The value of fraudulent insurance claims uncovered by insurers rose to a record £1.3 billion in 2013, up 18% on the previous year according to figures published by the Association of British Insurers. This figure is more than double the cost of the UK’s shoplifting bill.

Fraudulent motor insurance claims were the most expensive and common, with the number of dishonest claims at 59,900 claims, up 34% on 2012 and their value at £811 million, up 32%. It is small wonder that insurers are now looking to the courts to attempt to send out a clear message to claimants who may be acting fraudulently. 

Hayward v Zurich – the facts

One such case is the recent decision in Hayward v Zurich Insurance Co Plc [1]  – handed down in April 2015. The facts of the case are that the claimant – Mr Hayward (H) injured his back during an accident at work in 1998. He claimed that his injury continued to cause him serious lumbar pain which restricted his mobility, and his ability to work was seriously impaired. 

Zurich (the insurers for his employers) conducted the defence and relied on video evidence which showed H undertaking heavy work at home. They contended that he had exaggerated the consequences of his injury.

In 2003 they reached an agreement, embodied in a Tomlin order, under which the insurers agreed to pay £134,973 in full and final settlement of H's claim. 

In 2005 – 2 years after the claim had settled - H's neighbours (Mr & Mrs Cox) 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.  Insurers claimed damages for the tort of deceit, asserting that the statements which H had made about the extent of his injury in his particulars of claim and witness statements constituted fraudulent misrepresentation.

First instance decision

At first instance, arguments were based upon whether the insurers' actions were an abuse of process, and whether the insurers' claim amounted to an abuse of the doctrine of res judicata (the matter has already been judged and cannot be judged again). Because the basis of the claim was in contract, the case at first instance also focussed upon whether settlement in a Tomlin order as opposed to a consent order would avoid arguments of res judicata. Also, whether the terms of the order would allow the insurers to seek to set it aside.  

At first instance, the judge ordered that the original settlement agreement of £134,973 was to be set aside. The judge ordered that H was to be awarded damages of £14,720 and ordered to repay the £134,973 settlement sum, less that amount. 

The insurance industry hailed this case as a significant victory, given the obvious implications that are raised. Not surprisingly, H appealed against this decision, submitting that belief was a necessary component of a claim based on misrepresentation. H submitted that the insurers' decision to enter into the original settlement had been influenced by the fear that the court might not believe H’s “misrepresentations” rather than the insurers' own belief in them. 

Court of Appeal decision

It was held unanimously by the Court of Appeal that the Judge at first instance had been wrong to set aside the original 2003 settlement agreement.

The contract which the insurers sought to rescind was a contract to compromise a disputed claim. The claim for rescission was based on the very averments of fact which the claimant (H) made in advancing that claim. As such, the insurers would not be entitled to have the agreement set aside at some later date only on the basis that they could not show that the claimant's factual statements of the case being advanced were wrong. 

In deciding to settle, the insurers took a risk that those statements would not be proved at trial and paid a sum commensurate with their assessment of that risk – they could have taken the case to trial to attempt to disprove the statements but by settling they agreed to forego that opportunity and could not reserve the right to come back for another attempt – just because they had better evidence to prove their assertions. 

In the lead judgment from Underhill LJ, he states that "It may stick in the throat that the Claimant can retain the reward of his dishonesty, but the Defendant will have made the deal with his eyes open to the possibility of fraud, and there is an important public interest in the finality of settlements…….It cannot be right that a defendant who has made an allegation of fraud against the claimant but decided in the end not to have it tested in the court should be allowed, whenever he chooses, to revive that allegation as a basis for setting aside the settlement"..


This case raises an important public policy issue, in that unless this case was so decided (preventing the opportunity for one of the parties to come back for another attempt, after settlement) no settlement would ever be final.

The court stated that the position would be different where the claimant's case was not only ill-founded but dishonest. In the present case, the insurer had already advanced a case that the claimant's claim was exaggerated and this was set out in their pleadings and witness evidence. The court stated that for a rescission for misrepresentation to be applied, the insurer would have to show that they had given some credit to its truth and been induced into making the contract by a perception that it was true rather than false. 

The Court of Appeal stated that, in order to succeed, insurers would have needed to adduce completely new evidence, which showed fraud or exaggeration on the Claimant's part, which they could show now undermined their belief in the Claimant's honesty, and established that they had been induced into making the contract on false terms. 

The insurers not only made an issue of the misrepresentations that were made before the 2003 settlement but "positively asserted that they were dishonestly made". This is a case where no new evidence came to light at a later date, but simply better evidence. 

It is not surprising that when permission was initially granted by the Court of Appeal for the defendant insurer to pursue a second action against the Claimant in these circumstances, this case was hailed to be a good outcome for defendant and insurers, illustrating that the court will not prevent them from pursuing claimants for damages if fresh evidence of fraud comes to light after settlement is reached. 

This case does suggest that a carefully worded settlement agreement could still allow an insurer to pursue a claim in contract for fraud at some later date. This is assuming that new evidence comes to light which establishes that the defendant and/or their insurers had been fraudulently induced into entering into the contract to settle, by some active misrepresentation on the part of the claimant and this was not known to the defendant at the date the agreement was reached. Although careful consideration would need to be given to the form of wording used.

However, for Mr Hayward and Zurich, it appears that a deal is still a deal…