A Deluge of Costs: how misplaced fraud allegations can overflow into indemnity costs orders: Part Two – the costs decision

Following the recent Commercial Court judgment in Malhotra Leisure Ltd v Aviva Insurance Ltd [2025] EWHC 1090 (Comm) (see our previous article on this topic), in which the Court rejected Aviva’s fraud allegations against the policyholder, the costs decision was handed down on 6 November 2025.

The costs decision underlines the steep price of advancing serious fraud allegations that fail at trial, which in this case, failed for want of evidence that the escape of water had been induced by the Insured or that there was any financial motive to do so.

The Insurer’s evidential deficit framed the subsequent costs dispute regarding whether costs should be assessed on the standard or indemnity basis. Standard costs are the default, assessed as reasonable and proportionate, while indemnity costs are more generous—proportionality doesn’t apply and any doubt is resolved in the receiving party’s favour, often awarded when serious allegations, such as fraud, are pursued and fail.

Why indemnity costs mattered in this case

The practical stakes were high. The Insured’s approved costs budget totalled £546,730.50, while its actual spend was £1,202,957.09 – an excess of £656,226.59. An indemnity costs order would disapply proportionality and remove the relevance of the approved budget, materially increasing the Insured’s potential recovery.

What did the Court decide?

The starting point in all cases is that costs should be assessed on the standard basis, with the burden on the receiving party to justify indemnity. While there is no presumption of indemnity where fraud or dishonesty allegations fail, such failures can attract indemnity costs because they can render the case “out of the norm.”

The Court concluded that indemnity costs were justified for seven principal reasons, being:

1. The Insurer advanced allegations of dishonesty about both the cause of the escape of water and statements made during the investigation, which by their nature took the case out of the norm;
2. The allegations were at the most serious level, asserting a fraudulent conspiracy involving senior individuals to damage the Insured’s own property and accusing those individuals of lying;
3. The evidence showed tangible financial and reputational harm flowing from the allegations, including increased insurance costs for the Malhotra Group, impaired access to bank finance, and adverse personal consequences for the individuals concerned;
4. The Insurer pursued the dishonesty case through to trial without pursuing settlement discussions;
5. The risks in the Insurer’s dishonesty case should have been apparent from the outset such as the fact there was no direct proof of a deliberately induced flood;
6. The Insurer’s motive case shifted at trial to unpleaded themes; and
7. The Insurer pressed an allegation disputing whether an individual was celebrating his birthday on the night of the escape of water despite extensive disclosure provided well before trial, abandoning the point only weeks before trial.

The Court’s decision serves as a cautionary tale that the making of allegations of fraud, whether by a claimant or by a defendant, can amount to “a circumstance which can take a case out of the norm and where allegations are pursued aggressively over an extended period of time, […], then an order for indemnity costs is likely to be made”.

Significance of the costs decision

For insurers, the judgment underscores that advancing and maintaining serious “out of the norm” dishonesty defences through to trial carries a significant indemnity costs risk if the case fails, particularly where there is no direct evidence, material inconsistencies with physical evidence, weak motive, and shifting theories. Such is the case even where, as the Court recognised in this case, insurers face industry-wide difficulties with fraudulent claims; as these difficulties must be balanced against the foreseeable financial and reputational harm to insureds when grave allegations prove unfounded.

For policyholders, the case illustrates the availability of indemnity costs where a serious dishonesty case fails, especially where allegations are pursued to judgment, without settlement engagement, and cause demonstrable commercial and reputational harm to the insured.

Should you require legal advice in relation to the implications of fraud allegations in respect of an insurance claim, please contact a member of our Insurance Disputes team.