England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		St. Dunstan's House
		20th October 2005

 


JUDGE PETER COULSON QC:

A. INTRODUCTION

1. On the 13^th of June, 2001, there was a fire at 8, Craven Hill, London W2 ("the property"). At the time of the fire, the property was owned by Craven Hill Properties Ltd. ("Craven Hill") and managed by Starmax Services Ltd. It was divided up into 13 flats and entirely sub-let to tenants on assured short-hold tenancies with terms of 6 to 12 months.
2. Mr. Aron Shaya was the London manager of Craven Hill. Its ownership was complex, involving nominee shareholders and offshore companies which, during his cross-examination, Mr. Shaya was reluctant to identify. At least one director, a Mr. Bastable, was based in Jersey. Mr. Bader Masawi was the relevant director of Starmax, the company who managed Craven Hill's properties, collected rent and the like.
3. Craven Hill was insured by the defendant, Allied Underwriting Insurance Ltd. ("AUA"). The property itself was insured for a maximum of £650,000, and there was also cover for lost rent up to a figure of £130,000. Following the fire, Craven Hill made a claim to AUA under the policy for the cost of reinstatement/repair and for lost rent. The reinstatement/repair claim was agreed in August 2001 in the total sum of £83,000. AUA paid £25,000 on account. The loss of rent claim was first presented on 10^th October 2001 in the sum of £59,227.50, but this was later reduced in November to £53,487.40.
4. On 4^th December 2001, AUA's solicitors wrote to the solicitors acting for Craven Hill, notifying them that AUA regarded the insurance policy as void "and all claims thereunder shall be forfeited". They sought the return of the £25,000 already paid to Craven Hill. The letter alleged that there had been fraud on the part of Craven Hill.
5. Craven Hill denied fraud. They commenced these proceedings in the Chancery Division as long ago as April 2002. The proceedings were not transferred to the Technology and Construction Court until September 2004 and, by reason of an agreed stay imposed at the time of this transfer, the parties did not seek directions from this court until May of this year when the trial date was fixed.
6. It should also be noted at the outset that Craven Hill have assigned their claim against AUA in these proceedings to a company called Danepoint Ltd. No point is now taken on the efficacy of that assignment. However, Craven Hill remain a defendant to AUA's Part 20 claim for the return of the £25,000. For the purposes of this judgment, it is convenient to refer to the claimant and the Part 20 defendant simply as Craven Hill.
7. I set out below the background facts and the relevant narratives in respect of the reinstatement/repair claim and the loss of rent claim (paragraphs 8 to 42). I then identify the issues between the parties and the applicable principles of law (paragraphs 43 to 56 below). I then deal in detail with the claim for the cost of reinstatement/repair (paragraphs 57 to 76 below) and the claim for lost rent (paragraphs 77 to 141 below) before setting out my conclusions (paragraphs 142 to 147 below).

B. BACKGROUND

8. The insurance policy was effective from 29^th June 2000. It expressly covered damage by fire. General Condition 3 provided that:

"If the insured shall make any claim knowing the same to be false or fraudulent as regards amount or otherwise, this policy shall become void and all claims thereunder shall be forfeited."

9. The policy was itself based on a proposal form completed by Craven Hill. In answer to specific questions Craven Hill denied that the flats were let for periods of 12 months or less or let to referrals from the DSS or Local Authority.
10. Following the fire on 13^th June, Craven Hill appointed Mr. Stanley Balcombe of SB Insurance Loss Assessors Ltd. to act on their behalf in pursuing the claim against AUA. AUA themselves appointed Mr. Clive Ellis of Ellis May to act as the loss adjuster on their behalf. These two intermediaries dealt with and discussed both heads of loss, namely the reinstatement/repair claim and the loss of rent claim.
11. Mr. Ellis visited the property in the company of Mr. Balcombe on 14^th June 2001. He produced a preliminary report dated 18^th June 2001 which contained some photographs. The report and the photographs made clear that there was extensive damage to flat 4, where the fire started, and damage to many other parts of the property, which are then listed in the report.
12. Mr. Ellis visited the property again on 18^th June and his colleague, Mr. Kent, inspected certain flats on 22^nd June. There is a written record of Mr. Kent's visit.
13. Mr. Ellis's first report of 29^th June 2001 referred to the proposal form (para.9 above) and demonstrated that many of the flats were let on six month tenancy agreements. He advised that:

"We therefore consider that when the proposal form was completed the facts given to you were inaccurate and therefore a misrepresentation has taken place on the part of your insured or his agent. If you had been aware that many of the flats were being occupied on rental agreements for less than six months you may have made a decision to decline cover. If you would make a decision to decline cover in the event that you were aware that approximately 50% of the properties were being occupied by tenants on six month rental agreements, we consider that you were entitled to void the policy ab initio."

14. AUA took some time considering whether or not to avoid the policy on this ground. During that period Mr. Balcombe and Mr. Ellis progressed the claim "without prejudice" to this possibility. Mr. Ellis did not, however, inform Mr. Balcombe in writing expressly of the problem until 19^th July when he said:

"At the time of writing, policy liability is in doubt as there has been a misrepresentation on the proposal form. The proposal form specifically states that none of the premises will be let out to tenants or sub-tenants for periods of 12 months or less. Underwriters agreed to insure the property on the basis that the information provided on the proposal form was accurate."

15. The problem was allegedly compounded when Mr. Shaya of Craven Hill approached AUA direct and was alleged to have said that "We will need to refer some of the DHSS tenants back to the Local Authority once the repairs have been completed". The occupation by DHSS tenants would also have been contrary to the proposal form. Mr. Shaya later said that he had not made any reference to DHSS tenants in the building.
16. On 8^th August Craven Hill's solicitors wrote a long letter explaining that, in essence, AUA had been told precisely who was occupying the property and on what terms at the time of the inception of the insurance policy. On that basis, on 10^th August 2002, AUA instructed Mr. Ellis to settle the claim. He told Mr. Balcombe this on the same day. On 14^th August Mr. Ellis wrote to Craven Hill's solicitors to confirm that "AUA have agreed to accept liability for your client's claims under the terms of the policy". Accordingly, the question of AUA's liability did not feature again in the correspondence. In these proceedings Craven Hill argued that this early dispute coloured Mr. Ellis's view of Craven Hill and the validity of their claim. I reject that suggestion. Whilst I accept that Mr. Ellis was perhaps tougher than some loss adjusters, I do not believe that these early events led him to be prejudiced against Craven Hill.

C. NARRATIVE - THE REINSTATEMENT/REPAIR CLAIM

17. On 26^th June 2001 Mr. Balcombe procured a quotation for the reinstatement/repair works from Titchfield Construction in the sum of £106,160. Two days later he passed it on to Mr. Ellis. Titchfield Construction were known to Mr. Balcombe and he had used them before.
18. On 11^th July Mr. Balcombe and Mr. Ellis met on site and went through the Titchfield Construction quotation. Mr. Ellis thought that the quotation was too high and noted down lower figures for the items of work which indicated a total value of £83,000. On 19^th July Titchfield produced a revised quotation in the sum of £86,000.
19. On 10^th August, following the indication from AUA that they would meet the claim in principle, Mr. Ellis offered to Mr. Balcombe that the reinstatement/ repair claim would be met on condition that the total figure was £83,000 and that Titchfield Construction carried out the work. This offer was accepted by Mr. Balcombe.
20. The settlement agreement was confirmed in writing by Mr. Ellis on 16^th August. He said:

"I am in a position to agree the building repairs in the sum of £83,000 plus VAT, which is based upon a fixed price estimate from Titchfield Construction. As discussed, no extras will be considered to these agreed costs. The claim for building repairs is subject to the works being completed by Titchfield Construction and we propose to conduct approximately three visits to the site to make sure that the work is being completed as per the estimate."

Mr. Balcombe did not respond to or challenge any part of that letter. For the avoidance of doubt, I consider that on all the evidence the agreed sum of £83,000 was a fair and reasonable figure for the work in the Titchfield specification.

