Hayward v Zurich Insurance Company plc
The circumstances in which a compromise can be set aside on the basis of fraudulent misrepresentation have been revisited today by the Supreme Court.
The issues to be considered were that, in such applications, the defendant must show it has been influenced by, or relied upon, the misrepresentation. To meet this threshold, does the defendant have to prove that it was induced into settlement because it believed that the misrepresentations were true; or is it enough to show that the fact of the misrepresentation was a material cause of it entering into the settlement?
In addition, under what circumstances, if any, does the suspicion by the defendant of exaggeration for financial gain on the part of the claimant prevent the settlement of that disputed claim being revisited when fraud is subsequently established?
Several of the Justices who heard this case were involved in the divorce cases Gohil v Gohil & Sharland v Sharland, decided in October 2015, in which they were prepared to set aside an agreed settlement for ‘maintenance’, embodied in an order of the court, for non-disclosure where the respondent had fraudulently failed to discharge his statutory duty to make full and frank disclosure of his assets.
Mr. Hayward "H" had injured his back during an accident at work. He claimed that his injury continued to cause him serious lumbar pain which restricted his mobility and that his ability to work was seriously impaired. Zurich Insurance conducted the defence on behalf of the employer, and relied on video evidence which showed him undertaking heavy work at home, contending that he had exaggerated the consequences of his injury. The parties reached an agreement, embodied in a Tomlin order, under which the insurers agreed to pay £134,973 in full and final settlement of his claim. About two years later, H's neighbours approached the employers to say that from their observation of his conduct and activities, they believed that H had entirely recovered from his injury at least a year before the settlement was reached. The insurers attempted to rescind the compromise on the basis of fraudulent misrepresentation. The settlement agreement was set aside and H was awarded damages of £14,720, and ordered to repay the settlement sum, less that amount. H appealed to the Court of Appeal, not denying the exaggeration but asserting that belief was a necessary component of a claim based on misrepresentation and that the insurers had not been deceived.
The Court of Appeal decision
H’s appeal was successful. The Court of Appeal held that the original settlement was binding and the defendant could not recover most of the settlement sums via an action for deceit. In the light of its pleaded assertions in the original claim that the claimant’s presentation of his injuries had been dishonest, the insurers could not be said to have relied on his presentation when entering into the settlement. Underhill LJ concluded that “parties who settle claims with their eyes wide open should not be entitled to revive them only because better evidence comes along later”. What risk the defendant is to be treated as having accepted will depend on the circumstances of the particular case. If it is in any case sufficiently apparent that the defendant intended to settle notwithstanding the possibility that the claim was fraudulently advanced, there is no reason why he should not be held to his agreement even if the fraud subsequently became demonstrable. It is inherent in the antagonistic relationship of claimant and defendant that in deciding whether to settle a defendant has to form an independent judgment about whether the disputed statements made as part of the claim are likely to be accepted by the court. A relationship of reliance does not arise in such circumstances. To rescind a contract on the basis of a misstatement, a party 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.
The Supreme Court decision
The Supreme Court unanimously allowed Zurich’s appeal, restoring the judge’s conclusion that the settlement agreement should be set aside and that H should recover the reduced sum.
A defrauded party does not have to prove that it settled a claim because it believed that the misrepresentations were true and there is no authority to the contrary. The representee’s state of mind is relevant to, but not decisive of, the questions of inducement and causation. There may be factual circumstances in which a representee knows that a representation is false but nevertheless relies on it, but this was not such a case. Zurich did not know that H was deliberately exaggerating his injuries to such an extent as later became clear, with Lord Clarke commenting “..it is not in dispute that Zurich did as much as it reasonably could to investigate the position before settlement.”
Delivering the judgment, Lord Clarke drew the striking factual similarities with the BLM Supreme Court Summers v Fairclough Homes Ltd  decision which clarified and extended the remedies available to a defendant in these types of cases. He then identified that in this case, Zurich was suspicious of H but no very clear allegations were, or could be, made. It did not know the extent of H’s misrepresentations and the true position until the advent of the neighbours’ intervention some considerable time after settlement had been reached. “Qualified belief or disbelief does not rule out inducement, particularly where those investigations were never going to find out the evidence that subsequently came to light”
Addressing the tort of deceit and approving the judgment of HHJ Moloney QC in the earlier Hayward trial, Lord Clarke said “The authorities show that questions of inducement and causation are questions of fact. I would accept the submissions made on behalf of Zurich in support of the proposition that belief is not required as an independent ingredient of the tort. It may however be relevant as part of the court’s consideration of the questions whether there was inducement and, if so, whether causation has been established” He confirmed that HHJ Moloney had correctly decided those questions of fact in favour of Zurich, and that the Court of Appeal had not.
Lord Clarke expounded the view that “..there may be circumstances in which a representee may know that the representation is false but nevertheless may be held to rely upon the misrepresentation as a matter of fact” and as to the final issue to be decided about when revisiting settlements should be prevented his view was “it is difficult to envisage any circumstances in which mere suspicion that a claim was fraudulent would preclude unravelling a settlement when fraud is subsequently established”
Lord Toulson in his concurring judgment made reference specifically to the fact that the Justices had not decided on Zurich’s concession that a party seeking to set aside a settlement for fraud must prove the fraud by evidence which it could not have obtained by due diligence at the time of the settlement. There was no evidence or argument about whether such a concession is correct.
What this means for you
Claimants guilty of exaggerating insurance claims may be pursued after any agreed settlement should they later be exposed as fraudulent. It remains debatable whether ”new” evidence is needed to justify action, albeit that the defendant must have been unaware of the true extent of the deceit at the time of the agreed settlement.
The Supreme Court recognised that there are often situations where, whilst the claimant’s evidence may not be believed to be true, there was a risk to any insurer that the court would believe it to be. Therefore, insurers could be induced by the deceit of the claimant to enter into higher settlement agreements, but without appreciating the full extent of the fraud.
Lord Toulson in his judgment commented upon the history of fraudulently inflated personal injury claims saying “now as then, they present a serious problem. Personal injury claims usually fall to be met by insurers and the ultimate cost is borne by other policy holders through increased premiums.”
This judgment comes after previous decisions and legal reforms that have sent a message that fraud will not be tolerated. Firstly, BLM’s Supreme Court decision of Summers, which dealt with strike out for abuse of process, followed by new legislation in the form of s57 Criminal Justice and Courts Act 2015, making dismissal of a claim mandatory if it is found to be fundamentally dishonest. The recent reforms and the remit of the Insurance Fraud Taskforce chaired by BLM’s David Hertzell continue to rise to the challenge of claims fraud.