The Cost of Alleging Fraud: Costs Judgment Handed Down in Malhotra Leisure Ltd v Aviva [2025]

Introduction

This article examines the Commercial Court’s recent costs judgment in Malhotra Leisure Ltd v Aviva [2025], a case with significant implications for policyholders facing fraud allegations from their insurers. The decision underscores the risks insurers face when making serious allegations without sufficient evidence, and the potential for substantial costs consequences if those allegations fail.

Background

Earlier this year, we reported on the Commercial Court’s decision in Malhotra Leisure Ltd v Aviva [2025] EWHC 1090 (Comm).

To recap, during the Covid-19 lockdown in July 2020, water had escaped from a cold-water storage tank at one of the Claimant’s hotels causing significant damage.

Aviva, the Claimant’s insurer under a property damage and business interruption policy, refused to indemnify the Claimant on the basis that:

• the escape of water was deliberately and dishonestly induced by the Claimant; and
• there were associated breaches by the Claimant of a fraud condition in the policy.

However, considering that there was no evidence that (a) the escape of water had been induced by the Claimant, or (b) there was any financial motive for it to have been, the Commercial Court held that Aviva’s fraud allegations failed.

The judgment read as a cautionary tale, reminding insurers that allegations of dishonesty cannot be pleaded lightly and that reasonably credible evidence must exist to establish a prima facie case of fraud.

You can read our article on the underlying judgment here – Court pours cold water on insurer’s fraud claims: Malhotra Leisure Ltd v Aviva – Fenchurch Law UK.

The Costs Judgment

This month, the Commercial Court handed down judgment on a number of consequential matters. Crucially; whether Aviva should pay the Claimant’s costs of the proceedings on an indemnity or standard basis.

An award of costs on the indemnity basis is considerably more favourable than an award on the standard basis because it:

• places the onus of showing that costs are unreasonable on the paying party;
• disapplies the requirement for proportionality; and
• renders the parties’ approved budgets irrelevant for the purposes of assessment.

In this case, the Claimant had budgeted costs of £546,730.50 but incurred costs of £1,202,957.09. The difference—over £650,000—depended on whether indemnity costs were awarded.

The starting point in all cases is that costs should be assessed on the standard basis and the burden of proving that costs should be assessed on an indemnity basis lies with the receiving party (in this case, the Claimant). Whilst there is no presumption in favour of indemnity costs where a defendant makes unsuccessful allegations of fraud, it will frequently attract indemnity costs in practice.

In Clutterbuck v HSBC Plc [2016] 1 Costs LR 13, David Richards J, as he then was, stated that “the seriousness of allegations of fraud are [sic] such that where they fail they should be marked with an order for indemnity costs because, in effect, the defendant has no choice but to come to court to defend his position”.

In other words, failed allegations of fraud should be a significant factor in persuading a court that indemnity costs should be awarded.

The Claimant referred the Court to the test set out in Suez Fortune Investments Ltd v. Talbot Underwriting Ltd [2019] Costs LR 2019. Namely whether, when one looks at the circumstances of the case as a whole, they are “out of the norm” in such a way as to make it just to order costs on the indemnity basis.

The Parties’ Arguments

The Claimant argued that, because Aviva’s allegations were so serious, they had inflicted financial and reputational damage and, because those allegations had turned out to be misconceived, justice demanded that costs should be recovered on an indemnity basis. An order for indemnity costs would allow it to recover a higher percentage of the costs that it had been forced to incur in order to defend and vindicate itself. It is no answer to an application for indemnity costs to say, as Aviva did, that the allegations were reasonably made or advanced by experienced and responsible counsel (Farol Holdings v Clydesdale Bank [2024] EWHC 1044 (Ch)).

In support of its argument that it’s conduct did not warrant such an outcome, Aviva submitted that what is required for an order of indemnity costs is conduct that is unreasonable to a high degree, and that a fraud defence supported by credible, lay and expert evidence is not deemed to be speculative, weak, opportunistic or thin simply because it ultimately proves unsuccessful at trial.

It pointed out that the insurance industry is plagued with fraudulent claims and the financial pressures facing businesses both during and following the Covid-19 lockdowns only exacerbated the problem. It submitted that insurers have a duty to challenge insurance claims which appear disingenuous (in whole or in part) otherwise fraudulent claims go unchallenged, premiums across the industry increase and all policyholders suffer. Legally, it pointed out that the Court must be careful not to use hindsight when assessing the strength of an unsuccessful party’s case pursuant to Governors and Company of the Bank of Ireland & Anr v Watts Group Plc [2017] EWHC 2472 (TCC).

The Decision

Despite Aviva’s plea, in a judgment handed down on 6 November 2025, Nigel Cooper KC ordered it to pay the Claimants’ costs on an indemnity basis, for the following reasons:

1. The allegations of dishonesty made by Aviva (that individuals at the Claimant had devised a fraudulent scheme to damage the Claimant’s own property in order to defraud, and had subsequently lied to the court in respect of this) were of the highest level of seriousness.
2. Both the Claimant and individuals at the Claimant had suffered financial and reputational harm as a result of Aviva’s allegations.
3. Aviva had pursued the allegations through to the end of trial without entertaining settlement discussions with the Claimant.
4. The risks associated with making the allegations were reasonably apparent from when they were first raised, given that there was no evidence that the flood had been induced by the Claimant.
5. Aviva’s case evolved at trial without any attempt to amend its pleadings.

Implications for Policyholders and Insurers

This case serves as a salient reminder that fraud cannot be pleaded lightly. Aviva’s argument that it has a duty to challenge insurance claims that appear disingenuous is perhaps telling of what is at the heart of an increasing issue in the insurance industry; insurers being too willing to pursue fraud allegations. While there is no suggestion that insurers should not be able to allege fraud in circumstances where there are bona fide reasons to do so, those allegations must be balanced against the damage and harm they cause to policyholders if they prove to be incorrect. The starting point should a holistic assessment, considering all factors before such allegations are pursued, rather than the presumption that any suspicion of dishonesty should lead to a fraud allegation.

For policyholders, the case demonstrates that robustly defending unfounded fraud allegations can lead not only to vindication but also to recovery of costs on the indemnity basis.

An insurer must assess the risk, consider engaging in settlement discussions and ensure that all allegations are appropriately pleaded. Otherwise, it may well pay a significant price.

Authors

Daniel Robin, Deputy Managing Partner

Abigail Smith, Associate