Fraudulent Claims: the Rights of Underwriters Clarified

Two recent cases have†clarified the effect in†English law of†allegations of fraud†in the claims process.

Fraud As An Alternative Defence

In the first, Super Chem Products Ltd v American Life and General Insurance Co Ltd [2004] 2 AII ER 358, the Privy Council rejected a long-standing suggestion that an insurer who defends a claim by alleging fraud against the assured is unable to rely upon any other defence, a suggestion which leads to the possibility that if fraud is not proved then the assured is entitled to recover come what may. In Super Chem the†assured's chemicals factory in Trinidad was damaged†by fire in April 1990. The assured's insurance covered†material damage and business interruption. The†policies contained provisions to the effect that the†making of a fraudulent claim deprived the assured of†all benefit under the policy and that any action by the†assured on the insurance had to be brought within 12†months of a loss. In November 1991 the insurers†denied liability on the grounds that the assured had†been guilty of arson and that proceedings had not†been brought against the insurers within the†stipulated period. The assured brought an action†against the insurers in the Trinidad courts, and†allegations of fraud were found not to have been†made out. That left the defence based on the†contractual limitation period, and it was the ability of†the insurers to rely upon this clause which ultimately†reached the Privy Council.

The assured relied on Jureidini v National British and†Irish Millers Insurance Co Ltd [1915] AC 499. In that†case insurers pleaded fraud against their assured, and†were then sued in the courts. The insurers applied to†have the judicial proceedings stayed, on the ground†that the policy contained an arbitration clause. The†House of Lords held that the arbitration clause†extended only to disputes as to the amount of loss†and not as to allegations of fraud, so that it could not†operate. Viscount Haldane, however, based his†decision on the notion that a plea of fraud was a†repudiation of the insurers' obligations, which†disentitled them from relying upon the conditions of†the policy, including the arbitration clause.

In Super Chem the Privy Council rejected the views†of Viscount Haldane, and ruled that a plea of fraud†did not remove the entitlement of the insurers to rely†upon other terms of their policy. As Lord Steyn†pointed out, an allegation of arson by insurers was†not a breach of contract at all, let alone a...