21. The sum of £25,000 was paid on account by AUA in August. At Craven Hill's request it was made payable to Starmax. There had been some discussion as to the make-up of the £25,000 and it appears to have been agreed that there was an interim payment of £15,000 in respect of the reinstatement/repair work, and £10,000 in respect of the lost rent claim, although the latter head of claim had not as yet been presented by Craven Hill, much less accepted by AUA.
22. In fact the reinstatement/repair works went ahead in about mid-August with a company called Gulf Falcon carrying out the work. Gulf Falcon were closely linked to Starmax, in that they operated out of the same premises. Mr. Balcombe thought that the works were being done by Starmax themselves. The fact that Titchfield Construction were not carrying out the works was known to Mr. Balcombe in mid August but he deliberately chose not to tell Mr. Ellis of this, despite the terms of the letter of 16^th August.
23. On 6^th September Gulf Falcon produced an invoice for £25,000 described as "1st Interim Payment for works carried out". On 25^th September Gulf Falcon produced a second invoice for £35,000 described as "2nd Interim Payment for works carried out". These two invoices were then sent by Mr. Balcombe to Mr. Ellis on the fax on 1^st October. The following day, Mr. Ellis wrote to express his concern in these terms:

"We refer to our previous correspondence from which you will note that the reinstatement works were authorised in accordance with the revised estimate from Titchfield Construction in the sum of £83,000 plus VAT. The assessors and your insured put considerable pressure on us to authorise the works in accordance with Titchfield Construction's estimate, and we were most concerned to receive invoices in support of the reinstatement works from Gulf Falcon Ltd., who appear to be a company based in Dubai but who have offices in Marylebone High Street. We are carrying out further enquiries in relation to this company. We have enclosed a copy of their invoices."

24. As a result of these events, there was a meeting at the property attended by Mr. Balcombe and Mr. Ellis, Mr. Masawi of Starmax and, at least for part of the time, Mr. Shaya of Craven Hill. Mr. Ellis made plain that he was extremely concerned that, not only had the work not been carried out by Titchfield Construction but, in his view, only about £7,500 worth of work had been carried out, far less than the £60,000 claimed by Gulf Falcon. Even on Craven Hill's case as advanced now, it is accepted that, by this date, only about £25,000 worth of work and materials had been performed or supplied by Gulf Falcon.
25. After the meeting, on 12^th October Craven Hill engaged Titchfield Construction to carry out the remainder of the works at the property. No formal contract with Titchfield Construction was entered into. They carried out work at the property and in January 2002 produced a one-line final account in the total sum of £58,000. Accordingly, if the £25,000 interim payment of August 2001 is ascribed wholly to the reinstatement/repair claim, it means that the total of Craven Hill's claim under this head would be £83,000, which was, of course, the sum Mr. Ellis agreed to pay in August 2001. However, I am bound to point out that there was no breakdown of what work was done by whom for the £83,000 and on the evidence before me it is not at all clear that the work in the Titchfield Construction quotation, which formed the basis of the original figure of £83,000, was actually performed.
26. By the time of the Titchfield Construction final account document AUA had given notice that they considered the policy was void. The reason given concerned the amount claimed by reference to the Gulf Falcon invoices. The notice of 4^th December 2001 said:

"Having investigated this matter and discussed it with our clients, we hereby notify you on behalf of our clients that under General Condition 3 of your clients' policy, our clients regard the policy as void and all claims thereunder shall be forfeited. Please let us have a cheque for £25,000 which has already been paid to your client.

The fraud in question is of course the attempt to claim a total of £60,000 on invoices totalling this sum presented by Gulf Falcon Ltd. when no more than £5,000 or £6,000 worth had been carried out to the property."

D. NARRATIVE - THE LOSS OF RENT CLAIM

27. It appears that in the immediate aftermath of the fire, Craven Hill and Starmax considered that all the flats should be vacated. Mr. Ellis was told on 14^th June that all the tenants had moved out immediately after the fire. However, on his visit on that day, Mr. Ellis noted that this was not the case and that at least some of the flats were still occupied.
28. Four days later, when Mr. Ellis visited again on 18^th June, he again noticed that some of the flats were occupied. In his letter of 21^st June to Mr. Balcombe, Mr. Ellis said:

"When I re-visited the property on 18^th June it was apparent that certain flats were still occupied by tenants. Please will you let me have full details of the flats which remain occupied, together with the rent now being paid by each tenant."

29. On the same day, namely 18^th June, Starmax wrote to all the tenants purporting to terminate their tenancy agreements and telling them that they were no longer allowed to occupy their flats.
30. This letter seemed to invite the response from the City of Westminster dated 29^th June. In that letter the Council said:

"We have been advised by Richard Gitting from the Environmental Health Department that, with the exception of flat 4 on the first floor, the other properties are fit for human habitation. In regards to flat 3, following an inspection of the hallway directly below flat 4, we have reason to believe that there is no smoke damage and that the water damage is very minimal. Assuming that the electrical cable is not damaged, the tenant, Mr. Al Khazali, of flat 3 can return to his accommodation. If the electricity and alarm system are defective, then it is your responsibility to re-connect the supply of electricity and reinstate the alarm system.

I advise you that it is a criminal offence to withdraw persistently or withhold services such as the supply of electricity with the intent to force your tenants out.

We have advised your tenants of their legal entitlement to a court order for possession and bailiff's warrant. If you evict any of your tenants without having followed the due process of the law, then you may be guilty of having committed an offence under the Protection from Eviction Act 1977. As the local authority empowered to commence criminal proceedings, you may be liable to a fine and/or committal if found guilty of an offence…

I anticipate that you will appoint an approved contractor to reinstate the electricity. I have advised Mr. Al Khazali of flat 3 that he can now return to his flat within the next seven days. If you wish to evict him, then you must apply to the courts for an order of possession."

It appears that the emergency electrical works referred to were carried out by Tower Electrical Services and were completed by 9^th August 2001 when they sent what they called a "final bill" for the work carried out.

31. The first formal indication of the loss of rent claim was in Mr. Balcombe's letter to Mr. Ellis of 13^th August. He said:

"With regard to claim for Loss of Rent as discussed, our client is prepared to accept settlement for 21 weeks, i.e. from the date of fire till commencement of works - 13.6.01 to 15.8.01 (9 weeks), plus 12 weeks for duration of works to 7.11.01. We will forward details of the rentals as soon as possible."

32. Mr. Ellis responded on 16^th August, making the point that in his view the flats were not all vacated after the fire. He said:

"With regard to the loss of rent, it is apparent from our numerous site visits that many of the flats have remained occupied between the date of the fire and the day when the repairs were authorised, i.e. 10^th August. Please will you provide me with details of the rental payments received by your clients during this period."

33. On 17^th September 2001 Starmax sent Mr. Balcombe a record of the monthly rentals achieved at the property from 20.10.99 to 13.6.01. These were plainly actual rent receipts. They tallied, as Mr. Sutherland demonstrated in his careful cross-examination of Mr. Shaya, with the figures in the accounts of Craven Hill for the year ending 31.3.01. The immediate problem of course was that no figures were provided by Starmax for actual rent receipts after 13.6.01. As we shall see, although over four years have passed since this letter, Starmax have still never provided these figures.
34. In a document dated 28^th September but faxed on 1^st October, Mr. Balcombe sent the rental information, along with other documents, to Mr. Ellis. On 10^th October there was the meeting previously referred to at paragraph 24 above. At that meeting Mr. Balcombe gave to Mr. Ellis a loss of rent claim in the sum of £59,227.40. This schedule operated on the basis that all the flats were vacated on 13.6.01 except flat 1, which, it was stated, was vacated on 27.6.01. In his report to underwriters dated 16^th October Mr. Ellis said:

"Following the fire, we conducted visits to the property on various dates and found numerous flats to be occupied during the middle of the day. Where flats were unattended, we found personal possessions in the rooms, and brought the occupancy aspect to the attention of the assessors on numerous occasions, during which we received the standard reply: 'I will speak to my client and obtain further information'. The assessor failed to respond to our representative until prompted and eventually stated that his client had told him that nobody was living at the property and belongings had been left for safekeeping. The policy holder was hoping our representative would accept that whenever he visited, it was purely coincidental that ex-tenants were visiting to collect belongings.

We advised the assessor that we were not prepared to accept that the explanation given to us was accurate and we expected him to encourage his client to be honest…."

