The Supreme Court has set aside a settlement entered into by defendant liability insurers, despite the fact that the insurers had suspected that the claimant's personal injury claim was dishonestly exaggerated.

It is important that litigating parties have confidence that a settlement will bring the claim to a conclusion. However, fraudulent claims are increasing, particularly in the insurance sector.

In the case of Hayward v Zurich Insurance Company plc [2016] UKSC 48, the courts considered two key questions:

  1. What happens if a claim is settled but it later transpires that the claimant has dishonestly exaggerated his claim?
  2. Does it matter if the defendant knew or suspected that the claim was fraudulent, but still chose to settle?

The facts

In 1998 Mr Hayward was injured at his place of work. His employer accepted the injury was caused by their negligence or breach of duty (subject to a reduction for contributory negligence).

Mr Hayward alleged that the injury meant that he was not able to work or carry out normal daily activities without assistance, claiming just over £400,000 for his losses.

The employer's liability insurers, Zurich, produced surveillance video evidence in which Mr Hayward could be seen undertaking heavy lifting, suggesting that his injuries were not as serious as he claimed. However, Mr Hayward pursued his claim and obtained medical evidence in support of it.

Whilst Zurich had doubts regarding the legitimacy of the claim, they feared that they would not be able to prove fraud and that the court would accept the claim put forward by Mr Hayward. In 2003, before the quantum of the claim was tried, Zurich paid Mr Hayward £134,973.11 in full and final settlement of his claim.

Subsequently, Mr Hayward's neighbours came forward with evidence that his claims about the extent of his injury were dishonest and that he had fully recovered a year before the settlement.

Zurich used this evidence to commence a claim seeking damages for deceit or, in the alternative, for the settlement agreement to be set aside and the sums repaid under it.

At first instance, the judge found that Hayward had dishonestly exaggerated his claim, the true value of which was actually just short of £15,000.

The approach of the courts

The courts were left to balance two competing principles: firstly, the idea that parties should be able to settle with confidence that the settlement will be final and binding; and secondly, the principle that no one should profit from their own fraud.

The law states that deceit is made out where one party dishonestly makes false and material representations which are intended to, and do, induce the other party to act to its detriment.

The Court of Appeal overturned the decision of the judge at first instance, who had sided with Zurich and held that the settlement should be set aside. However, the Supreme Court disagreed and have restored the original verdict.

The Court of Appeal's reasoning for enforcing the settlement was that Zurich had not believed in the truth of Hayward's representations. They were swayed by the fact that Zurich had settled the claim even though they were aware of the risk that it was fraudulent, deciding that Zurich should be held to the settlement in circumstances where that risk later came to fruition.

The Supreme Court allowed Zurich's appeal and took a different view. It held that it was not necessary for Zurich to have believed in the truth of Hayward's false statements in order to show that they were influenced by them. The Supreme Court acknowledged that a party will not normally be influenced by a false representation unless they believe it to be true. But they pointed out that the position is different in a case like this, where the important thing for Zurich was whether or not the Court might believe the representations (even though they themselves did not).

The Court held that Zurich had feared that the Court would accept Hayward's version of events and settled the claim at the level they did to cover off that risk. As such, they had been influenced to act to their detriment by Hayward even though they suspected he was not being truthful. This was sufficient for the settlement to be set aside.

Conclusion

The Supreme Court's decision demonstrates the fundamental importance of the principle that parties should not benefit from their own fraud. It shows that the courts will, in circumstances like these, be prepared to enforce that principle at the expense of preserving binding settlements.

The decision is good news for defendants, particularly in the insurance industry, because:

  • it protects insurers and other defendant parties who suspect, but cannot prove, fraud and who enter into settlements to cover off their risk.
  • such parties will no longer feel they need to limit what they say in their pleadings through fear of losing the right to set aside a later settlement based on prior suspicion of fraud.
  • it should further deter personal injury claimants and others who might be tempted to bring dishonest claims. This is in line with the recent introduction of s57 of the Criminal Justice and Courts Act 2015, under which this type of claim would now be struck out by the Court.