Most claims handlers will, at some point, be forced to settle a case where fraud is suspected and, perhaps, formally alleged but the extent cannot be proved. What happens, however, if evidence is provided after the date of settlement which not only allows an insurer to prove the fraud but shows that the extent was far greater than had been originally suspected? In late July, the Supreme Court considered this question in Hayward v Zurich Insurance Company plc. The court ruled, unanimously, that Zurich was entitled to have the original settlement set aside and a new, considerably reduced, award put in its place.
The key issue for the court to decide was: did Zurich require to prove that it was induced to settle because it believed Mr Hayward’s representations to be true i.e. there was inducement because Zurich believed that the claim was genuine? Or, was it enough that Mr Hayward’s representations were a material cause of Zurich entering into settlement?
The Supreme Court took the second approach. It did not matter that the insurer had been suspicious, or even that surveillance footage had been procured which appeared to show that the claimant was exaggerating his injuries. The insurer had to take into account the risk that the claimant would be believed by the judge at Trial. The claimant’s fraudulent misrepresentation did therefore induce the insurer to agree the original settlement which, in turn, allowed the insurer to have the settlement set aside.
The decision of the Supreme Court is a positive one for insurers. If, like the Court of Appeal, the Supreme Court had decided that the insurer’s belief as to the truthfulness of the misrepresentation was necessary to demonstrating inducement, practical problems would have arisen in relation to when fraud suspicions could be properly raised by insurers. Hayward provides authority that even a “suspicious insurer” can re-open settlement if fraud can be later proven.
It should be noted, however, that the court did not consider whether, in order for settlement to be unravelled, new information must come to light which could not have been obtained by due diligence before settlement. Without clear comment on this point, insurers cannot rely on this case as a remedy for errors in investigation. Fraud investigations should still be thorough and commence as early as possible to ensure all evidence is captured. Claims handlers must remain prudent in their decision-making; this case does not allow an insurer to simply change its mind about the evidence before it.
Hayward is a welcome addition to existing fraud case law. The UK’s highest civil court has demonstrated that it is not willing to tolerate fraudulent claimants.