35. Earlier in the same report, Mr. Ellis had advised the insurers that he suspected from the outset that Craven Hill:

"… may well be attempting to over-state the claim in respect of loss of rent. We strongly suspect that individuals have been residing at the property since the fire occurred on 13^th June, despite being given assurances from the insured's assessors that no one has been living at the property since the fire."

36. On 8^th November 2001, Mr. Ellis sought a variety of documents and other information from Mr. Balcombe, including a signed copy of the rental accounts; a letter from a director of Craven Hill confirming that the 10.10.01 loss of rent claim was accurate; and a detailed written explanation of the reasons why tenants were in the flats if they were not actually paying rent.
37. There was no real answer to this letter. On 12^th November Starmax wrote to Mr. Balcombe with what looked like, on its face, an explanation of why the tenants had proved difficult to move. Mr. Masawi said:

"We have sent a notice to all tenants that their tenancy agreement has been terminated but some of them they did refuse to leave the property without giving them another flat to live as replacement. Please note that a person who unlawfully evicts or harasses as an occupier of a residential property commits an offence under section 21 of the Protection from Eviction Act 1977. A tenant who has been unlawfully evicted or who is being harassed may apply to the court for an injunction requiring the landlord to allow the tenant back into occupation and to discontinue the harassment. Therefore we tried to vacate the flat on the easiest way without need for any court order which that led for a more delay in this situation. However, we would like to confirm that there are no rent been paid by the tenants either to us or to Craven Hill Properties during this period."

38. On 15^th November Craven Hill made the claim for loss of rent based on a similar schedule to the one referred to at para.34 above. The claim was reduced to £53,487.40 because the claim for flat 1 was withdrawn completely and the claim for flat 7A was reduced to £800. The schedule was signed by Mr. Bastable, a director of Craven Hill. He declared that:

"The above details have been prepared under our instruction by SB Insurance Loss Adjusters Ltd. from information supplied by us. This is, to the best of our knowledge and belief, a true and just account of our loss."

In fact the information came from Starmax and nobody - not Mr. Shaya, not Mr. Masawi and not Mr. Balcombe - was prepared to say on oath that they had checked the information that went into that document.

39. This claim document was passed on by Craven Hill's solicitors on 20^th November. In that letter they also endeavoured to explain why so many of the tenants were still in occupation after the fire. They said that the tenants had been given 14 days to vacate but that some of the tenants had returned to the premises in the hope that they could stay without paying rent. The letter stressed that these tenants "were not there with either the permission or connivance of our client". Beyond the copies of Craven Hill's accounts up to 31.3.01 to which I have already referred, Craven Hill's solicitors were not able to provide any of the documents sought by Mr. Ellis.
40. On 26^th November Mr. Ellis responded, describing the solicitor's letter as "disappointing". The letter repeated the request for documents proving the rental income and the loss. The letter also made plain Mr. Ellis's fundamental concern:

"In view of the fact that we visited the property on numerous occasions, often in the present of your client's assessor, and found tenants in the flats, we have considerable difficulty in accepting that no rental income is being paid. If rental income was not being paid and your client was having major difficulty in evicting tenants because of legal issues, this information would have been known to the assessor at an early stage, who should have brought it to our attention."

41. Perhaps because the letter of 4^th December 2001 related only to the claim for reinstatement/repair, the loss of rent claim took something of a back seat when the litigation commenced, although I note it was the first of the four particular allegations of fraud relied on in AUA's defence and counterclaim. By February 2005 none of the documents relevant to the loss of rent claim and outstanding in November 2001 had been provided by Craven Hill or their solicitors.
42. On 14^th February 2005, AUA's solicitors wrote to Craven Hill's solicitors, seeking some of these documents, including the rent record of Craven Hill and Starmax's ledger accounts. In their reply Craven Hill's solicitors talked about the "documentation that was agreed to be forwarded (if available)" which was said to include "rent records from Starmax's own records". In fact, because Craven Hill still failed to provide any of these documents, AUA applied for and obtained an order from this court, dated 26^th May, for disclosure of all documents relevant to the loss of rent claim. Again, Craven Hill failed to comply and an Unless Order was subsequently made. Some documents were, belatedly, supplied in response to the Unless Order. Some documents were supplied even later still. I will analyse those documents and their effect in section H below.

        E. THE ISSUES

43. The principal issue between the parties is whether there was fraud such that AUA were justified in avoiding the policy. The four particular allegations of fraud can be broken down by reference to the two heads of loss identified above. It is common ground that although only the reinstatement/repair claim was the subject of the letter of 4.12.01, the allegations in respect of the rent claim are relevant to AUA's case of fraud at common law. Accordingly, it appeared to be agreed that I had to consider and decide all four of the allegations of fraud, whatever the content of the letter of 4.12.01. I am sure that, as a matter of law, that is the correct approach.
44. As to the claim for the cost of reinstatement/repair, there are three respects in which it is said that that claim is fraudulent. First, it is said that the remedial work contract was awarded to Gulf Falcon when Craven Hill represented that the work would be carried out by Titchfield Construction. Secondly, it is said that Craven Hill falsely represented that Gulf Falcon were building contractors and had received payment for the works. Finally, it is said that Craven Hill, through Mr. Balcombe's assertion on the phone on 28^th September that the works were nearly complete, and by making a claim based upon Gulf Falcon's two invoices, represented that most or at least £60,000 worth of the work had been carried out at the property, when in fact the real value of the work carried out was far less. This of course was the specific ground identified in the letter of 4^th December.
45. As to the claim for loss of rent, it is alleged that this was fraudulent because it significantly and substantially exaggerated any actual loss. In particular it is said that the claim wrongly assumed that all but one of the flats was vacant after 13^th June 2001 when the evidence demonstrated that many of the flats were occupied for some or all of the period for which the claim for lost rent was later made.
46. Before considering and resolving those issues, it is necessary to look at the applicable legal principles.

        F. APPLICABLE PRINCIPLES

47. The onus of proving fraud is on the party alleging it, in this case AUA. That onus is to some degree greater than usual in civil cases. This point is perhaps best summarised by the Lord Nicholls in In Re H [1996] AC 563. He said:

"The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not. When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and hence the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence… Built into the preponderance of probability standard is a generous degree of flexibility in respect of the seriousness of the allegation.

Although the result is much the same, this does not mean that where a serious allegation is in issue the standard of proof required is higher. It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence would be established."

48. The definition of fraud in circumstances such as these is that of Mance L.J. (as he then was) in The Aegeon [2003] QB 556. At para.30 he said:

"A fraudulent claim exists where the insured claims knowing that he has suffered no loss or only a lesser loss than that which he claims (or is reckless as to whether this is the case). A fraudulent device is used if the insured believes that he has suffered the loss claimed but seeks to improve or embellish the facts surrounding the claim by some lie."

49. As to the concept of a fraudulent device, this was developed further at para.45:

"What then is the appropriate approach for the law to adopt in relation to the use of a fraudulent device to promote a claim which may (or may not) prove at trial to be otherwise good but in relation to which the insured feels it expedient to tell lies to improve his prospects of a settlement or at trial? … My tentative view of an acceptable situation would be: (a) to recognise that the fraudulent claim rule applies as much to the fraudulent maintenance of an initially honest claim as to a claim which the insured knows from the outset to be exaggerated; (b) to treat the use of a fraudulent device as a sub-species of making a fraudulent claim - at least as regards forfeiture of the claim itself in relation to which the fraudulent device or means is used (the fraudulent claim rule may have a prospective aspect in respect of future and perhaps current claims but it is unnecessary to consider that aspect or its application to cases of use of fraudulent devices); (c) to treat as relevant for this purpose any lie directly related to the claim to which the fraudulent device relates which is intended to improve the insured's prospects of obtaining a settlement or winning the case and which would, if believed, tend objectively, prior to any final determination at trial of the parties' rights, to yield a not insignificant improvement in the insured's prospects - whether they be prospects of obtaining a settlement or a better settlement or of wining at trial…"

50. Mr. Rhys also helpfully drew my attention to the definition of dishonesty in Twinsectra Ltd. v. Yardley [2002] 2 AC 164 in which Lord Hutton observed:

"… it must be established that the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest. I will term this 'the combined test'."

