Direct Line Insurance Plc v Fox

The fraudulent-claims rule forfeits an insurance claim where dishonesty is used to advance a claim under the policy. It does not apply where the dishonest representation is made only to satisfy a condition precedent in a separate compromise agreement settling the claim. A compromise of an insurance claim is not, merely because it concerns insurance, a contract of utmost good faith. English law provides no general defence of retraction after a fraudulent claim has been advanced. An insurance policy clause providing that the policy becomes void on a fraudulent claim operates prospectively, and forfeiture concerns the fraudulent claim and subsequent benefits, not earlier claims properly made.

Direct Line Insurance plc insured the defendant’s house and contents against fire damage. After a kitchen fire, the parties agreed a buildings claim settlement of £46,524.50, with the final £4,112.50 payable on production of invoices showing payment of VAT on replacement kitchen work.

The defendant submitted an invoice which did not represent work or VAT actually paid, then withdrew the outstanding claim after Direct Line expressed suspicion. Direct Line relied on the policy’s fraudulent-claims condition and sought repayment of all sums paid under the policy. The central issues were whether the representation advanced a fraudulent policy claim, whether retraction was available, and whether the policy condition was unfair or operated retrospectively.

1. Claim dismissed. The defendant’s dishonest submission was made to assert satisfaction of a condition precedent in the Written Agreement, not to establish or increase a claim under the insurance policy. The rule stated in Britton v Royal Insurance Co. (1866) 4 F&F 905 was therefore not engaged. Direct Line could not recover the sums previously paid in respect of the fire damage.
2. The Written Agreement was a binding compromise. It was an offer to accept specified sums in full and final satisfaction of the buildings claim, accepted by Direct Line when it paid the interim sum. The final payment was conditional on evidence that the specified VAT had been paid. The agreement was not merely a quantification mechanism. A compromise agreement relating to an insurance claim was not a contract of utmost good faith.
3. There was no recognised defence of retraction to the fraudulent-claims rule. The authorities, including Agapitos v Agnew [2003] QB 556, Stemson v AMP General Insurance (NZ) Ltd. [2006] UKPC 30 and Axa General Insurance Ltd. v Gottlieb [2005] 1 All ER (Comm) 445, pointed against such a defence. If retraction could ever matter, it would have to be voluntary and sufficiently early, before the insurer had raised suspicion. The defendant’s withdrawal followed Direct Line’s letter expressing suspicion and was too late.
4. Condition 6 made the policy prospectively void, rather than void ab initio. The words forfeiting all benefit applied to benefits arising from the fraudulent or partly fraudulent claim, and thereafter, but not to earlier claims properly made.
5. The defence based on the Unfair Terms in Consumer Contracts Regulations 1999 failed. The condition reflected the common-law rule concerning fraudulent claims. In any event, the court considered it doubtful that an unfairness assessment would have favoured the defendant.