Bluebell Bistro: fabricated invoices and the fraudulent claim rule
Bluebell Bistro Ltd runs a restaurant in Manchester. It holds a commercial combined policy with Meridian Insurance. A kitchen fire causes damage. Bluebell submits a claim for £260,000: £120,000 for building damage, £30,000 for stock, and £110,000 for business interruption. The business interruption calculation includes £45,000 for 'lost bookings' supported by emails and duplicate invoices that the owner has fabricated. The rest of the claim is genuine. Meridian pays an interim payment of £80,000 while it investigates. Its forensic accountant later discovers that the booking emails were created after the fire and that several invoices were reused from the previous year. Meridian also finds that Bluebell had, two years earlier, made a small genuine claim for water damage. Bluebell argues that the fraud relates only to part of the claim and that the genuine elements should still be paid.
1. What must Meridian establish to rely on section 12 of the Insurance Act 2015, and what are the consequences for Bluebell's claim?
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Section 12 applies where the insured makes a fraudulent claim. Meridian must show that Bluebell acted dishonestly and that the false element was intended to induce the insurer to pay more than was due. The fabricated booking emails and duplicate invoices are strong evidence: they were created after the fire, they were presented as genuine, and they inflated the business interruption claim by £45,000. That is a fraudulent claim, not merely an exaggerated one caused by carelessness.
The consequences are severe. Meridian is not liable to pay the claim at all, including the genuine elements. It may recover the £80,000 interim payment as a sum paid in respect of the fraudulent claim. It may also treat the contract as terminated with effect from the date of the fraudulent act and retain any premium paid. It does not avoid the policy from inception, so the earlier genuine water damage claim is unaffected. The rule is often described as 'all or nothing': the insured cannot separate the honest part of the claim from the dishonest part. Bluebell's argument that the genuine elements should be paid therefore fails.
2. How would the position differ if the fabricated invoices related to a separate claim under the same policy, rather than the fire claim?
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Section 12 operates claim by claim. If Bluebell had made a separate claim, for example a theft claim, and had fabricated invoices only in that claim, Meridian could refuse that theft claim and recover any sums paid on it. It could also terminate the contract from the date of the fraudulent act and retain the premium. But it would remain liable for the genuine fire claim if that claim was honestly presented and was not tainted by the fraud.
The difficult question is whether the two claims are truly separate. If they were submitted together, arose from the same incident, or were part of a continuing course of dishonest conduct, the insurer may argue that they form one claim or that the fraud infected the whole notification. The insurer would need to show that the fire claim itself was fraudulent or that the claims were not genuinely separate. On the facts given, the fraud is within the fire claim, so the whole of that claim is forfeited.
3. Could Meridian avoid the policy from inception? Explain.
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No, not on the facts given. Avoidance from inception is a remedy for a breach of the duty of fair presentation that was deliberate or reckless, or for a fraudulent misrepresentation that induced the contract. A fraudulent claim under section 12 is different: it allows the insurer to refuse the claim, recover payments made on it, terminate the contract prospectively from the date of the fraudulent act, and retain the premium. It does not retrospectively wipe out the policy. That matters because genuine claims made before the fraud remain payable, and the insured's earlier water damage claim is unaffected. If Meridian could show that Bluebell had dishonestly concealed something at inception, it might have a separate avoidance argument, but the facts here concern conduct after the fire, not the original underwriting.