Direct Line Insurance Plc v Fox

The basic facts relevant to this action were not in dispute.

The claimant, Direct Line Insurance Plc (“Direct Line”) is an insurance company.

The defendant, Mr. Kenneth Fox, was, at all material times, the freehold owner of the property known as and situate at 26, Fallow Fields, Great Woodcote Park, Loughton, Essex (“the House”). Mr. Fox was also a director of a company called Bright Look Double Glazing East Ltd. In addition, Mr. Fox had interests in property development through a company called Fox Developments Ltd.

Mr. Fox entered into a contract of insurance (“the Policy”) numbered 40595540/01 with Direct Line under which Direct Line insured the buildings at the House, and the contents thereof, against, amongst other things, the risks of damage from fire and smoke.

One of the conditions of the Policy, Condition 6, was in these terms:-

“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.”

On 8 April 2007, during the continuation of the cover provided by the Policy, a fire occurred in the kitchen of the House. Severe damage was caused to the kitchen itself and to an adjacent hall. There was smoke damage to the remainder of the House and to various contents therein.

Mr. Fox made a claim under the Policy in respect of the damage to the House and to the contents thereof.

That claim was accepted by Direct Line.

Direct Line instructed loss adjusters, Cunningham Lindsey United Kingdom (“Cunningham”), in connection with the assessment of the claim.

Various payments were made in respect of the claim on the advice of Cunningham. The payments included an initial payment of £1,425, a payment amounting to £1,891.95 in respect of initial hotel accommodation, because the House was uninhabitable until repairs had been carried out, and further payments in respect of accommodation totalling £15,371.63. In addition an amount of £12,327.87 was paid in respect of damage to the contents of the House.

The question arose of the repair of the damage to the House itself. Tenders were sought by Cunningham for the work in question. The lowest tenderer was a company called S. & A. Gregory Ltd. The amount of the tender presented by that company totalled £53,015.00, plus Value Added Tax. However, as a result of discussion between Mr. Gilbert Theodore of Cunningham and Mr. Fox it was agreed that Mr. Fox would himself arrange, through his various contacts, the undertaking of the necessary work, and supervise that work himself.

The agreement between Mr. Theodore and Mr. Fox was reduced to writing (“the Written Agreement”) in a document prepared by Mr. Theodore, addressed to Direct Line, and signed by Mr. Fox, dated 7 June 2007. The Written Agreement was in these terms:-

“Subject to your approval and subject to the terms and conditions of the Policy I agree to accept the sum of £46,524.50 in full settlement and discharge of all my Buildings claims under your Policy No. 40595540/01 for loss and damage by Fire which occurred on the 8^th April 2007.

I understand that my Insurers will make an interim payment of £42,412.00, followed by a final payment of £4,112.50, subject to me providing invoices demonstrating my outlay in respect of the VAT element of replacement bespoke kitchen which will be manufactured by Darren Brett Furniture Ltd.

I confirm that there is no other insurance covering this loss or damage and that no other persons have an interest in the property the subject of this claim other than Abbey National.

I accept that any valuation used in assessing policy liability was calculated for that purpose only and is not a valuation for future insurance or loss adjustment. ”

Direct Line did approve the Written Agreement and the interim payment of £42,412 was made.

Mr. Fox wrote to Mr. Theodore a letter dated 14 August 2007. The material part was in these terms:-

“Gilbert, I am please [sic] to tell you we have now moved back to the above address. Thank you very much for your prompt and professional assistance with handling our claim. As per our agreement dated 07/06/07 there remains one small outstanding amount of monies for £4112.50. I enclose a copy of there [sic] invoice which has been settled by myself. Could you please ask Direct Line to forward me a cheque for the above amount?

Once again many thanks, if you have any queries please don’t hesitate to contact me.”

The document enclosed with the letter appeared on its face to be a copy of an invoice rendered on the printed letter-head of a company called Daren Brett Furniture Ltd. to Mr. Fox and to bear the number 2007007. It was dated 18 July 2007. It bore the heading “Re: Replacement kitchen for 26 Fallow Fields, Great Woodcote Park, Essex, IG10 4QP”. The narrative in the document was:-

“To remove granite tops and set aside.

To dismantle existing kitchen and take away.

To manufacture kitchen as per existing, re install, re paint as per original, re fit granite tops, sink etc.

At a cost of £23,500.00 plus vat @ 17.5% £4112.50

Total £27,612.50

Paid in full

Many thanks”

The authenticity of the document a copy of which was enclosed with the letter dated 14 August 2007 was called into question on behalf of Direct Line. In response to a request made by Cunningham Mrs. J.E. Brett, the wife of Daren Brett, provided a copy of an invoice rendered by Daren Brett Furniture Ltd. to Mr. Fox numbered 2007007. However, that invoice was dated 20 April 2007, was in the sum of £11,800 and related to work done in connection with two new-build properties in Upshire Road.

