Failed Fraud Allegations Justify Indemnity Costs Order Despite Proper Conduct

An insurer was ordered to pay indemnity costs following failed fraud allegations, despite properly pleading and pursuing them through experienced counsel, where objective weaknesses were apparent from an early stage and substantial harm was inflicted.

Indemnity costs fraud allegations CPR 44.3 Commercial Court judgment

MALHOTRA LEISURE LIMITED V AVIVA INSURANCE LIMITED [2025] EWHC 2901 (Comm)

In Malhotra Leisure Ltd v Aviva Insurance Ltd, the Commercial Court determined consequential costs following rejection of the Defendant insurer’s fraud allegations. The Claimant sought indemnity costs under CPR 44.3, arguing the failed allegations took the case “out of the norm.” The Defendant contended its fraud defence was properly pleaded and responsibly pursued through experienced counsel. The court ordered indemnity costs despite accepting at [27] that the allegations were properly pleaded and pursued appropriately. Applying Thakkar v Mican [2024] 1 WLR 4196, the judge identified six factors justifying the order: the exceptional seriousness of the conspiracy allegations; foreseeable reputational and financial harm; pursuit to trial without settlement discussions; objective weaknesses (including lack of direct evidence and flawed motive case) apparent or reasonably discoverable from an early stage; evolving unpleaded theories at trial; and late withdrawal of specific allegations after substantial costs had been incurred. The Defendant was ordered to pay costs on the indemnity basis with £660,000 interim payment on account.

Link to full judgment

I accept ... that the Defendant's allegations were properly pleaded and pursued in an appropriate way by the Defendant and those representing it....But, there were obvious difficulties with the Defendant's allegations of dishonesty such that the Defendant would or should have recognised that there was at least a serious risk that its case on dishonesty would fail and that as a consequence there was a significant risk that an order for indemnity costs would be made.

Citations

Excelsior Commercial and Industrial Holdings Ltd v. Salisbury Hannah Aspden and Johnson [2002] EWCA Civ 879 An award of indemnity costs is materially more favourable to the receiving party than standard basis assessment, as it shifts the burden to the paying party and disapplies proportionality. Lejonvarn v Burgess [2020] 4 WLR 43 Held that approved budgets are irrelevant for assessment where indemnity costs are awarded, and explained the operation of CPR r.3.18(a) in such contexts. Thakkar v Mican [2024] 1 WLR 4196 Reaffirmed that there is no presumption of indemnity costs for failed fraud allegations, but acknowledged that such allegations often lead to indemnity costs depending on the case’s circumstances. Manna v Central Manchester University Hospitals NHS Foundation Trust [2017] 1 Costs LO 89 Supported the view that failed allegations of dishonesty often justify indemnity costs against the party who made them, under the principle that the same standards apply to both sides. Clutterbuck v HSBC Plc [2016] 1 Costs LR 13 Stated that in cases involving failed fraud allegations, indemnity costs are normally ordered due to the seriousness and consequences of such accusations, though judicial discretion remains. Suez Fortune Investments Ltd v. Talbot Underwriting Ltd [2019] Costs LR 2019 Found that indemnity costs were appropriate where the claim was based on a fraudulent conspiracy and pursued despite evident weaknesses and foreseeable risks of failure. Farol Holdings Ltd & Ors v Clydesdale Bank PLC & Anor [2024] EWHC 1044 (Ch) (08 May 2024) Rejected the idea that proper conduct by legal representatives precludes indemnity costs where weak and flawed allegations of deceit were pursued to trial. Three Rivers District Council v. The Governor and Company of the Bank of England [2006] EWHC 816 (Comm) Indicated that indemnity costs may follow where a party takes high risk positions by pursuing speculative or weak claims or defences. Governors and Company of the Bank of Ireland & Anr v Watts Group Plc [2017] EWHC 2472 (TCC) Emphasised the need to avoid hindsight when evaluating whether a failed party’s conduct warrants indemnity costs, focusing on the case as seen prospectively.
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Key Points

  • The making of serious and wide-ranging allegations of dishonesty or fraud, particularly when pursued aggressively over an extended period, is a circumstance that can take a case out of the norm and justify an order for indemnity costs. [9, 19, 29]
  • A party making allegations of fraud runs a significant risk that, if the allegations fail, indemnity costs will be awarded against them, as the party defending such allegations is often forced to incur substantial costs to vindicate its position. [6, 8, 21]
  • The fact that serious allegations of dishonesty were properly pleaded and pursued by experienced legal representatives in a measured way is not, in itself, an answer to a claim for indemnity costs if the allegations were weak and subject to inherent flaws that were or should have been reasonably apparent. [12, 23, 27, 28]
  • When determining the appropriate basis for costs, the court will consider whether the unsuccessful party continued its case in circumstances where it should have been apparent that its claim or defence was weak and that there was a real and serious risk of failure. [10, 23, 28]
  • In the specific circumstances of a compromised disclosure application where the parties cooperated to agree a narrower scope of disclosure and it is not fruitful to determine the outcome of a contested hearing, the court may order that each party bears its own costs. [33, 34].

