It's an old legal maxim that those who come to equity must come with clean hands. The same is true of insurance claimants, says Mark Aitken. Any dishonest behaviour will jeopardise their entire compensation
Policyholders that are tempted to bolster honest claims by adding bogus ones have recently received a sharp reminder from the High Court that they risk losing everything if they are caught out.
In Direct Line Insurance vs Khan & Another (2000), the fraudulent part of a larger, genuine claim “tainted” the whole claim behaviour.
In July 1999, the defendants, a husband and wife, obtained home insurance from the claimant insurers. On January 8, 2000, their home was damaged by fire. They claimed under the policy and, by August 2000, the insurers had paid them £69,000, including £8,000 in respect of rent payments for alternative accommodation.
The insurers then discovered that the rented property had actually been purchased by the husband on January 21, 2000. His claim for the £8,000 was based on a fabricated rental agreement and a forged receipt for one month's rent and one month's deposit.
The insurer sought summary judgment. It alleged that they were not obliged to compensate the defendants and that all the money, not just the £8,000, should be returned pursuant to the Court of Appeal's decision Galloway vs GRE (UK) (1997).
No right to compensation?
In Galloway, a claimant who had sought £2,000 for a non-existent computer, forfeited all of his £16,000 claim, despite the fact that the £14,000 balance was genuine.
The defendants contended that they were entitled to keep the £69,000. They argued, firstly, that they could have put forward a genuine claim on the basis that the alternative accommodation was not available for letting and therefore they had lost rental income.
Secondly, the second defendant, the wife, was the sole policyholder. She had not known about her husband's fraudulent conduct and was therefore unaffected by it. The insurers, therefore, should pay out on the policy to her.
Mr Justice Jackson gave the defendants' arguments short shrift. He said, relying on Galloway, that “the fraudulent claim for rent taints the whole of the defendants' claim”. He added that “if the defendants had wished to advance a claim for loss of rental income, they should have done so honestly”.
They had, instead, put forward “a wholly false claim”. The judge regarded the defendants' first argument as “hopeless”.
In addition, even if he assumed that the wife was unaware of her husband's fraud (which he did for the purpose of the hearing), the judge held that there was still no defence to the claim. They jointly owned the property and they were named as joint policyholders in the policy schedule. They never told the insurer that the first defendant was not intended to be a joint policyholder. He concluded that “the fraud of the first defendant would taint the whole policy”.
At your own risk
Therefore, the judge found for the insurer on all points. It is also worth noting that he was prepared to grant summary judgment. The fact that it was granted here indicates the importance of the Galloway rule and the weakness of the defendants' arguments.
As Mr Justice Jackson stated: “It is particularly important at the present time that this rule of law is understood by everyone who may have insurance claims”. He added that “if policyholders seek to top up their honest claims by adding bogus claims, they are at peril of losing everything”.