In a letter dated 4 September 2007 to Mr. Fox Mr. Martin Bates of Direct Line wrote as follows:-

“I refer to your claim with the above incident and advise that we are instructing Cunningham Lindsey to make a further visit to you to verify the works that have been completed and ensure that all is proceeding as it should be. It will involve taking a statement and verifying the documentation received to date.

Whilst the claim is ongoing, it must be clearly understood that if your policy is cancelled, renewed or amended in any way and/or further premium payments are accepted, then this is done strictly without prejudice to any rights we may have to avoid your policy or take other appropriate action, from the date of this claim or from another appropriate date.

This is a standard paragraph, and we reserve our position generally.”

Mr. Fox seems to have received that letter by no later than 6 September 2007, for on that day, at 10.35 a.m. he telephoned Mr. Theodore. Mr. Theodore made an attendance note of the call the accuracy of which was not in dispute. What Mr. Theodore wrote in his attendance note was:-

“Insured advised that he has rec[eive]d a letter from Insurers and now no longer wishes to pursue the o/s [i.e. outstanding] aspect of his claim – namely VAT element of the kitchen replacement. I advised that I would speak to Insurers about his request and come back to him with their comments.”

Mr. Theodore did make contact with Direct Line and then telephoned Mr. Fox at 14.45 hours on 6 September 2007. Mr. Theodore’s attendance note of that call read:-

“Advised that on Insurers instructions he should now write to them explaining why he no longer wishes to pursue the claim.”

In a letter dated 7 September 2007 to Direct Line, marked “Without Prejudice”, Mr. Fox wrote:-

“I am writing with regard to the invoice I submitted from Mr. Darren Brett in respect of the above insurance claim.

As you are probably aware, after my house was damaged by fire, I negotiated a financial settlement with Direct Line Plc that enabled me to oversee the reinstatement of works. The final settlement figure I had to accept allowed no margin for adjustment, being some £20k under the closest quotation. Yet I agreed to it, because I was keen to ensure the highest standards of refurbishment work and my family were back in our home A.S.A.P.

During these negotiations, I witnessed the lengthy claim processes and got a fair insight into just how protracted the matter was going to become. For instance, I was told at the outset that it would take at least two months before the refurbishment would even be approved!

Bearing in mind my personal situation, of having a family with three young children – 11 years, 15 months and 4 months respectively; and my running a business that relies on my hands-on, day-to-day presence, I was eager to resolve matters as soon as possible. Living out of cases in a hotel and subsequently moving into rented accommodation of questionable standard, was stressful to say the least. Family life was suffering and I was becoming concerned with the knock-on effects on my business.

Therefore, after my completing the preparation work, I gave Mr. Brett – a previously trusted supplier – the go ahead to start work on refitting the kitchen in early July. Bearing my comments regarding processing in mind, I also asked for him to raise an invoice for the agreed amount (£23,500 + vat) so that I could pass it on and avoid any delays.

This he eventually did (copy enc.) but after enduring six weeks of delays and a series of heated discussions over his reliability and constant requests for cash advances, I was forced to dispense with his services. To say that relations between us are strained would be putting it mildly, yet I have subsequently learnt that amongst others, Mr. Brett is currently undergoing investigations by the CSA and has problems enough of his own.

However, in order for my family to get back into our home, I commissioned the completion of the work, albeit at substantially increased cost to me, and yet I submitted Mr. Brett’s invoice.

In hindsight, I realise this was unwise, a mistake on my behalf.

In an attempt to resolve this situation swiftly and amicably, I would like to withdraw my claim for the final payment of £4,112.50, ask you to accept my sincere apologies and to consider the claim closed.

I look forward to your earliest response.”

Mr. Fox was subsequently visited by Miss Jeanette Foster, an employee of Cunningham. The visit took place on 24 October 2007 and lasted, it seems about four hours. In the course of it Miss Foster wrote down in manuscript a statement from Mr. Fox. The statement was written on a pre-printed statement form. Mr. Fox signed on the first page beneath printed words concerning the use which might be made of the statement. He also signed at the end of each page. The statement included this passage:-

“10)

In respect of the repairs to my kitchen I spoke with Daren Brett, the person who had built my kitchen originally. I asked Daren how much it would cost to put my kitchen back to the way it was. I told him it was an insurance job and that I would leave him to get on with it. Daren gave me a verbal quote of £23,500.00 and I submitted this figure with the tender. I didn’t get a written estimate from D. Brett and he didn’t visit my house because he already had the spec. from when he made my original kitchen. I told D. Brett that the whole kitchen had to be stripped out and replaced and this was agreed by the loss adjuster and surveyor.