51. The fraud must be material in that it must have a decisive effect on the readiness of the insurer to pay. Thus in the South African case of Guardian Royal Exchange v. Ormsby [1982] 29 SASR 498, fraud, which consisted of supplying photographs which included damage inflicted after the relevant event, was held not to be material because the insurer would have paid the same amount anyway. However, it appears that that case might have been decided differently in this country if the conduct amounted to a fraudulent device (see above).
52. In addition, the fraud must be substantial. Provided that the effect of an exaggeration to a claim is not simply 'de minimis', a claim that is partly or even largely true but exaggerated is nonetheless regarded as substantially fraudulent: see para.27-2B1 of The Law of Insurance Contracts by Malcolm Clarke (November 2004 update).
53. Of particular importance on this question of exaggeration is the decision of the Court of Appeal in Galloway v. Guardian Royal Exchange [1999] LRLR 209. There the claimant had a valid claim for over £16,000 but he added to it a dishonest claim for a non-existent computer which he valued at £2,000. It was found that as a result of that dishonest element of the claim the whole claim was tainted and was forfeit. Lord Woolf said at p.213, second column:

"… if the fraud is material it does have the effect that it taints the whole. In determining whether or not the fraud is material so that it has that effect, one of course has, in my judgment, to look at the whole of the claim, but if you have a claim (which admittedly there is for a much more substantial sum than the part which is fraudulent) where the part which is fraudulent is nonetheless in relation to £2,000 (which amounts to about 10% of the whole) that is an amount which is substantial and therefore an amount which taints the whole. I would take the view that the consequences are that the view of the judge was right and the whole of the claim was thus tainted by the fraud. The position is that the contact remains one of good faith and the insured is required to exercise good faith in the making of the claim. In the making of the claim the facts are normally wholly within the insured's knowledge. The insurers are dependent on the insured exercising good faith in order to evaluate the claim."

54. Both counsel helpfully drew my attention to a number of authorities dealing with the exaggeration of insurance claims. In some the exaggeration of the claim was not regarded as fraudulent: see, for example, Ewer v. National Employers' Mutual General Insurance Association Ltd. [1937] 2 All ER 193. More recently, Thomas J. (as he then was) in Nsubuga v. Commercial Union [1998] 2 Lloyd's Rep. 682 at 686, referred to the "commercial reality that people will often put forward a claim that is more than they believe that they will recover". The judge said that that was "because they expect to engage in some form of 'horse trading' or other negotiation". He made the point that it "would not generally in those circumstances be right to conclude readily that someone had behaved fraudulently merely because he put forward an amount greater than that which he reasonably believed he would recover".
55. In similar vein, and again not addressing wilful exaggeration, Lord Hoffmann in Orakpo v. Barclays Insurance Services [1995] LRLR 443, said:

"In cases where nothing is misrepresented or concealed and the loss adjuster is in as good a position to form a view of the validity of the claim as the insured, it will be a legitimate reason that the assured was merely putting forward a starting figure for negotiation."

56. It seems to me that mere exaggeration of an insurance claim will not of itself be fraud. On the other hand, exaggeration which is wilful, or which is allied to misrepresentation or concealment will, in all probability, be fraudulent. In addition, I consider that exaggeration is more likely and more excusable where the value of the particular claim or head of loss in question is unclear or a matter of opinion; where, as Lord Hoffmann put it, the insurer's loss adjuster is in as good a position to value the claim as the insured. Conversely, where the value of the claim is or should be clear-cut, and the information on which it is based is wholly within the control of the insured, exaggeration is much less easy to excuse and thus much more likely to be fraudulent.

       G. THE CLAIM FOR REINSTATEMENT/REPAIR

(a) Introduction

57. I have set out the relevant facts in section C at paragraphs 17 to 26 above. However, before looking in detail at the three allegations of fraud relevant to this claim it is necessary to make one general point. I think that AUA, and Mr. Ellis in particular, were sometimes a little confused as to the rights and obligations of the parties arising out of the various agreements reached in August 2001.
58. On 10^th August AUA accepted liability for the reinstatement and repair claim. As a result AUA were liable under the terms of the insurance policy for the reasonable costs of the reinstatement/repair work necessitated by the fire.
59. Through Mr. Ellis, AUA reached an entirely separate agreement with Craven Hill to the effect that that liability would be compromised in the sum of £83,000 and on condition that Titchfield Construction carried out the work. That was the unequivocal effect of the letter from Mr Ellis of 16^th August 2003 to which Mr. Balcombe never replied. Mr. Balcombe also agreed that that was an express term of the contract in his cross-examination. If Craven Hill were then in breach of that settlement agreement because, for instance, Titchfield Construction did not carry out the work, that breach did not alter AUA's basic liability to pay the reasonable costs of reinstatement and repair. Nor would such a breach necessarily amount to fraud.
60. AUA, and in particular Mr. Ellis, were sometimes tempted to treat a breach of the settlement agreement as reason enough to declare the policy void. In my judgment, they were not entitled to do so. A breach might mean that the settlement agreement in respect of Titchfield Construction and the £83,000 might be voidable, and the financial cost of AUA's liability might have to be worked out from scratch, but it did not of itself render the insurance policy voidable due to fraud.

        (b) Ground 1 - The Representations in respect of Titchfield Construction

61. There is no doubt, as I have said, that it was agreed that the reinstatement/ repair work would be carried out by Titchfield Construction. Both Mr Ellis and Mr Balcombe confirmed that in their evidence. In breach of that agreement, the early reinstatement/repair work was carried out by Gulf Falcon.
62. The fraud alleged is that, although the work was done by Gulf Falcon, Craven Hill falsely represented that the work would be, and was, done by Titchfield Construction. I do not consider that that is a fair reflection of the facts. I find that Craven Hill originally intended to use Titchfield Construction and at the very last minute switched to Gulf Falcon. They did so on the advice of Mr. Masawi, who may or may not have stood to gain if Gulf Falcon carried out the work rather than Titchfield Construction. Importantly, in my judgment, at no time after the commencement of the work by Gulf Falcon did Craven Hill ever say that the work was in fact being done by Titchfield Construction.
63. I do accept that there was an element of deceit on the part of Mr. Balcombe because he frankly accepted that he knew of Gulf Falcon's involvement from mid August onwards but did not tell Mr. Ellis because he knew the switch would be, in his words, "a bone of contention". That was a plain admission of wrong-doing on Mr. Balcombe's part, but I have to balance that against Mr. Shaya's evidence that he did not understand that it was a condition of the settlement agreement that Titchfield Construction would do the work, a fact borne out by his conduct in October when, having been told by Mr. Ellis that this was a major problem, he immediately switch the work to Titchfield Construction.
64. Furthermore, even if, which I do not accept, this was potentially fraudulent conduct on the part of Mr. Balcombe, I do not consider that it was material. Mr. Balcombe knew that Mr. Ellis would find out sooner or later that the work was not being done by Titchfield Construction. After all, without a word of warning or explanation, it was Mr. Balcombe who faxed Mr. Ellis the Gulf Falcon documents on 1^st October. Accordingly, any deception could never be other than temporary, and Mr. Balcombe would always have known that.
65. Accordingly, I do not believe that the first particular of fraud has been made out. There was no misrepresentation to the effect that the work was being done by Titchfield Construction. There was an element of deceit in Mr. Balcombe's conduct, which I am sure he now regrets, but I do not consider that to be fraudulent within the definitions set out above. In any event, even if it was potentially fraudulent, I do not consider that it was material. Mr. Ellis, however, was entirely justified in taking a very dim view of the situation in early October 2001.

        (c) Ground 2 - The Representations in respect of Gulf Falcon

66. It is alleged that Gulf Falcon were not building contractors and that there was no valid appointment or payment to them. The pleaded representation that is said to be fraudulent was the representation by Craven Hill "that Gulf Falcon were contractors and had been appointed by Craven Hill".
67. In my judgment, this allegation has not been made out on the evidence. Craven Hill appointed Gulf Falcon because that is what Mr. Masawi advised them to do. In my view, that advice was plainly bad, but Craven Hill cannot be criticised for taking it. Craven Hill made no independent representation to Mr. Ellis as to the status of Gulf Falcon. When Mr. Ellis discovered Gulf Falcon's involvement, Mr. Shaya simply passed on to him information that he had been provided by Mr. Masawi. The first cheque from the insurers was made payable to Starmax. AUA agreed to that. That was sensible because Craven Hill were looking to Starmax to arrange all the works. If Starmax did not pay Gulf Falcon, that was not something for which Craven Hill can be held responsible.
68. There was no evidence to the effect that Gulf Falcon were not building contractors and no evidence about where the £25,000 ended up. In all the circumstances, I reject the second allegation of fraud.

