Flooded with doubt: Court assesses fraud allegations in Malhotra Leisure

In Malhotra Leisure Ltd v Aviva Insurance Limited [2025] EWHC 1090 (Comm), the Commercial Court has delivered a careful and considered judgment that underscores the importance of clear evidence in fraud-related insurance disputes.

The case offers a reminder that while insurers are right to scrutinise claims thoroughly, the legal threshold for proving fraud remains high.

The leak that sparked the dispute

In July 2020, during the Covid-19 lockdown, a cold-water storage tank burst at one of Malhotra Leisure’s hotels causing extensive property damage. The Claimant submitted a claim under its property damage and BI policy. The insurer Aviva declined to indemnify, alleging that the escape of water was deliberately caused and the claim was supported by false statements. The Court, however, was not satisfied that this threshold had been met.

The wording of the fraud condition in the policy was:

“If a claim made by You or anyone acting on your behalf is fraudulent or fraudulently exaggerated or supported by a false statement or fraudulent means or fraudulent evidence is provided to support the claim, We may:

(1) refuse to pay the claim”

Accident or arson? The burden of proof

The burden lay with Aviva to prove, on the balance of probabilities, that the incident was intentionally caused.

The Court held that there remained a plausible accidental explanation, even acknowledged by Aviva’s own expert. There was no direct evidence of deliberate wrongdoing nor was there sufficient circumstantial evidence to support an inference of intent.

The absence of financial motive

Aviva had suggested that pandemic-related financial pressures might have provided motive. However, the Court found that Malhotra had substantial assets at the time, including £7.5m in cash and £150m in tangible assets and no compelling evidence of financial distress. In the absence of a clear motive, the argument was not persuasive.

Common law position, collateral lies and policy construction

A key element of the case was the interpretation of the fraud exclusion. The Court reaffirmed that such clauses must be read in line with long-standing common law principles, particularly following Versloot Dredging BV v HDI Gerling [2016] UKSC 45. The Versloot principle is that ‘collateral lies’ (irrelevant or immaterial falsehoods made with dishonest intent but which do not further the claim directly) do not void otherwise valid claims

Crucially, the Court resisted a broader reading of the fraud exclusion that would allow the insurer to reject the claim based on any false statement. The Court held that if a clause is to go beyond the long-standing common law principles, then such clauses must contain clear and specific language. In this case, the words “claim… supported by a false statement…” showed that the clause did not go beyond the common law position.

The Court held that the exclusion could only be triggered by dishonest and material misstatements made to enhance the claim. Innocent errors – such as mistaken dates or misunderstandings during post-incident communications – did not meet that standard.

Key takeaways for property insurers

• There is a high threshold for fraud: Further, dishonesty must be clearly established as any inconsistencies or minor errors alone will not suffice.
• Motives matter: As the courts will consider the broader financial picture, any absence of motive can significantly weaken a fraud allegation.
• There must be precision in policy wording: Fraud exclusion in particular must be tightly drafted.
• Collateral lies are not fatal: Following Versloot, false but immaterial statements will not justify declinature unless it is clearly covered by policy language

This case highlights the need for insurers to take a balanced and evidence-based approach when fraud is suspected, given the high thresholds involved.