11)

…

12)

…

13)

After enduring 6 weeks of delays and heated discussions with Mr. Brett I decided to dispense with his services. At that point he hadn’t done any work at my house but he had given me his invoice no. 2007007 which he had prepared at my request for the work he was going to be doing in my kitchen, work which was needed as a result of the fire.

14)

I had asked him for the invoice because I wanted to make sure I had it ready to send to my insurers for the final VAT payment.

15)

The invoice that I sent to Cunningham Lindsey is a photocopy that I made of the original invoice that D. Brett gave to me. I have shown Miss Foster the original invoice that I was given.

15)

[sic] I have also shown her an original invoice given to me by D. Brett in respect of work he did at Plots 1 & 2 Upshire Road, these being 2 new build properties that my company was building.

16)

Both invoices are numbered 2007007. I have no idea how this came about and the first time I noticed it was when Miss Foster pointed it out to me today.

17)

I was definitely given the 2 invoices I have referred to by D. Brett and had absolutely nothing to do with the preparation of either of them.

18)

The invoice for my kitchen was handed to me personally by Daren Brett.

19)

Having dispensed with D. Brett’s services in respect of my kitchen I then got the work done by my own company. Any joinery work that was done for the kitchen was done by G. Miller and I can get documentation detailing exactly what work was done in the kitchen.

20)

All the work was done by Fox Developments, my own company and any payments were either by means of cash or through the company.

21)

I cannot remember exactly how much I paid G. Miller for the making of replacement parts for the kitchen but think it was about £4 – 5000.

22)

I already had the invoice from D. Brett and even though he didn’t do the work I sent the invoice to Cunningham Lindsey. The reason this was done was because other works needed to be done as a result of the fire which were not originally priced for or included costwise in the settlement that had been agreed as per my letter 7/9/07.

23)

On hindsight I accept that I should never had [sic] sent the invoice from D. Brett in and that in doing so (with him not having done the work) I have submitted a false document.

24)

At the end of the day the work was carried out to my kitchen regardless of who it was done by. In my view because a cash settlement was agreed it was irrelevant who I chose to do the work as long as it was brought back to its original standard.

25)

I understand from Miss Foster that D. Brett has said the invoice I have submitted was not prepared by him and has been fraudulently prepared by me. This is absolutely not the case and I have proved this by showing Miss Foster two invoices from D. Brett both numbered 2007007. One of which is the original I was given by him for my kitchen and the other which is the original of the one in respect of the new build in Upshire Road.

26)

I accept that I should not have submitted the invoice from D. Brett as he had not carried out the work. However, the reason I did this was because the work was actually costing more than I was being paid by my insurers so in effect I was saving them money.

27)

I am well aware that the VAT was not paid by me and I shouldn’t have claimed that it was.

28)

I have been very foolish by my actions re this matter. I did try to retrieve the invoice for £4112.50, letter sent to Direct Line refers.”

Mr. Fox, who was called to give evidence at the trial of this action, told me that, of the passage which I have quoted, he was content with all save the reference in paragraph 23 to him having submitted a false document and the reference in paragraph 19 to him being able to obtain documentation concerning the work done by Mr. Miller.

In this action Direct Line sought to recover from Mr. Fox the total sum of £72,428.48 paid out in respect of Mr. Fox’s claim under the Policy in relation to the damage suffered in the fire on 8 April 2007. The ground of the claim was put simply on the basis that the effect of the submission of the document enclosed with Mr. Fox’s letter to Cunningham dated 14 August 2007 was that Mr. Fox contended, falsely, that Mr. Brett’s company had carried out repairs to the kitchen units in the House and that that company had been paid an amount including Value Added Tax amounting to £4,112.50 in respect of that work when in fact no amount, and in particular no amount in relation to Value Added Tax, had been paid. In those circumstances, it was submitted on behalf of Direct Line, the effect of Condition 6 of the Policy was that the Policy became void and all benefit under the Policy was forfeited.