        (d) Ground 3 - Overpayment

69. The third, and in some ways the most serious, allegation relating to the reinstatement/repair claim was to the effect that Gulf Falcon were claiming £60,000 worth of work had been done when in fact, according to Mr. Ellis, the right figure was about £7,500. On a detailed consideration of the relevant evidence on this point, there are ultimately three reasons why I consider that this allegation, whilst wholly understandable, should not, on balance, succeed.
70. First, it was part of the settlement agreement that Mr. Ellis would inspect the works periodically so as to ensure that they were being properly carried out and so, by inference, that he could ensure that any further interim payments were properly justified. He himself referred to a maximum of three inspections in his letter of 16^th August. Accordingly, whatever monies Gulf Falcon claimed on account, it would, in my judgment, have ultimately made no difference. Craven Hill knew that Mr. Ellis would not authorise any payments beyond those that he felt, on inspection, were justified.
71. Secondly, it is clear from the evidence of Mr. Brunt at Titchfield Construction that although only £7,500 worth of work had been carried out by the time the work was switched to Titchfield, there was about £20,000 worth of materials on site. That of course is consistent with Mr. Brunt, on behalf of Titchfield, completing the rest of the works for £58,000. He had been prepared to do all of it for £83,000. So the fact that about £25,000 worth of work and materials had been performed or provided by the time he started in November 2001was consistent with the overall figure which he claimed on completion.
72. I should say at once that I accept Mr. Ellis's evidence that these materials were not on site when he inspected on 10^th October. It would appear therefore, on the evidence which I have heard, which is not entirely satisfactory, that these materials must have been brought to site after 10^th October but before Mr. Brunt visited. But it does seem to me that Mr. Brunt had no reason whatsoever to lie as to what he found on site. Indeed, to the contrary, he stood to gain if the materials were not there, because his own charges would then have been correspondingly higher.
73. Thirdly, although the two Gulf Falcon invoices of 6^th and 25^th September were for works carried out, they expressly said that they were claims for interim payment. They were not fixed; they were not final; they were capable of adjustment. There is always a relatively wide margin for error in the calculation of interim payments in the construction industry. As a general rule, it would, I think, be wrong to find, without compelling evidence, that claims for interim payments (as opposed to final payments) were made fraudulently.
74. I accept of course that the two Gulf Falcon invoices were wholly over-stated and stood at the very edge of credibility, notwithstanding my observations about the wide margin of error in interim payments. But even if, which I do not accept, they were potentially fraudulent, given that Mr. Ellis was always going to check any claim for further monies, I do not believe that any such fraud could be, or was, material.

        (e) Summary on Claim for Reinstatement/Repair

75. The claim in respect of the two Gulf Falcon invoices is a pretty sorry saga of deceit (for instance in deliberately not telling Mr. Ellis earlier about Gulf Falcon); exaggeration (for instance in representing that three quarters of the work had been done when in fact the work to the worst affected part of the building, namely flat 4, had not even been started); and ineptitude (for instance Mr. Balcombe sending documents to Mr. Ellis such as the purported Gulf Falcon estimate of 15^th August which was contrary to the settlement agreement and which Mr. Balcombe, the addressee, expressly told me he had never seen before). I have every sympathy with the unflattering conclusions that Mr. Ellis reached in respect of that claim but, on all the evidence, I do not find that these various failures amounted to fraud within the definition and to the standard of proof set out above. Crucially, the payment of any additional sums in respect of reinstatement and repair over and above the £25,000 already paid would have always depended on Mr. Ellis's site inspections. The claim on the Gulf Falcon invoices was therefore a try-on which could not hope to get past his scrutiny.
76. The authorities say that, wherever appropriate, alleged fraudsters should be given the benefit of the doubt. That is therefore what I do in respect of this head of claim. Moreover, in doing so, I am following the guidelines articulated by Lord Hoffmann in Orakpo, to the effect that it is less probable that disputes over valuation which depend on opinion will or can be fraudulent.

        H. THE CLAIM FOR LOST RENT

(a) Introduction

77. The relevant facts are set out in section D, paras.27 to 42 above. It is clear that the whole basis of the loss of rent claim was challenged by Mr. Ellis in the correspondence from the outset, and his concerns were compounded by the complete absence of documents that went to support the claim. The key question is: was the claim for loss of rent, made in October 2001 and modified in November 2001, fraudulent?
78. Before going on to answer that question, I should make this important point. I asked Mr. Rhys during his helpful closing submissions whether there were any documents at all which post-dated the fire and which Craven Hill could rely on in support of the lost rent claim. He very fairly said that he could not point to any. In my judgment, Mr. Rhys was absolutely right. There were no reliable documents whatsoever to enable Craven Hill to demonstrate that, after the fire, there was a loss of rent. That is a matter I explore in detail below. But this complete lack of evidence means that, irrespective of fraud, I am bound to find that the lost rent claim must fail in its entirety. It was simply not proved in any respect. That of course does not of itself mean that the claim was fraudulent but, in my judgment, it is important not to forget, when considering whether or not the claims for lost rent were fraudulent, that even four years later Craven Hill have been quite unable to make good in any respect the loss of rent claim that they first presented in October/November 2001.

        (b) The False Basis for the Claim

79. It is clear that, immediately after the fire, Craven Hill operated on the basis that all their tenants would move out straightaway so that the claim for lost rent would commence on 13^th June 2001. That premise underpinned every loss of rent claim ever made by Craven Hill. Each one of them took 13^th June as the commencement date of the claim. Mr. Shaya's evidence confirmed this. He said that all he knew was that "on the day after the fire we told them all to leave".
80. This basic premise was, however, demonstrably false. Many of the flats at the property were tenanted after the fire, some probably for the whole period during which remedial works were carried out. Although very belatedly, and wholly at the prompting of Mr. Ellis, Craven Hill accepted that at least one flat was tenanted throughout, that simply led them to tinker with the detail of the loss of rent claim. They never altered their fundamental (and false) starting point of 13^th June 2001. They never sat down and worked out when in fact flats were empty and when in fact rent was not paid. This false premise bedevilled Craven Hill's entire claim for lost rent.
81. This point can be demonstrated in another way. It appears that the tenants paid rent in advance. Accordingly, on 13^th June 2001 the tenants had paid up rent until the end of that month. Thus, any actual loss of rent would not commence until the beginning of July, unless refunds were provided. None of Craven Hill's witnesses suggested that there had been any such refunds to the tenants. The simplistic start date of 13^th June was, therefore, just plain wrong.
82. On the evidence, it is most improbable that this false basis for the claim was "merely" a mistake. As we shall see, the various inspections in June and July establish beyond doubt that many of the tenants were still at the property. The only fair inference is that they were also paying rent. Craven Hill, through Mr. Shaya, Mr. Masawi and Mr. Balcombe, knew that a start date of 13^th June could not be simply assumed across the board for all the flats, yet they persisted in mounting claims which did just that. I am bound to conclude that was a deliberate attempt to exaggerate significantly the loss of rent claim.

        (c) The Evidence of Occupancy

83. There is good general evidence that a number of the tenants continued to stay in the property after the fire. Much of that can be found in Mr. Ellis's statement as follows:

(i) As at 14^th June:

Paragraphs 8 and 9 of Mr. Ellis's statement record that some of the flats were still occupied and that some of the occupants had slept the night before in those flats.

(ii) As at 18^th June:

Paragraphs 17 and 18 of Mr. Ellis's statement record a variety of flats which were occupied on his inspection. I deal below with the particular flats in question.

(iii) As at 22^nd June:

The relevant document is that produced by Mr. Ellis's assistant, Mr. Kent, who visited on that date, and who recorded his findings in writing. Many of them were supported in cross-examination by Mr. Balcombe, in particular the occupancy of flat 9 by Miss Oriel Morrison, an Australian woman.

