UK: Fraudulent Claimant Escapes Justice

Last Updated: 2 October 2015
Article by Clyde & Co LLP

Insurer unable to set aside settlement of fraudulent claim as reliance could not be shown

Hayward v Zurich Insurance [2015] EWCA Civ 327

First instance

The Claimant made a claim for a back injury he allegedly suffered whilst in the course of his employment. Video surveillance obtained pre-action showed that the Claimant was exaggerating his injuries and this was accordingly disclosed without delay.

The Claimant commenced proceedings for personal injury against his employer, seeking damages of about GBP 420,000. A defence was filed pleading fraud on the basis that the Claimant was exaggerating his injuries.

Given the employer's insurers' concerns that the Claimant was exaggerating his injuries, an offer was made in the sum of GBP 135,000, including interim payments, which was duly accepted by the Claimant and agreed in a Tomlin Order.

Three years later the insurers received further information that the Claimant had been dishonest and had recovered from his injuries one year prior to the case being settled. The insurers accordingly commenced proceedings to recover the sums paid.

The Court of Appeal initially allowed the action to continue and held that insurers were not estopped from relying on the subsequently discovered fraud (even though fraud had been alleged in the earlier proceedings).

The case then went to trial and the trial Judge held that the settlement should be repaid.

The Claimant appealed and the Court of Appeal has now unanimously allowed that appeal.

The Appeal

Underhill LJ held that in deciding to settle, a defendant takes the risk that the claimant's statements are false and therefore agrees to forego the opportunity to disprove those statements at trial.

However, Underhill LJ recognised that this reasoning might not be reconcilable with the earlier Court of Appeal ruling in the case that the claim could proceed. Accordingly, he said that "the fair thing is to park that question and consider whether my reasoning can be re-cast in a form which, albeit perhaps less satisfactory, avoids the potential conflict".

Accordingly, the Court of Appeal's decision is based on the reliance point instead. Being influenced by the possibility that statements may be believed by the court does not constitute "reliance" on misrepresentations. To rescind an agreement for misrepresentation, "Zurich must have given some credit to its truth, and been induced into making the contract by a perception that it was true rather than false". In this case, the insurers had not merely disbelieved the Claimant's assertions about his injuries, they had also pleaded (under a statement of truth) that they were fraudulent. Accordingly, the settlement agreement could not be rescinded. Whilst this may be correct as a matter of law, it appears to be very unfair otherwise.

What can we learn?

  • Had the insurer in this case not investigated and discovered a suspected fraud prior to the settlement, the later discovery of proof of fraud would have allowed it to rescind the settlement agreement. However, having already believed that the claim was fraudulent prior to settlement, the insurer was stuck with its bargain. That result could have been avoided by drafting the settlement in such a way that discovery of further evidence would have allowed the insurer to terminate the agreement (whether the Claimant would have agreed to such a term, though, is doubtful)
  • The reversed judgement potentially acts as a disincentive to defendants and their insurers to plead their case fully, whilst also discouraging them from compromising claims in circumstances where fraud has been pleaded

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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