Mr. John Collins, who appeared on behalf of Direct Line, reminded me of the well-established principle articulated by Willes J in his directions to the jury in Britton v. Royal Insurance Co. (1866) 4 F&F 905 at pages 908 – 909:-

“A fire insurance, …, is a contract of indemnity; that is, a contract to indemnify the assured against the consequences of a fire, provided that it is not wilful. Of course, if the assured set fire to his house, he could not recover. That is clear. But it is not less clear that, even supposing it were not wilful, yet as it is a contract of indemnity only, that is, a contract to recoup the insured the value of the property destroyed by fire, if the claim is fraudulent, it is defeated altogether. That is, suppose the insured made a claim for twice the amount insured and lost, thus seeking to put the office off its guard, and in the result to recover more than he is entitled to, that would be a wilful fraud, and the consequence is that he could not recover anything. This is a defence quite different from that of wilful arson. It gives the go-bye to the origin of the fire, and it amounts to this – that the assured took advantage of the fire to make a fraudulent claim. The law upon such a case is in accordance with justice, and also with sound policy. The law is, that a person who has made such a fraudulent claim could not be permitted to recover at all. The contract of insurance is one of perfect good faith on both sides, and it is most important that such good faith should be maintained. It is the common practice to insert in fire-policies conditions that they shall be void in the event of a fraudulent claim, and there was such a condition in the present case. Such a condition is only in accordance with legal principle and sound policy. It would be most dangerous to permit parties to practise such frauds, and then, notwithstanding their falsehood and fraud, to recover the real value of the goods consumed. And if there is wilful falsehood and fraud in the claim, the insured forfeits all claim whatever upon the policy.”

That principle, often mentioned in later cases, and not confined to fire policies, was not in dispute before me.

Mr. Edward Brown, who appeared on behalf of Mr. Fox, advanced three lines of defence, each in fact alternative to, and inconsistent with, the others, on behalf of Mr. Fox.

The first line of defence was that, on the facts of this case, Mr. Fox had not sought to advance a fraudulent claim under the Policy, but had rather sought to use a misleading document to satisfy a condition precedent to payment of the sum of £4,112.50 under the Written Agreement. Mr. Brown submitted that the Written Agreement was not a contract to which the principles of utmost good faith applied, but in the nature of an agreement compromising the obligations of Direct Line under the Policy.

Mr. Brown reminded me that in Miles v. New Zealand Alford Estate Company (1885) 32 Ch D 266 at page 291 Bowen LJ had considered the issue of compromise and the consideration which the parties to a compromise gave for the contract which they made. He said:-

“It seems to me that if an intending litigant bona fide forbears a right to litigate a question of law or fact which is not vexatious or frivolous to litigate, he does give up something of value. It is a mistake to suppose it is not an advantage, which a suitor is capable of appreciating, to be able to litigate his claim, even if he turns out to be wrong. It seems to me it is equally a mistake to suppose that it is not sometimes a disadvantage to a man to have to defend an action even if in the end he succeeds in his defence; and I think therefore that the reality of the claim which is given up must be measured, not by the state of the law as it is ultimately discovered to be, but by the state of knowledge of the person who at the time has to judge and make the concession. Otherwise you would have to try the whole cause to know if the man had a right to compromise it, and with regard to questions of law it is obvious you could never safely compromise a question of law at all. ”

In McCallum v. Country Residences Ltd. [1965] 1 WLR 657 Lord Denning MR observed, as Mr. Brown emphasised, at page 660 that:-

“When an action is compromised by an agreement to pay a sum in satisfaction, it gives rise to a new cause of action.”

That, I think, must be right. An agreement compromising a contractual claim, depending upon its terms, either discharges or modifies the contract in relation to which the claim is said to have arisen.

Moreover, Mr. Brown drew to my attention that in Baghbadrani v. Commercial Union Assurance Co. Plc [2000] Lloyd’s Rep. IR 94 at page 118. His Honour Judge Gibbs Q.C., sitting as a judge of this court, had expressed the view that a contract compromising a claim under an insurance policy, even though relating to an insurance claim, was not a contract of the utmost good faith. I respectfully agree. Mr. Collins did not positively submit the contrary, although he did stress that the view of Judge Gibbs was obiter, his decision being that in fact no compromise agreement had been made.

Mr. Collins’s answer to the point advanced by Mr. Brown was that the Written Agreement was not a contract at all, but a mechanism of quantification of the sums payable under the Policy. He did not submit that, if a contract, the Written Agreement should be interpreted as incorporating the terms and conditions of the Policy, although the Written Agreement was expressed to be subject to those terms and conditions.

In support of his submission Mr. Collins relied upon some observations in Magee v. Pennine Insurance Co. Ltd. [1969] 2 QB 507. In his judgment in that case Fenton Atkinson LJ said, at page 517:-

“Before hearing my Lords’ judgments I had been inclined to the view that the letter of May 12 was not an offer to enter into a contract independent of the policy, but merely an offer of quantification of a claim made under a policy, both parties at that stage believing that there was a valid policy under which the insurers could have no answer to the claim.”