(iv) As at 11^th July:

Paragraph 25 of Mr. Ellis's statement again records various flats occupied on his inspection on this date. Mr. Balcombe accepted in his cross-examination that he had been told by Craven Hill that all the flats had been vacated, and he expressed his embarrassment and apologies to Mr. Ellis on 11^th July when this proved not to be the case.

(v) July-August

Paragraph 28 of Mr. Ellis's statement records various visits to the building where he parked outside and noticed a large number of individuals going in and coming out of the building.

(vi) September

Paragraphs 44 and 45 of Mr. Ellis's statement again record his observation of people coming and going, and in the evening lights being on in the property and then lights being turned off. It seems to me that that last point is particularly telling because, as Mr. Ellis says, the turning of lights on and off confirmed that people were living in the property.

84. Furthermore, Westminster's letter of 29^th June and Mr. Masawi's letter of 12^th November, both of which I have referred to and set out above, suggest that tenants remained in occupation at the property because of the difficulties of evicting them, particularly in respect of those tenants in flats where there was little damage.
85. The explanation for the fact that occupants were regularly seen in the building was to the effect that they had left their belongings there and were just returning (at all times of the day and night) to pick up their possessions. I regard such an explanation as straining credulity beyond breaking point, particularly given the frequency with which Mr Ellis saw people at the property. Moreover, this explanation does not explain how, if the tenants were spending so much time at the property (even, on the evidence, sleeping there) there was any need for them to have any other place to live.
86. Taking the general evidence as a whole, I find that whilst some of the tenants probably moved out after the fire, many did not. There was simply too much evidence of occupation of this property to lead me to any other conclusion.
87. But, on the evidence, I can go further. I can make specific findings in relation to particular flats and I do so below.

        (i) Flat 1

88. In October Craven Hill made a claim for rent on flat 1 from 27^th June 2001 onwards. That was a significant claim in the sum of £3,501.43. In fact, as Craven Hill eventually accepted, but only because Mr. Ellis had demonstrated it, the tenant, Mrs. Huczko, never moved out of flat 1 and stayed in residence throughout the relevant period. It was also accepted that she paid rent throughout and that, as a result, the first loss of rent claim of 10^th October was wholly wrong.

(ii) Flat 3

89. The absence of any significant damage to flat 3 and its habitable condition was referred to in the Westminster letter of 29^th June. It is plain from that letter (see paragraph 30 above) that Mr. Al Khazali was in a position to occupy that flat either immediately after the fire or, at the latest, by early August, when the electrical work had been completed. In the absence of any other evidence at all in relation to flat 3, I am bound to find that Mr. Al Khazali occupied the flat for at least most of the period for which the loss of rent claim was later made.

(iii) Flat 5

90. Mr. Prahl provided a witness statement to Mr. Hockaday, a private investigator employed by Mr. Ellis. Mr. Rhys, as he was bound to do, attacked the reliability of this evidence, but I am entitled to observe that this criticism was a bit rich considering that Mr. Ellis was driven to take such extreme measures because of the adamant refusal of Craven Hill to prove their loss of rent claim in the usual way. I accept the evidence obtained by Mr. Hockaday, particularly because there was no evidence to counter it.
91. Mr. Prahl's statement confirmed that he had moved in on 2^nd October and had paid his rent in advance. The rent claims of October and November both claimed lost rent until 7^th November. Thus, even if the flat was empty prior to 2^nd October, the claims made by Craven Hill were obviously exaggerated.
92. It is perhaps no coincidence that on 18^th June both flats 5 and 6 were noted as occupied by Mr. Ellis, and that again on 11^th July one of those two flats was again noted as being occupied. That evidence demonstrates still further the absence of any real need for the tenants on the second floor to vacate the property at all.

(iv) Flats 7, 7A, 7B and 7C

93. These were the flats in the top third floor. The evidence from Mr. Ellis was that on the inspection of 11^th July, as well as the inspection on 18^th June, these flats seemed to be occupied. This was expressly accepted and agreed by Mr. Balcombe in his cross-examination:

"Q: On 11^th July all the flats on the top floor were occupied, were they not?

A: Yes, correct.

Q: The occupants were paying rent?

A: I cannot answer that.

Q: You do not consider that they were there on any different basis?

A: If they were not paying rent, they should not have been there.

Q: You would expect all the flats on the top floor to be dealt with in the same way?

A: Yes."

94. I find that those flats were occupied for all, or almost all, of the relevant period, and that the tenants continued to pay rent. In any event, Miss Ozawa, a new tenant in flat 7C, who was there from 26^th September onwards, paid rent in advance. The October lost rent claim again sought rent for this flat up until 7^th November. Again, that was obviously wrong.

(v) Flat 8

95. It was clear on the evidence that this flat was not significantly damaged. On the 11^th July inspection both Mr. Ellis and Mr. Balcombe found that it was occupied by a new tenant who was quite happy to be there. Nothing suggested that she was not paying rent.

(vi) Flat 9

96. Again it was common ground that on the inspection on 22^nd June this flat was occupied by Mrs. Morrison who confirmed expressly that she was still paying rent, although she was soon due to depart for Australia. Mr. Balcombe confirmed in his cross-examination that Mrs. Morrison was living in the flat at the time and was paying rent.

        (d) The State of the Property

97. My findings that many of the tenants did not move out after the fire are confirmed by the evidence as to the state of the building. I have already referred to Westminster's letter of 29^th June, which said in terms that many of the flats were perfectly habitable after the fire. That general approach is supported by a number of other documents which indicate that, outside of flat 4 where the fire started, smoke and water damage was widespread but not severe. I refer in particular to Mr. Ellis's preliminary report which was provided for me during closing submissions; the quotation from Titchfield Construction; and the separate quotation obtained by Mr. Ellis from GSG, who were another company of building contractors who inspected the damage.
98. Furthermore, I am satisfied that the photographs, belatedly provided from Mr. Ellis' file, also show that, aside from flat 4, the damage in many of the flats was not extensive. This was again confirmed by Mr. Balcombe in his cross-examination when he accepted that the damage caused by smoke and water, other than in flat 4, could fairly be described as "light".
99. These general findings are again supported by findings which I can and do make in relation to particular flats. I use the same flats that I have already referred to in paragraphs 88 to 96 above:

(i) Flat 1

100. The evidence of Mr. Shaya was that there was no damage to this flat. There was therefore no need for Mrs. Huczko to move out. There was therefore never any basis for the claim for £3,501.43.

(ii) Flat 3

101. Gulf Falcon allegedly provided a quotation dated 15^th August 2001. This document made no mention of the need to carry out any works at all to flat 3, confirming, so it seems to me, the stance of Westminster Council in their letter of 29^th June. Mr. Ellis obtained a quotation from GSG, building contractors, for the necessary work at the property. That quotation too did not contain any element of work for flat 3.

(iii) Flat 5

102. Whilst there was some damage to flat 5, it was limited to the kitchen floor and some decoration work: see the GSG quotation. There was no evidence that the flat had to be vacated for such work to be carried out. Indeed, the evidence of occupation (paragraph 95 above) indicates to the contrary.

(iv) Flats 7, 7A, 7B and 7C

103. These flats were not affected by water damage, as Mr. Balcombe accepted. They were occupied after the fire. The only work said to be required was "decoration". The photographs of the flats do not show a need for their vacation in order for this limited work to be carried out.

(v) Flat 8

104. This flat suffered no real damage at all. Mr. Ellis said of it, in a draft letter of 23.7.01, which was not in fact sent:

"The basement flat at the rear of the property has suffered no damage whatsoever but an allowance of £500 is more than adequate to install their defogging machine to remove any traces of smoke. When I last visited on 11^th July the flat was occupied by a new tenant who confirmed that she was unable to smell any smoke in this flat."

105. The GSG quotation expressly said in relation to flat 8 that "no works" were required to that flat. Mr. Balcombe agreed in cross-examination that the damage in the basement was "minimal".

