Mr Reid for Mrs Gottlieb at other premises (4 Montefiore Court). It was on its face an invoice, not an estimate. On Mr Reid’s evidence, which the judge accepted, Mr Reid had never attended Mrs Gottlieb at 99 Darenth Road to quote for, still less to do, work there. Mrs Gottlieb was quite unable to explain why someone should, on her case, put a forged document in Mr Reid’s name through her letter-box. She produced it to Axa’s adjusters as an invoice for work that she had paid and in respect of which she demanded reimbursement. The judge found that it was created by her or on her instructions. The original introduction to Mr Reid was by a Mr McQueen who had worked for Mr Galvin. Mr Jacob invited us to consider the possibility that Mr Galvin was responsible for creating the invoice. The idea that Mr Galvin would do so, and put it through Mrs Gottlieb’s letter-box in the hope that she would then think that she had instructed and paid for, or ought to pay Mr Galvin for, work by Mr Reid which had never been estimated or done by Mr Reid or paid for by her is fanciful. Nothing has been shown or said to us that could in my view possibly throw doubt in this court on the judge’s conclusions, after hearing the evidence, that Mrs Gottlieb was party to a fraud in claiming “reimbursement” for this invoice also.

For these reasons, the application for an extension of time to appeal the judge’s findings of fraud fails.

I turn to the issues on which permission to appeal was given by the judge. They concern the scope and effect of the common rule relating to fraudulent insurance claims. This has been considered in a number of recent cases, including Insurance Corp. of the Channel Islands v. McHugh [1997] Ll.R. 94 (Mance J); Galloway v. Guardian Royal Exchange (U.K.) Limited [1999] LRIR 209 (CA); Manifest Shipping Co. Ltd. v. Uni-Polaris Co. Ltd. (The Star Sea) [2001] UKHL 1; [2003] AC 469; Direct Line Insurance v. Khan [2002] LRIR 364; and Agapitos v. Agnew [2002] EWCA Civ 247; [2003] QB 556 (CA). Many of the issues canvassed in these cases are irrelevant in this case, in which the issues are relatively confined. This is because Axa relies simply and solely on what it describes as the rule of law relating to fraudulent claims.

Lord Hobhouse’s speech in The Star Sea at paras 50-53, 61 and 66 distinguishes between three possible analyses, based on or proceeding by analogy from: (i) the principle reflected in s.17 of the Marine Insurance Act 1906, leading to avoidance ab initio; (ii) general contractual principles, including repudiation (and possibly, in view of the insurance context, breach of warranty in the insurance sense); and (iii) a special rule relating to fraudulent insurance claims. Lord Hobhouse’s speech seeks to separate these strands, and at para. 62 he endorsed the existence of a special rule relating to fraudulent claims:

“Where an insured is found to have made a fraudulent claim upon the insurers, the insurer is obviously not liable for the fraudulent claim. But often there will have been a lesser claim which could properly have been made and which the insured, when found out, seeks to recover. The law is that the insured who has made a fraudulent claim may not recover the claim which could have been honestly made. …. This result is not dependant upon the inclusion in the contract of a term having that effect or the type of insurance; it is the consequence of a rule of law. Just as the law will not allow an insured to commit a crime and then use it as a basis for recovering an indemnity (Beresford v. Royal Insurance Co Ltd [1937] 2 KB 197), so it will not allow an insured who has made a fraudulent claim to recover. The logic is simple. The fraudulent insured must not be allowed to think: if the fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing.”

Lord Hobhouse’s speech was endorsed by Lords Steyn and Hoffmann. They also agreed with the speech of Lord Scott who at paragraphs 110-111 said that

“The presentation of a dishonest or fraudulent claim constitutes a breach of duty that entitles the insurer to repudiate any liability for the claim and, prospectively at least, to avoid any liability under the policy. Whether the presentation of such a claim should be regarded as a breach of a continuing duty under section 17 that entitles the insurer to avoid the policy ab initio with retrospective effect, enabling any payments made in satisfaction of previous unimpeachable claims to be recovered by the insurer is more debatable. It is not necessary in this case to decide this point.”

In Agapitos I also favoured the view that the common law principle governing fraudulent claims has a separate origin and existence to any principle that exists under or by analogy with s.17 of the Marine Insurance Act 1906: see at para. 45(g). In the event in this case, Axa does not seek to rescind the whole policy ab initio or to rely on any general principle reflected in s.17 of the Marine Insurance Act. Further, Axa does not rely on the general contractual principle which might have entitled it to treat the insurance as at an end or repudiated for the future, and it would have been irrelevant for it to do so in circumstances where the policy has long expired and it is not seeking to recover sums paid after the fraud in respect of claims separate from those to which the fraud related.