Mr. Collins submitted that the Written Agreement was just such a quantification of a claim as Fenton Atkinson LJ contemplated. He also drew attention to the comments of Lord Denning at page 514:-

“But the judge upheld the claim on the letter of May 12. He said it was a binding contract of compromise. I am not so sure about this. It might be said to be a mere quantification of the account which should be paid in case the insurance company were liable: and that it did not preclude them from afterwards contesting liability. But on the whole, I do not think we should regard it as a mere quantification. The letter contains the important words: “in settlement of your claim,” which import that it is to be settled without further controversy. In short, it bears the stamp of an agreement of compromise. The consideration for it was the ascertainment of a sum which was previously unascertained.”

In my judgment, the observations of Fenton Atkinson LJ and Lord Denning do not support the submission of Mr. Collins. While, no doubt, if an insurance company were to assess the value of a claim, state the value of that assessment in a document, and pay the sum so assessed, the document in which the assessment was stated might be only a quantification of the claim and not an offer, capable of acceptance, of an amount in settlement of the claim, that was not what the Court of Appeal decided that the letter dated 12 May in fact was in Magee v. Pennine Insurance Co. Ltd. The Court of Appeal concluded that the letter was actually an offer capable of acceptance, and Lord Denning, at least, was influenced in coming to that conclusion by the use of the words, “in settlement of your claim”, in the letter.

As it seems to me, it is plain on the face of the Written Agreement that it was, when initially written and signed by Mr. Fox, an offer on his part to Direct Line to accept the sums set out in it in full and final satisfaction of his claim under the Policy in respect of damage to buildings caused by the fire on 8 April 2007. That offer was accepted by Direct Line, which paid the agreed interim sum of £42,412.00. The payment of the agreed balance of £4,112.50 was subject to a condition precedent, namely the provision of an invoice, or invoices, demonstrating that Value Added Tax in the sum of £4,112.50 had been paid to Daren Brett Furniture Ltd. Mr. Fox never satisfied that condition precedent and so the balance of the agreed sum was never due. He represented to Direct Line, through his letter dated 14 August 2007 to its agent, Mr. Theodore of Cunningham and the enclosure thereto, that he had met that condition precedent. The writing of that letter and the sending of the enclosure was, I think, dishonest, and made with the intention of deceiving Direct Line into paying the balance of £4,112.50. Mr. Fox knew perfectly well when he sent the letter and the enclosure, as he accepted in evidence before me, that Mr. Brett had not done any work in the kitchen of the House, he had not been paid, and no Value Added Tax had been paid in relation to the repair or replacement of the kitchen units at the House. Had Mr. Fox written the letter dated 14 August 2007, and sent the enclosure with it, in support of a claim for payment under the Policy, I accept, and Mr. Brown did not dispute, that the consequences explained by Willes J in his directions to the jury in Britton v. Royal Insurance Co. would have followed. However, it is clear, as it seems to me, that the letter dated 14 August 2007, and the enclosure to it, was not sent in order to seek to establish an element of claim under the Policy, but in order to assert that the condition precedent in the Written Agreement to the payment of the balance of £4,112.50 had been satisfied. Consequently, the rule enunciated by Willes J was not engaged and the dishonest attempt of Mr. Fox to assert that the condition precedent had been satisfied does not have the result that he has to repay to Direct Line all of the sums paid to him in respect of his claims for indemnity against the losses sustained by him as a result of the fire at the House on 8 April 2007. This action therefore fails.

Mr. Brown’s second line of defence was only relevant if I decided either that the rule of law enunciated by Willes J applied to a contract of compromise of a claim under an insurance policy or that the Written Agreement was not a contract of compromise, but the sort of quantification for which Mr. Collins contended. This second line of defence could conveniently be described as “retraction”. There seems to be no authority to support this sort of defence. Its origin appears to be found in an article written by Professor Rhidian Thomas of University of Wales Swansea. The article was entitled, “Fraudulent insurance claims: definition, consequences and limitations”. It was published at [2006] LMCLQ 485. In the course of his article Professor Thomas wrote,

“The question of retraction raises a serious question of legal policy. The counterpart to the declared policy of discouraging fraudulent claims must be the encouragement of honest claims. There is also a distinct moral difference between the position of a fraudulent claimant and a fraudulent claimant who retracts before the claim is considered by the insurer or settlement, particularly where the retraction manifests repentance rather than strategic advantage (which might be the interpretation placed on the change of mind by the insured in The Michael [1979] 2 Lloyd’s Rep 1). It is suggested that the law in its development should recognize this difference and encourage honesty by recognizing the effectiveness of a genuine retraction. This could, for example, be achieved by continuing to recognize the validity of the honest element of a claim. However, it has to be admitted that as yet there is no hint of any such concession in the developing law, the general tone of which may even indicate that the suggested policy has an unlikely prospect of acceptance.”

