GALLOWAY v GUARDIAN ROYAL EXCHANGE (UK) LTD

An insured owes a continuing duty of good faith when making a claim. A materially fraudulent part of a claim taints the whole claim and avoids the policy, even without an express fraudulent-claims clause.

Materiality is not determined by comparing the fraudulent amount with the genuine loss. The court should consider the fraudulent claim in isolation and ask whether its seriousness justifies treating it as a breach of the duty of good faith. Only an immaterial or de minimis fraud escapes that consequence.

A proposal-form question about convictions for fraud includes an offence for which fraud is the critical ingredient, although the offence's formal title does not contain the word “fraud”.

The insured claimed under a home contents policy following a burglary. His claim included £2,000 for a computer which he had not lost, supported by a false receipt. The balance of approximately £16,134 was assumed to represent genuine losses.

The Central London County Court determined two preliminary issues against the insured and dismissed his claim. It held that the fraudulent part contaminated the whole claim and that his earlier conviction for obtaining property by deception fell within a proposal-form question concerning convictions for fraud. The court also declared the policy void ab initio.

The insured appealed, arguing that the absence of an express fraudulent-claims clause preserved the genuine part of the claim, that a fraud representing about 10 per cent of the total was insufficient, and that the proposal-form question did not encompass obtaining property by deception.

1. Appeal dismissed unanimously. Lord Woolf MR held that an insurance contract remains one of good faith after its formation. The insured must act in good faith when presenting a claim because the relevant facts will normally be within the insured's knowledge and the insurer depends upon the insured's honesty.

2. A materially fraudulent claim contaminates the whole claim and prevents recovery of its genuine part. This consequence follows from legal principle and public policy even where the policy contains no express fraudulent-claims clause. The rule provides a necessary deterrent against fraudulent insurance claims.

3. The expressions “substantially fraudulent” and “fraudulent to a substantial degree” exclude immaterial or de minimis fraud. Lord Woolf MR held that the £2,000 fabricated claim was substantial and tainted the whole claim, notwithstanding that it represented about 10 per cent of the total.

4. Millett LJ, with whom Mummery LJ agreed, rejected a test based on the proportion which the fraudulent amount bears to the entire claim. Such a test would permit a larger fraud whenever the genuine loss was larger. The fraudulent claim should instead be considered as though it stood alone. The question is whether its making was sufficiently serious to constitute a breach of the insured's duty of good faith and avoid the policy. A deliberate claim for goods worth £2,000 which had not been lost plainly met that standard.

5. On the second preliminary issue, Lord Woolf MR accepted that ambiguity in a policy or insurer-prepared proposal form is construed against the insurer. He also accepted that expressio unius est exclusio alterius may apply in an appropriate case. Those principles did not assist the insured because “fraud” describes an ingredient of offences rather than a separately named offence. Obtaining property by deception contrary to Theft Act 1968, section 15(1), was within the question because fraud was its critical ingredient.

1. Court of Appeal (Civil Division): The insured's appeal was dismissed unanimously with costs. The order below was left undisturbed.
2. Central London County Court: His Honour Judge Butter answered both preliminary issues in the insurer's favour, dismissed the insured's claim and declared the policy void ab initio.