Mr Field for Axa recognises that in these circumstances Axa’s cross-appeal can only succeed if the rule relating to fraudulent claims itself forfeits all claims during the relative policy year, including those already paid prior to late September or very early October 1999, when Mrs Gottlieb first became party to a fraudulent claim being pursued against Axa. As the table at the start of this judgment shows, the payments made on, and finally resolving, those claims in relation to which there was no fraud (that is claims (2) and (3)) were made before there was any fraud in relation to any other claim. Mr Field acknowledges that the cross-appeal could therefore only succeed if the fraudulent claim rule has an effect very similar to that of avoidance ab initio. Although he does not press the contention that it has such an effect, he asks us, if we conclude that that is the proper ambit of the rule, to give effect to our conclusion.

To my mind, there is no basis or reason for giving the common law rule relating to fraudulent claims a retrospective effect on prior, separate claims which have already been settled under the same policy before any fraud occurs. It is unnecessary to reach any conclusion in this case on the common law position relating to separate claims which are still unpaid at the time of the fraud, though there seems to me some force in the argument that the common law rule relating to fraudulent claims should be confined to the particular claim to which any fraud relates, while the potential scope and operation of more general contractual principles might in some circumstances also require consideration (cf paragraph 18(ii) above). What I have said is sufficient to dispose of the cross-appeal.

The question arises on Mr and Mrs Gottlieb’s appeal whether under the common law rule relating to fraudulent claims an insurer may recover interim payments made prior to any fraud in respect of genuine losses incurred on the claim to which the subsequent fraud related. Mr Jacob accepts that claim (1) is in all its aspects a single claim. A number of features of the rule relating to fraudulent claims can be stated with reasonable certainty: (i) Where all or part of a claim is fraudulent, or where fraudulent devices are used to promote a genuine claim, the insured cannot thereafter recover in respect of any part of the claim: see The Star Sea per Lord Hobhouse at paragraph 62, cited above, and Agapitos para. 2; (ii) The rule applies to a claim which is initially honest, but later fraudulently exaggerated or supported by fraudulent devices: Agapitos paras. 15-17 and 45(a), considering previous authority; (iii) The rule enables the recovery from a fraudulent insured of all sums paid out in ignorance of the fraud subsequent to its commission, including any such sums relating to genuine loss in respect of which the insured was entitled to indemnity apart from the effect of the fraud: Direct Line Insurance v. Khan [2002] Ll.R. 364 (CA). Mr Jacob accepts this. But he also submits and I accept that (contrary to the view taken by HHJ Bowers) that case cannot be taken to have concerned the recovery by insurers of any payment made in respect of genuine loss prior to the addition to the same claim of a fraudulent element. The loss in Direct Line Insurance v. Khan only occurred on 8^th January 2000, and it is improbable that any of the sums recorded on p.365 in the report as having been paid “between 8 January 2000 and 7 August 2000” was paid prior to the commission of the fraud which, as the same page shows, pre-dated 19^th January 2000. In any event, if any such sum was paid prior to the fraud, it was not argued that it was on this ground irrecoverable, and Direct Line Insurance v. Khan is therefore no authority on that point.

Mr Jacob argues that the features of the rule identified in the previous paragraph point to the rule having a purely prospective effect, prospective that is from the date of the fraud. Thereafter, as he puts it, the relationship of trust between insurers and insured is at an end. Prior payments in respect of genuine loss, albeit on the same claim, remain unaffected. Mr Jacob submits that the recovery of payments made, even in respect of genuine loss, after the fraud is explicable on the basis that such payments must be regarded as made on the assumption that there was been no fraud relating to any part of the claim prior to their payment; and that insurers’ right to recover such payments in circumstances like those in Direct Insurance v. Khan is explicable accordingly on the basis that they were payments made under a mistake of fact. My comment on that is that the suggested assumption seems itself to be a legal rule, rather than a necessary factual implication. There seems no particular reason, as a matter of fact, to regard both parties as having shared the common assumption that payments relating to genuine loss were made on the basis that no other part of the claim was fraudulent. So one comes back to the scope which should, in the light of existing authority, attach to the rule of law relating to fraudulent claims.

