Court of Appeal holds that insurer is unable to set aside settlement of fraudulent claim because reliance could not be demonstrated

Weekly Update 20/11 reported the earlier Court of Appeal decision in this case. The claimant commenced proceedings for personal injury against his employer. The employer's insurers suspected that he was exaggerating his injuries and investigated further. A settlement agreement was then reached. Three years later they received further information that the claimant had been dishonest and commenced proceedings to recover the sums paid. The Court of Appeal 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. Although it is normally necessary to prove reliance on a fraudulent misrepresentation, the judge held that the position in a litigation context is different. In litigation, parties suspect that the other side may be lying, but when settling they take into account the risk that the other side may be believed. Hence they need to show that they are "influenced" by the fraud, rather than that they believed it.

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

Underhill LJ held that in deciding to settle, a defendant takes the risk that the claimant's statements are false and he agrees to forego the opportunity to disprove those statements at trial. Where the statements are fraudulent, rather than merely false, though, sums will be recoverable: "while it may be fair to treat the defendant as having taken the risk of the claimant's statements in support of his claim being wrong, it will not – absent any indication to the contrary – be fair to treat him as having taken the risk of them being dishonest" (emphasis added). Here, though, there was "indication to the contrary", because allegations of fraud had already been made by the insurer prior to the settlement.

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, "the claimant 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.

COMMENT: 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).