Supreme Court sets aside settlement agreement for fraud

Hayward v Zurich Insurance Company plc: The Supreme Court overturns the Court of Appeal’s decision, setting aside a settlement agreement between an insurer and a fraudulent former employee.

This case endorses the Court’s approach that it will not allow agreements induced by fraud. Even though Zurich had suspicions of fraud at the time of the settlement, it could still be set aside when it subsequently obtained evidence of the fraud. This will make it easier to challenge fraudulent claims in future albeit the threshold for establishing fraud remains high.

The facts

Mr Hayward made an insurance claim when he suffered an accident at work causing damage to his back and a depressive illness which impaired his ability to work. Supported by expert medical evidence, he claimed £420,000, not including damages for pain and suffering.

The insurers suspected that Mr Hayward had exaggerated his claim, not least because they had a video which appeared to show him doing heavy work at home. Notwithstanding that, recognising the high threshold to prove fraud and in the absence of an expert who was prepared to say that Mr Hayward was exaggerating, the claim settled before trial with Mr Hayward receiving approximately £135,000. 

A couple of years later, Mr Hayward’s neighbours approached his employer saying they thought his claim was dishonest and that he had entirely recovered from his injury at least a year before the settlement had been reached.

In light of this evidence the insurer, Zurich, brought a claim against Mr Hayward on the basis that his accounts to medical experts were fraudulent misrepresentations. Zurich sought an order setting aside the settlement and that Mr Hayward repay them the difference between what they had paid him and what he would have been awarded if he had told the truth.

The judgments

At first instance, the settlement agreement was set aside and the underlying case tried with Mr Hayward being awarded damages of just £14,720, meaning that he had to repay the insurers approximately £120,000. Mr Hayward appealed.

The Court of Appeal held that the settlement agreement should stand: after all Zurich had been aware that Mr Hayward had exaggerated his claim, that was part of its original case and it had taken that into account when reaching a settlement with him. In the Court of Appeal Lord Justice Underhill closed his judgment by saying “There is a wider principle at stake, that parties who settle claims with their eye wide open should not be entitled to revive them only because better evidence comes along later”.

The Supreme Court unanimously allowed Zurich’s appeal and found that the settlement agreement should be set aside. It held that Zurich did not have to believe that Mr Hayward’s misrepresentations were true in order to set aside the settlement agreement, it just had to be influenced by his misrepresentations when entering the settlement agreement.

In response to Lord Justice Underhill’s comment about encouraging settlement, Lord Clarke stated “I am not persuaded that the importance of encouraging settlement, which I entirely agree is considerable, is sufficient to allow Mr Hayward to retain moneys which he only obtained by fraud”.

This confirmation from the Supreme Court will be of comfort to parties who find compelling evidence of fraud having settled claims even where they had suspected fraud at the outset. Whilst it remains difficult to prove, it seems, fraud unravels everything.

 

For further information please contact Catherine Penny, Senior Associate, on catherine.penny@stevens-bolton.com

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