Mr Jacob refers to Gore Mutual Insurance Co. v. Bifford (1987) 45 DLR (4^th) 763, where the British Columbia Court of Appeal dismissed a claim to recover sums paid pursuant to a claim on a householder’s policy prior to the addition by an insured to the claim of a fraudulent invoice. There are, however, difficulties about relying, in this jurisdiction at least, on the reasoning and decision in that case, since it was decided (a) without reference to the existence or effect of the common law principle and authorities relating to fraudulent insurance claims identified in The Star Sea at para. 62 and in Agapitos at para. 2, and (b) in reliance on conventional contractual principles relating to repudiation and acceptance of repudiation. Such principles would (as I pointed out in Insurance Corp. of the Channel Islands Inc. v. McHugh [1997] LIRL 94, 134) normally lead to a conclusion that any payments made, and even payments accruing due, up to the time of acceptance of repudiation could be recovered or retained. That conclusion might be avoided if one preferred an analogy of breach of insurance warranty to repudiation, although I note in passing that the effect of breach of an insurance warranty is automatic, rather than dependant on any acceptance or election: Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Ltd.(The Good Luck) [1992] 1 AC 233. In the light of point (a) and the undoubted existence in this jurisdiction of the rule relating to fraudulent claims, Gore’s case does not on any view assist to resolve the present. Mr Jacob’s suggestion that breakdown in trust is at the root of the principle that fraud precludes further recoveries has similar contractual undertones to those which appear in the judgment in Gore’s case; and it also fails to explain why it is that the insurer can recover any payments in respect of genuine loss made between the date of a fraud and its discovery.

More fundamentally, it is clear that the rule relating to fraudulent claims operates generally in a manner which cannot be regarded as purely prospective. Save where there is some special condition and leaving aside liability insurance, an insurance indemnity is payable from the moment an insured peril causes loss. A cause of action then arises, even though it is, under a technical rule of insurance law, for damages for failing to hold the insured free from or indemnified against the peril which has arisen: cf Chitty on Contracts Vol. II para. 41-074. So the effect of a fraudulent claim is retrospectively to remove or bar the insured’s pre-existing cause of action: see paragraph 23(i) above. This retrospective effect is underlined by the application of the rule to circumstances where a valid insurance claim has been presented to insurers, which is later precluded by the addition of a fraudulent element or the use of fraudulent devices to support all or part of the claim: see paragraph 23(ii) above. The insured may thus not only be exposed to lack of cover in respect of genuine uninsured loss which would, but for his fraud, have been insured, but also to having to repay any sum received by way of indemnity in respect of such loss before the fraud is discovered. The question on Mr and Mrs Gottlieb’s appeal is whether it makes all the difference if the sum happens to have been received before the fraud is even committed. If it had not been received, but was merely outstanding, then it would be forfeit. But Mr Jacob submits that, where a genuine right to indemnity has both arisen and been the subject of a payment made prior to any fraud committed in respect of the same claim, there is no conceptual basis for requiring the insured to repay the amount so paid.

I disagree with this last submission. If a later fraud forfeits a genuine claim which has already accrued but not been paid, the obvious conceptual basis is that the whole claim is forfeit. Lord Woolf in Galloway v. Guardian Royal Exchange (UK) Ltd. [1999] LIRL 209, 213 and Buxton LJ in Direct Line Insurance v. Khan spoke of the whole claim being forfeit, although in neither case in the context of a payment made prior to fraud. If the whole claim is forfeit, then the fact that sums have been advanced towards it is of itself no answer to their recovery. The sums previously paid on that claim will have been paid on a consideration which has now wholly failed. What I said in Insurance Corp. of the Channels Islands v. McHugh at p.135 in relation to forfeiture of “all benefit under this Policy” under an express clause also applies in this context to the common law rule:

“If payments on account have already been made with respect to that claim [i..e. the particular claim to which the fraud relates], they have been made on the assumption that an obligation to indemnify exists or would arise. Once that obligation is forfeit, any such payments cease to have any basis and, if already made, are recoverable accordingly as payments made on a false premise or for a consideration which wholly failed.”

