July 27, 2016

Deceit - Hayward v Zurich Insurance Company plc (Supreme Court)


Fraud trumps settlement

In a landmark judgment for defendants, the Supreme Court has unanimously decided that where an insurer suspects fraud but has nevertheless chosen to settle a claim, it would be entitled to set aside the settlement under the tort of deceit , if it subsequently discovers proof that it was in fact fraudulent.

To establish the tort of deceit, it must be shown that the claimant dishonestly made a material false representation which was intended to, and did, induce the representee (the insurer) to act to its detriment. The necessity of inducement was of issue in this case.


Mr Hayward made a claim for £420,000 for a back injury he suffered at work in 1998, for which liability was accepted. Zurich made an offer of £134,973.11 as video surveillance footage demonstrated that Mr Hayward was exaggerating his injuries. The offer was accepted in 2003.

By the beginning of 2009 Zurich acquired further evidence to show that Mr Hayward had been dishonest and had in fact recovered from his injuries one year prior to the settlement.

Zurich therefore commenced proceedings to recover the sums paid, settings aside the settlement, and to seek damages for deceit. The Court of Appeal decided to allow the action to continue, despite Zurich not merely disbelieving My Hayward's assertions about his injuries, but having already pleaded that they were fraudulent.

At trial, the Judge decided that the settlement should be set aside and repaid, awarding Mr Hayward £14,720. The Court of Appeal nevertheless overturned the County Court decision and held that, given Zurich was aware of the fraud at the time of settlement; it could not be set aside. Given the insurer's earlier pleadings of fraud, it was held that they could not now rescind the settlement agreement when proof of the fraud was obtained. Zurich appealed to the Supreme Court.


The two issues for the Supreme Court to consider were as follows:

1. Does Zurich have to prove that the reason it was induced to settle was because it believed the misrepresentations made by Mr Hayward to be true? Or is it enough that the misrepresentations were a material cause of Zurich entering into the settlement?

The Supreme Court rejected the Court of Appeal's analysis and re-instated HHJ Moloney QC's "admirable" first instance decision.

Giving the lead judgment, Lord Clarke held that the insurer's belief as to the truthfulness of the misrepresentation is "not a necessary ingredient of the test" as an insurer may, instead, settle on the basis that the judge will believe the misrepresentations. It was sufficient to show that the fact of the misrepresentations "was a material cause" of Zurich entering into the settlement.

Indeed, just because an insurer does not "wholly credit the fraudster" or perhaps believes that a representation is false but nevertheless relies on it, does not necessarily mean that it was not induced into making a settlement.

This was particularly the case given that Zurich's initial investigations would not have revealed the evidence which later came to light and because Zurich did not know the extent to which Mr Hayward was exaggerating his injuries.

Zurich's belief instead goes towards the questions of inducement and causation which, it was held, were correctly decided by the trial Judge. The false representation caused Zurich to act to its detriment, settling on a false basis; the deceitful conduct "was intended to influence the mind of the insurers, not necessarily by causing them to believe him, but by causing them to value his litigation claim more highly than it was worth…"

Mr Hayward had "achieved his dishonest purpose and thereby induced them to act to their detriment by paying almost ten times more than they would have paid but for his dishonesty."

Accordingly, contrary to Mr Hayward's assertions, it was held that belief in the misrepresentation was not required and, in any event, "it could not be fairly said that Zurich had full knowledge of the facts."

2. Are there circumstances under which a defendant's suspicion of exaggeration precludes the unravelling of a settlement, if fraud is subsequently established?

On the second issue, giving a concurring judgment, Lord Toulson simply explained that "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."

Implications for defendants

  • As Lord Toulson himself stated, the judgment is "important both as a matter of law and for its practical consequences for insurers and dishonest claimants."
  • The Court of Appeal's earlier judgment in this case caused practical problems for insurers who raise suspicions of fraud prior to a settlement (and then go on to discover proof of fraud). Although it would have been possible to address this situation by careful drafting of the settlement agreement, we would suggest that the Supreme Court has adopted a practical, common-sense approach to this issue.
  • It is now open to a suspicious insurer to reopen a settlement if fraud can later be proven, particularly if had done all it reasonably could to investigate the claim and settled realistically in the circumstances.
  • The fact that Zurich carried out its own investigations and did not "wholly credit the fraudster" did not preclude the insurer from being induced by Mr Hayward's misrepresentations. An insurer therefore does not have to have believed the misrepresentations on which it relied to its detriment.
  • Competing public policy arguments carried different weights in the Court of Appeal and Supreme Court. However, it would seem that ultimately fraud appears to trump the public policy arguments of finality and the encouragement of settlement; settlement will no longer be the final word if a finding of fraud is later made.
  • Contrary to the position under the Court of Appeal judgment, defendants and their insurers should no longer be discouraged from pleading their cases fully. Previous investigations for suspected fraud by the insurer prior to settlement will no longer preclude the insurer from recovery, when fraud is later established.
  • The case serves as stark warning to claimants that fraud will not be tolerated, even following settlement. Historic fraudsters are no longer safe as this welcome judgment adds to the increasing arsenal of weapons that insurers are able to deploy against fraudulent claimants.
  • Had this case come to light since 13th April 2015, s.57 of the Criminal Justice and Courts Act 2015 would have been triggered, the whole claim would have been dismissed and Mr Hayward would not have been entitled to the award of £14,720. Accordingly Mr Hayward would have also lost costs protection.
  • The judgment makes for interesting reading given the Supreme Court's decision in the Versloot case last week. The Supreme Court seems to be reluctant to have too wide a definition of a fraudulent claim, yet it is still prepared to crack down on fraudulent conduct, where found. See our case report here: http://www.clydeco.com/blog/insurance-hub/article/fraudulent-devices-versloot-v-hdi-gerling-supreme-court