Insurers usually are confident of recovering their outlay if they can prove that an insured has fraudulently submitted an invoice for costs that have not been incurred. Imagine the surprise in Direct Line Insurance v Fox when insurers failed to make a recovery.
Mr Fox made a claim under his household policy following a fire in his kitchen. Insurers accepted the claim. It was agreed that the insured would arrange the repairs himself as he had various contacts that would allow him to beat the lowest tender presented to loss adjusters.
This was recorded in a written agreement which included the following terms: “. . . 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 . . . I understand that my insurers will make an interim payment of £42,414 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.”
Mr Fox was paid the interim payment and presented an invoice on the printed letterhead of Darren Brett Furniture that showed kitchen costs of £23,500 and VAT at £4,112.50.
Direct Line queried the authenticity of the invoice and Mr Fox dropped the VAT claim.
He later explained that he had not used Mr Brett’s company but had obtained the invoice in advance. He had submitted it as the repairs were costing more than estimated.
Insurers sought to recover more than £72,000 and relied on the express fraud condition in the policy. But they failed on the basis that the written settlement agreement, as a contract compromising a claim under an insurance policy, was not a contract to which the principles of utmost good faith applied.
It appears from the judgment that, although insurers unsuccessfully tried to argue that the agreement was not a contract but merely a mechanism of quantification, they did not seek to argue that the agreement should be interpreted as incorporating the terms and conditions of the policy.
Alternative defences of retraction (that the insured had subsequently withdrawn the fraudulent element) and that the fraud condition was in breach of the Unfair Terms in Consumer Contracts Regulation 1999 were both unsuccessful.
It is clear that if the insured had simply provided the invoice in support of a claim for payment under the policy, he would have forfeited the whole claim. This decision highlights that insurers must be careful in settling claims to preserve their rights in relation to fraud.
Wendy Hopkins is a partner in the Policy Coverage Unit at national commercial law firm Beachcroft LLP.