Sharon's Bakery (Europe) Ltd v Axa Insurance UK Plc & Anor

In insurance, moral hazard may constitute a material fact where the insured’s dishonesty increases the likelihood of dishonest reporting or presentation of a claim. Materiality is assessed objectively by reference to the prudent underwriter, with proportionality having regard to the nature of the risk and the conduct in question. A dishonest use or production of a false commercial document may therefore require disclosure and may induce avoidance. Separately, an insured forfeits all benefit under a policy where it uses a fraudulent means or device to improve its prospects of obtaining a settlement. The insurer must show a dishonest lie connected with the claim and an objectively significant tendency to improve the prospects of recovery.

The claimant sought an indemnity from two insurers for loss caused by an accidental fire at its wholesale bakery. The insurers avoided the policy and defended the claim on two grounds: material non-disclosure of dishonesty connected with a financial leasing transaction, and the use of a false invoice as a fraudulent means or device in presenting the insurance claim.

The court examined whether the claimant knowingly used a false invoice purporting to evidence the sale and payment for bakery equipment, whether that conduct was material to prudent underwriters and induced the insurance, and whether the same document was dishonestly used to support the claim.

1. Claim dismissed. The claimant knowingly submitted a false invoice to Lombard as evidence of a genuine chain of supply, rather than as a valuation. The invoice purported to record a fictitious sale and payment for equipment. The claimant’s directors knew that it was false.

2. Materiality is assessed objectively by asking what would influence the judgment of the prudent underwriter. The relevant risk is not confined to the possibility of physical loss. It includes moral hazard, namely circumstances giving rise to concern that loss or damage may dishonestly be reported or presented. Proportionality may be relevant, having regard to the risk and the moral hazard under consideration.

3. The dishonest use of the false invoice in dealings with Lombard was material. The evidence established that the relevant underwriter would have declined the risk had he known of dishonesty with a potential funder. Inducement was therefore proved, and the insurers were entitled to avoid the policy for non-disclosure.

4. The court applied the principles in Agapitos v Agnew. A fraudulent means or device requires a lie used by the insured to improve or embellish the facts surrounding the claim. The lie must, if believed, have tended objectively to produce a not insignificant improvement in the insured’s prospects of obtaining a settlement.

5. The false invoice was supplied to the loss assessor as evidence of a purchase and was forwarded to the insurers in response to a request for supporting invoices and an audit trail confirming ownership. It embellished the factual basis of the claim and, if believed, would have materially improved the prospects of settlement. The policy condition therefore operated, and all benefit under the policy was forfeited.

6. The court made favourable findings on quantum, including the value of the equipment, but those findings did not affect the result because liability failed on both defences.