The Taylor Wessing Insurance and Reinsurance Review of 2010

Property insurance

Fraudulent claims and the burden of proof

Yeganeh v. Zurich Insurance Co [2010]1

London Mercantile Court, 24 May 2010

This case concerned a claim under a buildings and contents insurance policy following a fire at the insured property.

The policy provided that, in the event of the insured pursuing a claim that was "fraudulent or false in any way, we will not make any payment and all cover will end", although it was common ground that, on the present facts, this clause added little to the common law position2.

In defence of the claim, the insurer alleged fraud or misconduct by the insured in two respects, either of which it was said would defeat the claim:

1. that the fire was caused deliberately, by or at the behest of the insured;

2. that the insured had sought to inflate the contents claim, in particular by falsely alleging the destruction of a quantity of high value clothing, the alleged evidence for which had in fact – so insurers contended - been planted after the fire.

   Cause of the fire

   Dealing firstly with the cause of the fire, the court noted the long established common law position on the question of burden of proof. Where an insurer alleges that the insured property has been lost by the deliberate act or with the connivance of the insured, the onus is on the insurer to prove it, but to what standard of proof? Although based upon the civil test of the "balance of probabilities", the courts have held that a higher degree of proof is in fact required in these cases, something approaching the criminal standard, in order to reflect the gravity of the accusation. The position was summarised by Neil LJ. in Continental Illinois National Bank & Trust Co v. Alliance Assurance Co (The Captain Panangos DP) [1989]3 thus:

   "I turn now to the central issue in this case... (e) that the onus of proving the privity of the owners rests on the insurers...(f) that the burden of proof, though not quite equivalent to that required in a criminal case, is a heavy burden, commensurate with the gravity of the matter..."4

   Difficulties arise, however, where the court is presented with alternative theories, none of which it finds attractive on its own. In the present case, the only theory put forward, other than deliberate ignition, was an accident involving a halogen heater, the likelihood of which the judge considered to be "remote" on the evidence. Was the judge then compelled to find in favour of the only other theory in play, namely arson by the insured?

   The answer to that question is to be found in Rhesa Shipping Co SA v. Edmunds (The Popi M) [1985] 1 WLR 948 HL. In that case, Lord Brandon declined to apply what he called the "dictum of Sherlock Holmes", namely that "when you have eliminated the impossible, what remains, however improbable, must be the truth". The correct position, he said, was this:

   "A judge is not bound always to make a finding one way or the other with regard to the facts averred by the parties. He has open to him the third alternative of saying that the party on whom the burden of proof lies... has failed to discharge that burden. No judge likes to decide cases on burden of proof if he can legitimately avoid having to do so. There are cases, however, in which, owing to the unsatisfactory state of the evidence or otherwise, deciding on the burden of proof is the only just course for him to take."

   The judge concluded that the present claim was just such a case. In the absence of having shown any discernible motive for the insured to burn down the property, the insurers had not done enough to discharge their burden of proving deliberate act as the cause of the fire.

   Inflated claim

   The court then turned to the allegedly inflated claim. On this, the judge was able to make a much more definitive finding on the evidence available, concluding that the insured was, in this matter, clearly "the sort of person who is casual about the truth". On the basis of the factual statement of the two loss adjusters involved, the judge concluded that the insured had indeed planted clothing on the premises after the fire, in a bid to restore the integrity of an inflated contents claim that had by then been demolished by the insurer's investigations. Applying the principle in Axa v. Gottlieb [2005], the result was that the entire claim failed.

   Result: Judgment for the insurer.

   Business interruption and the "but for" test

   Orient-Express Hotels v. Assicurazioni Generali SpA (UK Branch)5

   Commercial Court, 27 May 2010

   The case concerned a claim under a combined property policy covering physical damage and business interruption in respect of the Windsor Court Hotel, a 23-storey...