(vi) Flat 9

106. It is clear that some decoration work was required in flat 9. There was no evidence that the work was so substantial that the tenant had to vacate. Again the evidence of occupation (para.96 above) indicates clearly to the contrary. Again, this damage was described by Mr. Balcombe as minimal.

(e) The Absence of Disruption

107. During his cross-examination of Mr. Shaya, Mr. Sutherland made a point to the effect that if tenants had been housed elsewhere on a large scale, there would have been evidence of returned deposits and/or returned rent that had been paid in advance, together with evidence as to the returning of keys and the like. That is what happens in circumstances like this when, on Craven Hill's case, an unexpected but major event forces the tenants of 13 flats to find alternative accommodation.
108. There was no such evidence in this case. Only one tenant came to give evidence on behalf of Craven Hill, and that was Mrs. Huczko, in respect of whose flat a claim for lost rent had been made despite the fact that she had never moved out. She confirmed that there were plenty of people in the building throughout the latter part of 2001. She did not know if they were squatters or other tenants.

(f) The Contemporaneous Claims Made

109. The lack of credibility of the claim for lost rent was further exacerbated by the numerous errors which, even on Craven Hill's case, were contained in the two contemporaneous claims made.
110. The first claim was made when Mr. Balcombe handed Mr. Ellis a copy of the document entitled "Loss of Rent Claim" at the meeting on 10^th October. I reject the suggestion that this was somehow a draft claim. Mr. Balcombe confirmed it was not. There was nothing on the face of the document which could have led Mr. Ellis to believe that it was anything other than the formal claim for lost rent which he had been chasing for the previous three months. It was only superseded at a later date because Mr. Ellis had expressly requested a signed/certified version, and it was only altered because of exaggerations which Mr. Ellis himself had pointed out in the first version.
111. The document of 10^th October included a claim for lost rent on flat 1 from 27^th June to 21^st September, when it is now accepted that Mrs. Huczko was present and paying rent throughout that period. Mr. Balcombe and Mr. Shaya blamed Mr. Masawi for that. Mr. Masawi blamed Mr. Balcombe. That sort of finger- pointing was, I am afraid, a feature of some aspects of the Craven Hill evidence.
112. The document included a claim for flat 7A for over £3,000, being the rent from 13^th June to 27^th September. Craven Hill later accepted that the claim should have been for just £800, although no explanation for this change and no identification of the period during which the flat was in fact empty was ever provided.
113. The document included a claim for flat 7C for £4,410, being the rent from 13^th June to 7^th November. Other documents were accepted by Mr. Shaya, Mr. Balcombe and Mr. Masawi in their respective cross-examinations as showing that the flat was occupied by a new tenant paying rent from at least the end of September. I should note that Mr. Rhys, in his closing submissions, said that the evidence of occupation from the end of September only came from Mrs. Ozawa in a statement provided to Mr. Hockaday and was therefore unreliable. I reject that. There was the evidence of Craven Hill's own witnesses to support the contention that this flat was occupied, at least from the end of September onwards. I also note that the document from Craven Hill at p.375 of the bundle, which was purporting to show rent figures on a monthly basis, identifies a figure of £910 rent for this flat for the month of October 2001.
114. Full claims were also made in the 10^th October document in respect of flats 3, 5, 7, 7B, 8 and 9, despite the findings set out in paragraphs 88 to 96 and 100 to 106 above. Mr. Balcombe, who prepared the claim document (on the basis, he said, of information provided by Mr. Masawi) agreed in cross-examination that the claim document of 10^th October was wrong and that he knew at the time that it was prepared that it was wrong.
115. On 15^th November a very similar document was produced. This contained a lower figure, certified by Mr. Bastable. On exploration in the evidence it turned out that Mr. Bastable could have had no idea whether this claim document was right or not. Although it made adjustments in respect of flats 1 and 7A to reflect the errors identified in paragraphs 111 and 112 above, this claim did not make any adjustment for flat 7C, despite Craven Hill's evidence that the claim as stated was incorrect, and neither did it make any adjustments in respect of the flats referred to in paragraph 114 above.
116. Given all the evidence set out above, it is impossible not to conclude that the claim for lost rent as advanced in the October document and modified in November was a complete try-on: a claim which Craven Hill knew in part to be false (flat 7C, for example) and which they knew or should have known was also false in other respects (such as in respect of flats 3, 5, 7, 7B, 8 and 9).
117. The question for me is: were these in some way honest mistakes? Was there a sound claim for lost rent that had simply been muddled up and hidden by a large number of errors? That was Mr. Rhys's submission. On all of the evidence which I have set out above, I simply cannot accept it. The overwhelming impression I got was of a claim that was being advanced in a deliberate way, regardless of the true position, by reference to large sums which Craven Hill knew could not be justified but which, given that they controlled the documents, they hoped would lead to as high a settlement as possible.
118. I consider that, on the contemporaneous evidence that I have so far analysed, the claim for lost rent was fraudulent because it was grossly exaggerated and that exaggeration was deliberate, material and substantial.
119. Even if I am wrong and the exaggerations were not deliberate, then, at the very least, the claim was advanced in circumstances where Mr. Shaya and Craven Hill were completely reckless as to whether the information that they provided to AUA was correct or not. Mr. Shaya said he did not check it; Mr. Balcombe said he did not check it; Mr. Masawi said he did not check it. The only changes made to the original claim were as a result of the errors pointed out by Mr. Ellis. Beyond that, Craven Hill sat back and waited for Mr. Ellis to do the work, and to point out other areas of the claim which were unjustified. Craven Hill knew or should have known that the claims were unjustified and they should never have been made.
120. However, I am conscious that, whatever the contemporaneous documents said or did not say, this action has been on foot for three and a half years and during that time AUA have repeatedly sought the documents that would either support or disprove the loss of rent claim. Some documents have been provided which, at the outset of the trial, were suggested by Craven Hill's solicitors as demonstrating that the loss of rent claim was valid. In my judgment, therefore, those documents are very important. Do they correct the clear impression of fraud given by the contemporaneous documents or do they confirm it?

(g) The Documents alleged to Show Lost Rent

121. There is a variety of documents relied on in one way or another to prove the loss of rent claim. They are:

(i) Starmax's letter of 17^th September setting out the rents achieved up to 13^th June 2001;

(ii) Craven Hill's accounts setting out the rent received for the years ending 31^st March 2000 and 31^st March 2001;

(iii) the Excel spreadsheet showing figures per flat per month up to January 2001;

(iv) the monthly record of figures for each flat at the property in 2001 less expenses and the like;

(v) documents made available by the Woolwich Building Society;

(vi) a document, again in Excel spreadsheet form, which states right in the middle:

"No rent income for 8 Craven Hill during June 2002 - fire/ref 432ST/CH/refund till 13/06. New contract/Flat 1 continue ACC/."