“...because the making of a dishonest claim will very often attract an indemnity costs order against a claimant, a failed allegation of dishonesty will very often lead to the making of an indemnity costs order against the defendant, on the simple basis that 'what is sauce for the goose is sauce for the gander' ... A defendant who makes allegations of this kind therefore runs a very significant risk that, if the allegations fail, indemnity costs will be awarded against them." Thakkar v Mican [2024] 1 WLR 4196

Key Findings In The Case

  • The Defendant’s serious and wide-ranging allegations of dishonesty against the Claimant—including that senior personnel conspired to damage property and defraud the insurer—were pursued aggressively to trial without settlement efforts, and were found to be wholly unsubstantiated, justifying an award of indemnity costs as a case out of the norm [19–22].
  • The Defendant’s allegations of fraud were based entirely on speculative inferences, lacked direct supporting evidence, and should reasonably have been recognised as weak early in proceedings, particularly given the absence of motive and the existence of contradictory expert and documentary evidence available at an early stage [23].
  • The Defendant persisted with various flawed arguments at trial, including late-evolving motives unsupported by pleadings or initial disclosure, and pursued abandoned allegations (such as Mr Meenu Malhotra’s birthday celebration) long after receiving contrary evidence, contributing to the court’s conclusion that costs should be awarded on an indemnity basis [24–25].
  • Although the Defendant’s legal representatives conducted the case in a measured and professional manner, and the fraud allegations were properly pleaded, this did not negate the fact that the evidential weaknesses in the Defendant’s case were apparent from the outset, further supporting the appropriateness of indemnity costs [27–28].
  • In relation to a specific disclosure application that was compromised pre-hearing, the court held that, because the parties had cooperated to resolve the dispute and radically narrowed the scope of requested documents, each party should bear their own costs and no order should be made as to costs on that issue [34].

"...the Defendant had available to it at an early stage the public audited accounts of the Malhotra Group and a screening report from its agent, Sedgwick, which concluded, inter alia, that the Malhotra Group was both profitable and solvent and that the Claimant exhibited no signs of financial stress or pressure. In other words, the weakness of the Defendant's case on financial motive was not something which was only apparent with hindsight but could be seen from an early stage of the litigation."

The Commercial Court’s decision in Malhotra Leisure Limited v Aviva Insurance Limited [2025] EWHC 2901 (Comm) establishes that properly pleaded and responsibly pursued fraud allegations can still attract indemnity costs where their objective weaknesses should have been apparent and they caused foreseeable harm.

Background

The case arose from a claim by Malhotra Leisure Limited against Aviva Insurance Limited concerning water damage to a hotel in July 2020. Aviva denied cover, alleging the escape of water was deliberate and formed part of a fraudulent conspiracy by the Malhotra principals to defraud the insurer. In the liability judgment ([2025] EWHC 1090 (Comm), 7 May 2025), the court rejected those allegations and found in favour of the Claimant. The subsequent costs judgment ([2025] EWHC 2901 (Comm), 6 November 2025) determined consequential costs matters following a July 2025 hearing.

Costs Issues Before the Court

The central issue was whether costs should be assessed on the indemnity or standard basis. This was significant because the Claimant’s actual costs of £1,202,957 were more than double its approved budget of £546,731. An indemnity costs order would render the budget irrelevant under CPR 3.18(a), whilst a standard basis order would require “good reason” to exceed it. The court also had to decide who should bear the costs of a specific disclosure application and the appropriate quantum of an interim payment on account (agreed at either £475,000 or £660,000 depending on the basis of assessment).

The Parties’ Positions

The Claimant argued that Aviva’s failed fraud allegations took the case “out of the norm” and warranted indemnity costs. It relied on Thakkar v Mican [2024] 1 WLR 4196, which confirmed that whilst there is no presumption, failed allegations of fraud will “very often” lead to indemnity costs. The Claimant submitted that Aviva’s fraud case was objectively weak from the outset, lacked proper evidential foundation for the alleged financial motive, and evolved at trial with unpleaded allegations. The Claimant highlighted significant financial and reputational harm suffered by its principals, including increased insurance costs, inability to obtain bank financing, and impacts on health and business relationships.