Mr. Collins contended that the possibility of a defence of retraction was precluded by the observations of Mance LJ, as he then was, in Agapitos v. Agnew [2003] QB 556 at paragraph 37 of his judgment, on pages 571 – 572:-

“What is the position where there is use of a fraudulent device designed to promote a claim? I would see no reason for requiring proof of actual inducement here, any more than there is in the context of a fraudulent claim for non-existent or exaggerated loss. As to any further requirement of “materiality”, if one were to adopt in this context the test identified in the Royal Boskalis case [1997] LRLR 523 and The Mercandian Continent [2001] 2 Lloyd’s Rep 563, then, as I have said, the effect is, in most cases, tantamount to saying that the use of a fraudulent device carries no sanction. It is irrelevant (unless it succeeds, which only the insured will then know). On the basis (which the cases show and I would endorse) that the policy behind the fraudulent claim rule remains as powerful today as ever, there is, in my view, force in Mr. Popplewell’s submission that it either applies, or should be matched by an equivalent rule, in the case of use of a fraudulent device to promote a claim – even though at the end of a trial it may be shown that the claim was all along in other respects valid. The fraud must of course be directly related to and intended to promote the claim (unlike the deceit in The Mercandian Continent). Whenever that is so, the usual reason for the use of the fraudulent device will have been concern by the insured about prospects of success and a desire to improve them by presenting the claim on a false factual basis. If one does use in this context the language of materiality, what is material at the claims stage depends on the facts then known and the strengths and weaknesses of the case as they may then appear. It seems irrelevant to measure materiality against what may be known at some future date, after a trial. The object of a lie is to deceive. The deceit may never be discovered. The case may then be fought on a false premise, or the lie may lead to a favourable settlement before trial. Does the fact that the lie happens to be detected or unravelled before a settlement or during a trial make it immaterial at the time when it was told? In my opinion, not. Materiality should take into account the different appreciation of the prospects, which a lie is usually intended to induce on insurers’ side, and the different understanding of the facts which it is intended to induce on the part of a judge at trial.”

The judgment of Mance LJ was the leading judgment in that case. Mr. Collins relied in particular on the reference to the issue whether the detection or unravelling of a lie made it immaterial at the time it was told, and Mance LJ’s answer to that issue, in support of his submission. Mr. Brown submitted that in fact the comments of Mance LJ did not preclude the existence of a defence of retraction. Semantically that is perhaps so. However, the consideration by the Judicial Committee of the Privy Council of the issue of the relevance of an admission of the truth on the part of an insured who had previously misled an insurer in Stemson v. AMP General Insurance (NZ) Ltd. [2006] UKPC 30, a decision upon which Mr. Collins also relied, seems to me to provide little encouragement for the view that retraction can be to the benefit of an insured after he has advanced a fraudulent element of claim. The material part of the decision of the Judicial Committee was contained in a concurring judgment of Lord Mance. He said:-

“34.

Mr. Witten-Hannah submits nevertheless that the respondent can have no basis for denying liability, in circumstances where, as the judge found, the appellant admitted the true position on 3^rd December 1992, four months before the respondent rejected the insurance claim in April 1993. He submits that the respondent cannot have relied on the false statement in that rejection. At one point, he also submitted that the case should be seen as one where the appellant had himself corrected the false statement (in effect voluntarily), rather than one where the lie was detected or unravelled by insurers. That submission, even if it could have any legal relevance, does not marry with the judge’s findings in paragraph 47 of the judgment. The correction was only made when and because it became apparent that the respondent could point to the previous statement as a ground for saying that Mr. Byrne had been given false information.

35.

Mr. Witten-Hannah did not take any issue with the statements of legal principle advanced in the judgment given by Mance LJ in Agapitos v. Agnew [2003] QB 556, including those in paragraph 37 relating to the use of fraudulent devices to promote a claim. In that regard, he specifically accepted the following opinion expressed in that paragraph:

“Does the fact that the lie happens to be detected or unravelled before a settlement or during a trial make it immaterial at the time when it was told? In my opinion, not.”

36.

On that basis, the Board has no hesitation in upholding the judge’s conclusion that, quite apart from any question of arson, the respondent was entitled to reject the appellant’s insurance claim (as it did) on the ground that the appellant had sought to promote it in May 1992 by lying to the respondent about the position, and his state of mind, regarding any attempt to sell the house prior to the fire. The materiality of such matters to the respondent’s investigation and evaluation of this insurance claim is not challenged, and is, as the judge indicated, obvious.”