122. For the reasons set out below, my analysis of these documents has confirmed beyond doubt my conclusion that the claim in respect of lost rent was a fraudulent claim.
123. It will be immediately apparent that the documents referred to at paragraphs 121(i) and (ii) are irrelevant to the loss of rent claim because they do not give any information relating to the position after 13^th June. However, as I have already pointed out, they are consistent with each other and they support the figures in the Starmax letter of 17^th September 2001. Therefore they were, as Mr. Masawi and Mr. Shaya said, records of rents actually paid and received. Incredibly, no explanation has been offered as to why Craven Hill's accounts for the year ending 31^st March 2002 have not been provided. Those accounts would contain the relevant records of rents actually paid and received during the relevant period.
124. The document referred to at paragraph 121(iii) is also irrelevant because it again stops some months before the fire. It was unclear whether this was a record of actual payments or the sums that should have been paid by way of rent. Either way, the very existence of this document demonstrated the curious absence of a similar record dealing with the position from February 2001 to November 2001. Mr. Masawi said there would have been such a document. Craven Hill were obliged, pursuant to the Unless Order, to provide it. They have not done so, nor have they provided an explanation as to why not.
125. The document identified at paragraph 121(iv) looked as if it might be relevant, but both Mr. Shaya and Mr. Masawi (the latter being the person responsible for its creation) said that it did not show actual payments but simply demonstrated what sums should have been paid by way of rent. That explains why the figures are different from the records of actual payment identified in the documents at paragraph 121(i) above, but it also means that these records cannot prove that rent was not paid for a particular period, because both men said it was not a record of actual payment at all.
126. The documents identified at paragraph 121(v) were those made available by the Woolwich Building Society. They had advanced £1,050,000 in respect of the purchase of the property, together with an additional £100,000 in January 2001. The documents showed that payments were made to the Woolwich of figures varying between £14,000 and £23,000-odd for each quarter. I was told that these payments were made by Starmax and were effectively the rental payments being achieved on the property.
127. These records showed that £22,886.19 was paid by Starmax to the Woolwich on 2^nd July 2001; £22,343.85 on 3^rd October 2001, and £20,320.39 on 31^st December 2001. In other words, there was no apparent reduction whatsoever in the amounts paid to the Woolwich in the six months after the fire. On the face of the documents, therefore, there was no shortfall in rent. Mr. Shaya suggested that the payments may have been made up by others, but these others were never identified. Craven Hill, I was told, did not even have a bank account, so it could not have been them. Mr. Shaya said that he personally did not make up any such payments. There was no evidence that anyone else connected with Craven Hill, whoever they might be, had made any direct payments to the Woolwich.
128. Also on this point, the Woolwich documents recorded each payment they received. There was only one payment on each of the dates that they identified. That would rule out there being a number of different payments to them, some of rent, and some being made up by others. Accordingly, these can only have been the quarterly payments made to the Woolwich by Starmax. There was no evidence from Mr. Masawi that Starmax were paid anything by others on behalf of Craven Hill in order that these sums could be passed on to the Woolwich so that some sort of shortfall could be made good.
129. Moreover, Mr. Shaya confirmed that, if lesser payments had been made to the Woolwich to reflect the fact that rentals had ceased, this would not have constituted default on the interest-only mortgage. In other words, as he accepted, there was no reason for the payments to the Woolwich to be made up by others in July, October or December 2001 in any event.
130. For all these reasons, I regard the documents supplied by the Woolwich as constituting good evidence that rental payments were generally paid by the tenants throughout the period after the fire.
131. That leaves the document identified at paragraph 121(vi). I regard that as a critical document. It was not provided in accordance with the Unless Order. It was produced by Craven Hill's solicitors much more recently. It looks like an Excel spreadsheet of the type identified at paragraph 121(iii) above, but with specific changes made to it.
132. On analysis it proved to be a very curious document indeed, not least because it apparently dealt with the position from November 2001 and into 2002 and therefore, on its face, contained no information dealing with the rent paid (or not) between June and November 2001. It also stated that the fire was in June 2002, which was obviously wrong. In some entries the days of the week and the number of the month have been transposed. As a result, it is very difficult to conclude that this is anything other than a doctored document designed, however ineptly, to support the claim for loss of rent at the eleventh hour. It was very revealing that as soon as the difficulties with this document were put to Mr. Shaya in cross-examination, he immediately said: "I have not seen it before today". I am bound to say that I found that answer incredible and I do not accept it.
133. Mr. Masawi's evidence in cross-examination in relation to this document was equally defensive. He very quickly said that the document "was a mistake". He said that he had not been responsible for all the entries on it because it had been produced by a number of his colleagues. He said he had "got the wrong file". In answer to a question from me, he said I should disregard the document completely. In answer to the suggestion from Mr. Sutherland that the document appeared to have been concocted, he invoked the protection of the court but did not directly answer the question.
134. If I follow Mr. Masawi's advice, it means that there is no document, even four years on, which begins to show that rental payments were not made by some of the tenants for some of the time after the fire. It therefore means that, even now, the claim is wholly unsupported and must fail (see paragraph 78 above).
135. On the other hand, if, as I believe I should, I take this document into account, it could only be to find that it was a concoction and a particularly inept one at that. It was designed to try and provide written support for a large loss of rent claim where only a small claim on flat 4, and perhaps one or two others, actually existed.
136. Accordingly, not only were Craven Hill endeavouring to defraud the insurers in October/November 2001, but, despite all the opportunities that they had been given to withdraw that fraudulent claim, they were still perpetrating the fraud and still trying to support it with concocted documents four years after the claim for lost rent was first made.

(h) Summary on Claim for Loss of Rent

137. For the reasons which I have set out, the loss of rent claim in the pleaded sum of £53,497.40 must fail in its entirety. Craven Hill have not proved any part of it. A modest claim in respect of flat 4, for instance, may have existed but it has not been demonstrated on the evidence. The vast majority of the claim was always doomed to fail.
138. Judged by reference to the documents which they provided at the time, the Craven Hill claim for loss of rent was fraudulent. The original claim assumed, without any basis in fact, that all the tenants stopped paying rent in June 2001, when the other documents and the state of occupation of the property meant that such an assumption was plainly and obviously false. The claim also blithely ignored all of the evidence of actual occupation which Mr. Ellis continued to bring to Craven Hill's attention.
139. I find that the documents provided in the years thereafter, in an effort to support the claim for lost rent, have confirmed beyond doubt that the claim was fraudulent. In particular I regard the absence of documentary records that should have been provided, and the existence of documents that were obviously concocted, as proving beyond doubt that this head of claim was fraudulent.
140. In some ways the claim for lost rent was similar to the claim for £60,000 by reference to the Gulf Falcon invoices: a try-on, made in the knowledge that large parts of it were unsustained and unsustainable. But there was one crucial difference. For the reinstatement/repair claim there was always going to be Mr. Ellis to exercise careful scrutiny and an independent view by inspecting the property himself before any payments were authorised. For the rent claim, as Craven Hill knew, detailed scrutiny in that sense was impossible. The claim would always depend on the documents which they themselves would provide and which they themselves could therefore control.
141. In other words, unlike the claim in respect of reinstatement/repair, I cannot give the benefit of the doubt to Craven Hill. This is primarily because I am in no doubt that the loss of rent claim was fraudulent. But, unlike the reinstatement/ repair claim, the claimed loss of rent was neither an interim payment nor was it a matter of opinion. It was, or should have been, fixed by reference to documented information collected by the insured. It was not a situation in which Mr. Ellis was in as good a position to value the claim as Craven Hill. In those circumstances, on the basis of Lord Hoffmann's guidelines in Orakpo, this grossly exaggerated claim is more likely than not to be fraudulent. Indeed, I find that it plainly was fraudulent.

I. CONCLUSIONS

142. As set out is section G above, I find that although the claim in respect of reinstatement/repair contained elements of deceit, exaggeration and ineptitude, I consider that I should give Craven Hill the benefit of the doubt and find that the claim is not fraudulent.
143. By contrast, there is ultimately nothing that Craven Hill can rely on to counter the overwhelming evidence that the loss of rent claim was fraudulent. Based on a patently false premise, it ignored the clear evidence of occupation and payment of rent; it contained numerous exaggerations, some of which were admitted and some of which were not; and it was not, despite the production of documents very late in the day, capable of being supported by any post-fire documents at all.
144. Critically, this head of claim was based on information which was within Craven Hill's control. It could not be scrutinised by Mr. Ellis in the same way as the reinstatement/repair claim. It was Craven Hill's responsibility to put forward an honest claim relying on the documents that they or their agents must have had. They failed to do so. They had no excuse for that. No conclusion is appropriate on the evidence other than to find that the claim for lost rent was fraudulent.
145. The final point for me to decide is the effect of this finding of fraud. Mr. Rhys submitted that there are two separate claims and that if, as I have found, one of them is not fraudulent, that claim should not be struck down. Mr. Sutherland, on the other hand, says that there is only one claim with two heads of loss and that the fraud strikes down the entire claim.
146. I have concluded that Mr. Sutherland must be right. A similar point was considered by the Court of Appeal in Axa General Assurance v. Clara and Joseph Gottlieb (11.2.05). In that case, there was an interim payment that had been paid out on a tainted claim and, following the finding of fraud, the interim payment had to be returned. In this case there was one claim on the policy, based on one event, namely the fire. The claim made by Craven Hill broke down into two different heads of loss but, given that it was one claim, fraud within one head of loss taints the claim as a whole. The interim payment must therefore be returned.
147. Accordingly, I grant the declaration sought that this entire claim is forfeit due to fraud. The consequence of that is that Craven Hill will have to repay the £25,000 paid on account. I so order.
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