Aviva contended that costs should be assessed on the standard basis. It argued its fraud defence was properly pleaded, supported by credible lay and expert evidence, and pursued responsibly by experienced counsel. Aviva submitted the court must avoid hindsight and recognise the legitimate difficulties insurers face in challenging potentially fraudulent claims. The Defendant emphasised that insurers have a duty to challenge suspicious claims, as failing to do so adversely impacts all policyholders through higher premiums.

The Legal Framework

The court reaffirmed that indemnity costs are exceptional and awarded only where a case is “out of the norm.” An indemnity costs order is considerably more favourable than standard basis because it places the onus of showing costs are unreasonable on the paying party, disapplies proportionality, and renders approved budgets irrelevant. Failed fraud allegations often meet the “out of the norm” threshold, though there is no presumption. As the Court of Appeal stated in Thakkar v Mican, “what is sauce for the goose is sauce for the gander” – just as a dishonest claim attracts indemnity costs against a claimant, failed fraud allegations very often lead to indemnity costs against the defendant.

The Court’s Decision

Nigel Cooper KC, sitting as a Judge of the High Court, ordered that Aviva pay the Claimant’s costs on the indemnity basis. Critically, the judge accepted at [27] that Aviva’s allegations “were properly pleaded and pursued in an appropriate way” by experienced counsel. The court also acknowledged the case was supported by expert evidence and that there was evidence supporting the possibility of deliberate causation.

Nevertheless, the court concluded at [30] that “looking at the circumstances of the case overall an order for indemnity costs is appropriate.” The judge identified six specific factors justifying this conclusion:

      • First, the exceptional seriousness of the allegations | The allegations were at the highest level – that three individuals had entered into a fraudulent conspiracy to damage property and defraud the insurer, supported by lies to both the insurer and the court.
      • Second, foreseeable harm | The Claimant suffered financially (significantly increased insurance costs), Mr Meenu Malhotra was unable to obtain bank financing for developments, and both principals suffered reputational harm and impacts on health and business relations. These consequences were reasonably foreseeable, as evidenced by Aviva’s solicitors’ letter of 5 March 2021.
      • Third, pursuit to the end | The allegations were pursued through to the end of trial without settlement discussions being pursued.
      • Fourth, objective weakness apparent from the outset | The serious risks associated with Aviva’s allegations were, or should reasonably have been, apparent from when first raised. There was no direct evidence of deliberate causation. Aviva’s own expert initially considered the escape fortuitous and accepted in cross-examination that each required failure was plausibly capable of occurring fortuitously. Physical evidence was consistent with Tank 18 overspilling, yet none of Aviva’s proposed deliberate mechanisms involved this. The pleaded financial motive lacked proper evidential foundation – Aviva had early access to audited accounts and a screening report from its agent Sedgwick concluding the Malhotra Group was profitable and solvent with no signs of financial stress. The weakness of the motive case was apparent from an early stage, not only with hindsight.
      • Fifth, evolving case at trial | Aviva’s motive case evolved at trial with new, unpleaded allegations concerning asbestos in the hotel and an alleged aim of constructing a sports bar. Neither was properly pleaded despite both requiring pleading. Both necessitated supplemental evidence and submissions. Both failed.
      • Sixth, late withdrawal of specific allegations | Aviva pursued an allegation that Mr Malhotra was not celebrating his 60th birthday on the relevant night. The Claimant provided extensive disclosure in August 2021 and August 2022. The allegation was only dropped three weeks before trial, after the Claimant had procured witness statements from 10 individuals and obtained witness summonses for their attendance.

The court observed at [28] that Aviva was “determined to pursue this case through to trial,” as was apparent from counsel’s submissions. Despite the obvious difficulties and the serious risk of an indemnity costs order, Aviva chose to proceed.

The judge clarified at [17] that the effect of an indemnity costs order on costs management was “not a relevant circumstance” for deciding whether to make such an order. The disparity between budgeted and incurred costs did not itself justify indemnity costs.

On the specific disclosure application, the court made no order as to costs, meaning each party bore its own costs. The judge found it neither fruitful nor straightforward to determine what a contested hearing would have achieved given the parties’ cooperation in resolving the application.