Mr. Brown submitted that in that passage also Lord Mance had not precluded the possibility of retraction being relevant to the consequences of an attempt to advance a fraudulent element of claim. However, in my judgment the whole tenor of the passage quoted points, at least, in the direction of retraction being immaterial.

Mr. Collins relied on what he contended were other contra-indications in decided cases. One such case, Axa General Insurance Ltd. v. Gottlieb [2005] 1 All ER (Comm) 445, was again a case in which the only substantive judgment of the Court of Appeal was that of Mance LJ. The material passage starts towards the end of paragraph 26 of his judgment, at page 456 of the report:-

“So the effect of a fraudulent claim is retrospectively to remove or bar the insured’s pre-existing cause of action: see [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 [23](i), 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 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.

27.

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] Lloyd’s Rep IR 209 at 213 and Buxton LJ in Direct Line Insurance plc 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 Channel Islands Ltd. v. McHugh [1997] LRLR 94 at 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 [ie 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.’

28.

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, ie to any part that remains unpaid at the date of the 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. …

31.

The rule relating to fraudulent insurance claims is accordingly a special common law rule. We have to set its limits without 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 [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.

32.

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.”

The other case upon which Mr. Collins particularly relied was the decision of the Court of Appeal in Direct Line Insurance plc v. Khan [2002] 1 Lloyd’s Rep 364. That case was concerned, amongst other things, with the relevance to the applicability of the rule of law enunciated by Willes J in Britton v. Royal Insurance Co. of the provisions of The Unfair Terms in Consumer Contracts Regulations 1999 (“the 1999 Regulations”). The leading judgment was that of Arden LJ. She considered the relevance of the 1999 Regulations in this passage:-

“36.

As I read these Regulations they do not apply to a situation where a contract is affected by a rule of law, even though the contract is made with a consumer and is otherwise within the purview of these Regulations. Such a term could not be described as one which has been “drafted in advance”. Moreover, I would find it a startling proposition if any rule of law could be reviewed under these Regulations. It seems to me to be well outside the purpose and spirit of the Regulations and might produce some surprising results.

37.

Moreover, so far as any unfairness is concerned it would have to take into account that the rule of law set out in the Galloway case is in furtherance of a policy of discouraging fraudulent claims.

38.

Mr. Nicol has submitted that the law is effectively penal, but I would go back to what Lord Woolf said in the Galloway case that the policy of the law is to discourage fraudulent claims. Millett LJ was of the same view. He said this:

The making of dishonest insurance claims has become all too common. There seems to be a widespread belief that insurance companies are fair game, and the defrauding them is not morally reprehensible. The rule which we are asked to enforce today may appear to some to be harsh, but it is in my opinion a necessary and salutary rule which deserves to be better known by the public. I for my part would be most unwilling to dilute it in any way.

39.

So it is not simply a question of the rule preventing recovery of a benefit to which the policyholder was not entitled. The rule is also directed to deterrence and to discouraging false claims. Contrary to Mr. Nicol’s submission, in my judgment this is a proper objective of the civil law in an appropriate case and this is one such case. A civil law sanction, particularly a financial one, made in an appropriate case may be more effective than a criminal sanction or other sanction.”

The whole tenor of the authorities to which my attention has been drawn, the most material passages in which I have quoted, in my judgment leads to the conclusion that it is no part of English law that the consequences of the rule concerning fraudulent claims can be mitigated in the case of retraction.

However, if, contrary to my view, retraction could be material in any case, such a case, on principle, could only be one in which the fraudulent insured retracted voluntarily, and at a point at which the insurer had not raised any suggestion that he was suspicious about the claim or the relevant element in it. Mr. Brown submitted that retraction should be possible at any stage prior to the insurer declining the relevant claim. On any view that must, I think, be too wide a formulation. If it were the true principle, it would set a premium on a fraudulent insured guessing how long it would take the insurer to assemble evidence which would justify declining cover, so as to be able to retract, if necessary, before the insurer had assembled the necessary evidence.

The evidence put before me in the present case demonstrated clearly, as it seemed to me, that, having sought, fraudulently, to obtain the payment of £4,112.50, Mr. Fox only changed his mind once he was made aware, by the letter dated 4 September 2007 written by Mr. Bates, that Direct Line was suspicious about the claim for that sum.

In his witness statement prepared for the purposes of this action Mr. Fox said this about the circumstances in which he changed his mind about claiming the £4,112.50:-

“32.

After the works completion I decided to go away with my family just to get away from it all. During the holiday I realised that I should not have submitted the invoice. With a young family living in unacceptable accommodation my judgment was clouded and although I know now, with hindsight, that this was the wrong thing to do, I didn’t think much more of it as I had incurred considerably more than I would have paid Mr. Daren Brett so I simply bore the rest of the work personally. I had intended to speak with Mr. Gilbert Theodore when I got home.