Mr Jacob’s submission is in effect that we should view the forfeiture of the whole claim as restricted to the whole of the outstanding claim, i.e. to any part that remains unpaid at the date of fraud. But his suggested justification for this restriction, that to allow recovery of previous payments would undermine settled expectations and impose windfall hardship, is met by the consideration that the fraud rule is designed to forfeit existing rights, so leaving an insured exposed, without insurance cover, to genuine loss and/or liability to pay for repairs which would otherwise have been insured. The actual rationale of the rule of law relating to fraudulent claims is that an insured should not have the settled expectation that, even if the fraud fails, he will lose nothing. There is no obvious reason why the consequences of making a fraudulent claim should depend upon the timing of any payment in respect of any genuine part of the claim. Further, while it may be fanciful to suppose that many dishonest insureds would tailor their fraud so that it came at the end, and after settlement of all or the bulk, of their genuine claim, insurance fraud is not uncommon and it is not impossible that some well-informed practitioners might do so. It is also not impossible that some insurers, aware of the prevalence of insurance fraud generally or (wrongly) suspecting its possibility in a particular case, might be discouraged from making interim payments, if they knew that, even if they were able later to prove fraud, they would only be able to recover any payments made after the date by when they could prove that fraud was being committed. The facts of the present case illustrate the difficulties that insurers have in showing when an insured’s fraud began. The judge said in paragraph 26:

“I am deeply suspicious that [Mrs Gottlieb] was aware of the fraudulent nature of the claim [for alternative accommodation] from its very inception [i.e. in July 1999] but at that stage and in the absence of firm evidence I feel unable to make a finding on that basis”.

His eventual conclusion was, as I have stated, that “she was an active and willing participant from shortly after the third cheque at the end of September 1999 (or very early October 1999)”.

On the other hand, Lord Hobhouse confined his language in The Star Sea at paragraph 62 to circumstances where an insured was seeking to “recover” an insurance indemnity; and drew an analogy with the law of illegality which might be suggested to assist Mr Jacob’s proposition, when he said that “Just as the law will not allow an insured to commit a crime and then use it as a basis for recovering an indemnity (Beresford v. Royal Insurance Co Ltd [1937] 2 KB 197), so it will not allow an insured who has made a fraudulent claim to recover”. Beresford v. Royal Insurance Co Ltd does not in my view, however, provide a complete analogy to or explanation of the common law rule relating to fraudulent claims. It applies the rule that a person cannot benefit from his own wrong. It does not explain either the forfeiture of the genuine part of an insurance claim - that is explained by the different considerations of policy which appear in the concluding sentences of paragraph 62 of Lord Hobhouse’s speech in The Star Sea – or the recovery of sums paid in respect of a genuine loss after a fraud but before its discovery.

Further, none of the conventional principles regarding illegality which apply to contracts generally has the same effect as the common law rule relating to fraudulent insurance claims. Chitty on Contracts (29^th Ed.) para. 16-010 describes such principles as follows:

“…. [T]he fact that a party commits some illegality in the course of performance does not result in his being unable to enforce the contract:

“The fact that a party has in the course of performing a contract committed an unlawful or immoral act will not by itself prevent him from further enforcing that contract unless the contract was entered into with the purpose of doing that unlawful or immoral act or the contract itself (as opposed to the mode of ….. performance) is prohibited by law (Coral Leisure Group Ltd. v. Barnett [1981] ICR 503, 509)”

The commission of a fraud or use of fraudulent devices would not on normal contractual principles convert the whole policy into one prohibited by law. And, even if it did, the effect would be to preclude the party committing the fraud from further enforcing the policy, not, for example, to enable insurers to recover sums paid in respect of genuine and otherwise insured loss after the fraud, but prior to its discovery.

The rule relating to fraudulent insurance claims is accordingly a special common law rule. We have to set its limits without the benefit of authority binding on us. The answer more consistent with principle - namely the forfeiture of the whole claim including any part of it that is or may be otherwise good - seems to me that indicated in paragraphs 27-28 above. Mr Jacob’s submission is that we should temper the harshness of the rule by excluding from its ambit payments made on the same claim prior to the fraud in respect of genuine loss. This invites the question why we should in any way reduce the severity of a rule which is deliberately designed to operate in a draconian and deterrent fashion. The only justification offered is that to do so would reflect settled expectation, but the policy of the rule is to discourage any feeling that the genuine part of a claim can be regarded as safe - and that any fraud will lead at best to an unjustified bonus and at worst, in probability, to no more than a refusal to pay a sum which was never insured in the first place. The arguments in favour of a modification of the policy according to the relative “happenchance” of when payments are made do not appear to me strong.

I therefore conclude that the proper scope of the common law rule relating to fraudulent insurance claims is to forfeit the whole of the claim to which the fraud relates, with the effect that the consideration for any interim payments made on that claim fails and they are recoverable. It follows that I consider that the judge was correct on both issues argued before us, and that the appeal and the cross-appeal should be dismissed.

I agree.

I also agree.