Aviva was ordered to pay £660,000 on account of costs within 21 days, being the sum agreed as appropriate where costs are assessed on the indemnity basis.

Implications for Practice

This decision reinforces several important principles for costs practitioners and insurers:

      • Proper pursuit does not insulate from indemnity costs | The court’s explicit acknowledgment that Aviva’s allegations were properly pleaded and pursued through experienced counsel demonstrates that technical compliance with pleading requirements and responsible litigation conduct does not prevent an indemnity costs order. The focus is on whether the overall circumstances take the case out of the norm.
      • Objective assessment, not hindsight | Whilst courts must avoid hindsight bias, they will assess whether case weaknesses were or should have been apparent when allegations were first raised. Early availability of evidence undermining core elements (particularly motive) is highly relevant. Here, Aviva had access from an early stage to audited accounts and professional reports contradicting its financial motive theory.
      • Foreseeable harm matters | Courts give weight to whether the consequences of serious fraud allegations – financial, reputational, and personal – were or should have been foreseeable. Solicitors’ correspondence acknowledging such consequences may be used against the alleging party in costs assessment.
      • Aggressive pursuit includes refusing settlement | Pursuing allegations through to trial’s end without exploring settlement, combined with other factors, contributes to findings of aggressive pursuit warranting indemnity costs.
      • Evolving theories require pleading | Introducing new aspects of case theory at trial (here, asbestos and sports bar allegations) that should have been pleaded supports indemnity costs awards, particularly where they necessitate supplemental evidence and submissions from the opposing party.
      • Strategic withdrawal timing is scrutinised | Dropping specific allegations shortly before trial after the opposing party has incurred substantial costs responding (here, 10 witness statements and witness summonses) is relevant to assessing aggressive pursuit.
      • Costs budgets become irrelevant | Once indemnity costs are awarded, approved budgets no longer constrain recovery under CPR 3.18(a). However, budget disparity alone does not justify indemnity costs.

For insurers, this decision serves as a clear warning: whilst entitled and sometimes duty-bound to investigate and defend potentially fraudulent claims, insurers must carefully assess the objective strength of fraud allegations before pursuing them through to trial. The duty to policyholders through maintaining premium levels does not override the costs risks of aggressively pursuing objectively weak fraud defences where core elements (particularly motive) lack proper evidential foundation from an early stage.

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MALHOTRA LEISURE LIMITED V AVIVA INSURANCE LIMITED [2025] EWHC 2901 (COMM) | MR NIGEL COOPER KC | INDEMNITY BASIS | STANDARD BASIS | CPR 44.3 | CPR 3.18(A) | CPR 3.18(B) | PROPORTIONALITY DISAPPLIED | OUT OF THE NORM CONDUCT | FAILED ALLEGATIONS OF FRAUD | LATE STAGE DISCONTINUANCE | SERIOUS ALLEGATIONS OF DISHONESTY | COSTS CONSEQUENCES OF FRAUD ALLEGATIONS | CLAIMANT’S UNBUDGETED COSTS | WHITE BOOK 2025 PARAGRAPH 44.3.5 | WHITE BOOK 2025 PARAGRAPH 3.18.1 | PAYMENT ON ACCOUNT OF COSTS | NO ORDER AS TO COSTS | DISCLOSURE APPLICATION COSTS | EXCEEDING COSTS BUDGET | FINANCIAL AND REPUTATIONAL IMPACT | ADDITIONAL DOCUMENTS DISCLOSURE | SPLIT COSTS ORDER | ZACAROLI J | WHITE BOOK GUIDANCE ON COSTS | EXCELSIOR V SALISBURY HANNAH ASPDEN AND JOHNSON [2002] EWCA CIV 879 | LEJONVARN V BURGESS [2020] 4 WLR 43 | THAKKAR V MICAN [2024] 1 WLR 4196 | CLUTTERBUCK V HSBC PLC [2016] 1 COSTS LR 13 | MANNA V CENTRAL MANCHESTER UNIVERSITY HOSPITALS NHS FOUNDATION TRUST [2017] 1 COSTS LO 89 | THREE RIVERS DC V BANK OF ENGLAND [2006] EWHC 816 (COMM) | SUEZ FORTUNE INVESTMENTS LTD V TALBOT UNDERWRITING LTD [2019] COSTS LR 2019 | FAROL HOLDINGS V CLYDESDALE BANK [2024] EWHC 1044 (CH) | BANK OF IRELAND V WATTS GROUP PLC [2017] EWHC 2472 (TCC)