33.

On my return I received a letter from Direct Line [Mr. Bates’s letter of 4 September 2007] and immediately wrote to withdraw the invoice … after a couple of discussions with Mr. Gilbert Theodore.”

Mr. Fox was cross-examined during the trial. I was not impressed by him as a witness. I do not accept that he was not thinking clearly when he wrote his letter dated 14 August 2007 and enclosed with it the invoice ostensibly from Mr. Brett. As he accepted in cross-examination, by the date of that letter he was back living with his family in the House, and no longer in the unacceptable temporary accommodation about which he spoke. He also accepted in cross-examination that in fact he spoke to Mr. Theodore whilst he was on holiday in the Lake District, but he did not then recant.

Mr. Collins urged me in his closing submissions to find that Mr. Fox in fact forged the invoice of which a copy was sent to Mr. Theodore under cover of Mr. Fox’s letter dated 14 August 2007. It is not actually necessary to reach any conclusion on that issue, for, even assuming that the invoice was in fact produced by Mr. Brett, on Mr. Fox’s own case it was used for an illegitimate purpose. I strongly suspect that Mr. Fox did indeed forge the document in question. I can think of no reason for an invoice to be produced in the context of repairs to the fire damage to the kitchen of the House which unaccountably had the same invoice number as a genuine invoice rendered by Mr. Brett’s company to Mr. Fox. Although Mr. Brett was called to give evidence at the trial, he told me that it had in fact been his wife who had dealt with the production of invoices and he was not able to comment specifically on the invoice of which a copy was sent by Mr. Fox to Mr. Theodore. That notwithstanding, as it seemed to me, there was no obvious reason for Mr. or Mrs. Brett to produce at any stage in advance of Mr. Brett’s company actually undertaking work to repair the kitchen units in the House, and being paid, an invoice acknowledging payment. However, as the issue of forgery is not actually material to any issue which I have to decide, I go no further than to express my strong suspicions on the question and do not formally make any finding of fact about it.

In the result, had I been persuaded that in principle retraction was a possible answer to the application of the rule of law concerning fraudulent insurance claims, I should have found on the facts that Mr. Fox was not able to demonstrate retraction unprompted and sufficiently early in time to be able to benefit.

The third basis of defence advanced by Mr. Brown was reliance on the provisions of the 1999 Regulations. He sought to distinguish the decision of the Court of Appeal in Direct Line Insurance plc v. Khan on the grounds that in that case there had been no express term of the contract of insurance like Condition 6, Direct Line relying in that case only on the common law rule. Mr. Brown accepted that that ground of distinction was of no avail if Condition 6 simply mirrored the common law rule. He contended that Condition 6 did not simply mirror the common law rule because, on proper construction, the effect of it was not simply to disentitle Mr. Fox to indemnity in respect of losses sustained as a result of the fire on 8 April 2007, but potentially it exposed him to the obligation to repay amounts paid by Direct Line in respect of previous legitimate claims during the currency of the Policy. There had been no such claims, but Mr. Brown submitted that it was the potential effect of Condition 6, as he contended it should be construed, which was relevant in deciding whether advantage could be taken of the 1999 Regulations.

Mr. Brown’s submissions in relation to the applicability of the 1999 Regulations depended, first, upon his construction of Condition 6 being correct. I am satisfied that his submission is not well-founded. In my judgment, the consequence of making a fraudulent claim or a partly fraudulent claim for which Condition 6 provided was that “the policy shall become void”, that is to say, is prospectively void, not that the Policy fell to be treated as void ab initio. Mr. Brown very properly drew to my attention that in Agapitos v. Agnew at paragraph 45 Mance LJ had expressed the view that the common law rule did not have the effect of rendering a contract of insurance void ab initio. The words in Condition 6 which follow those which I have just quoted, “and all benefit under this policy will be forfeited” in my judgment fall to be construed in the light of the proper construction of the previous words, and so as applying only to benefits which would have been due under the Policy in respect of the claim made fraudulently, or partly fraudulently, or thereafter, but for the avoidance of the Policy. Those latter words have no effect, as it seems to me, on any earlier claims properly made under the Policy.

In those circumstances the third line of defence fails.

I have to say that, even if I had been persuaded that in principle Mr. Fox could rely on the provisions of the 1999 Regulations, in the light of the observations of Arden LJ in Direct Line Insurance plc v. Khan, it is far from clear that a consideration in the context of the 1999 Regulations of the issue of unfairness would have resulted in the conclusion that Mr. Fox should succeed on that question.

In the result this action fails and is dismissed.