DIRECT LINE INSURANCE v KHAN

An insured cannot recover on an insurance claim where a sufficiently substantial part of that claim was advanced fraudulently. The invalidity extends to the whole claim arising from the insured event, and the insurer may recover payments already made. It is unnecessary to establish that the policy was avoided from its inception.

A principal is bound by a fraudulent claim made by an agent within the scope of the agent’s authority. The principal’s ignorance of the fraud does not preserve the claim. A rule of law governing fraudulent claims is not a contractual term reviewable under the Unfair Terms in Consumer Contracts Regulations 1994.

A husband and wife were named as policyholders under household insurance covering their home and contents. Following a fire, the husband submitted claims on behalf of both spouses. He dishonestly obtained reimbursement for rent by concealing his ownership of the alternative accommodation and producing forged documents.

Jackson J granted the insurer summary judgment under CPR Part 24 for the recovery of all payments made in respect of the fire. The wife appealed alone. For the appeal, the court assumed without deciding that the policy separately insured her interest and that she was unaware of the fraud.

The central issues were whether her claim was nevertheless defeated because her husband acted as her agent, and whether the rule governing fraudulent insurance claims was reviewable under the Unfair Terms in Consumer Contracts Regulations 1994.

1. Disposition. The appeal was dismissed unanimously. Arden LJ delivered the leading judgment. Buxton LJ and the Vice-Chancellor agreed that the husband’s fraud defeated the wife’s entire claim, even on the assumed basis that her interest was separately insured and she did not know of the fraud.

2. Fraudulent insurance claims. The court was bound by Galloway v Guardian Royal Exchange UK Ltd [1999] Lloyds Reports 209. Where any sufficiently substantial part of a claim arising from an insured event is fraudulent, the insured cannot recover any part of that claim. Payments already made under it are recoverable. The rule serves the legitimate civil-law objective of deterring dishonest insurance claims.

3. Avoidance from inception unnecessary. It was unnecessary to decide whether the fraud avoided the insurance contract ab initio. Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] 2 WLR 170 showed that a distinction may exist between defeating the relevant claim and avoiding the entire policy retrospectively. Nothing in that decision detracted from the binding rule in Galloway. The insurer needed to establish only that the claim was invalid and that payments made under it were recoverable.

4. Agency. The husband submitted the only insurance claim, did so partly on the wife’s behalf and acted within the scope of his authority. A principal is bound by an agent’s fraudulent acts within the agency unless the fraud falls outside its scope. The wife could not establish that qualification. As against the insurer, the claim was therefore her act, irrespective of whether the policy was joint or composite and irrespective of the spouses’ beneficial interests in the property.

5. Consumer-contract regulations. Regulation 3 of the Unfair Terms in Consumer Contracts Regulations 1994 concerned contractual terms which had not been individually negotiated. The fraudulent-claims rule was a rule of law, not a term drafted in advance. It consequently fell outside the Regulations. In any event, an assessment of unfairness would have to recognise the rule’s deterrent purpose.

6. The order for repayment was upheld. The wife was ordered to pay the costs, subject to detailed assessment. Permission to appeal to the House of Lords was refused.

1. Court of Appeal (Civil Division): The wife’s appeal was dismissed unanimously. The summary judgment and repayment order were upheld. Permission to appeal to the House of Lords was refused.

2. Court of Appeal permission proceedings: Simon Brown LJ and Mance LJ granted the wife permission to appeal after an oral renewal. They treated it as arguable that the policy separately insured her interest and that summary judgment might therefore have been inappropriate.

3. Queen’s Bench Division: Jackson J granted the insurer summary judgment against both spouses under CPR Part 24 for £69,045.60 plus interest. He held that the fraudulent rent claim tainted all claims arising from the fire.