Judgment was given by the Supreme Court in Hayward v Zurich Insurance Company plc [2016] last week. The Supreme Court held that settlement agreements may be set aside where a party has entered into that agreement based on the other party’s fraudulent misrepresentations, even where there was a suspicion of fraud prior to entering into such an agreement. It is not, therefore, game over for an employer who, whilst suspecting fraudulent behaviour, nonetheless, enters into a settlement and they may still be able to seek repayment if new evidence emerges demonstrating that their suspicion was, indeed, well founded.
Following an accident at work, an employee, Mr Hayward, brought a personal injury claim against his employer. Although admitting liability, the employer’s insurance company, Zurich Insurance Company plc (“Zurich”), asserted that Mr Hayward was exaggerating the symptoms of his condition. Zurich had obtained video footage of Mr Hayward doing some heavy work at home despite his claim that his ability to work had been seriously impaired. Before the trial, which would have heard the medical evidence, the claim was settled for £134,973 in damages.
Two years later, Mr Hayward’s neighbours contacted his employer stating that his claim to have a serious back injury was in fact dishonest. They said that based on his level of activity they believed he had in fact fully recovered from his injury at least a year before his settlement.
Zurich brought court proceedings against Mr Hayward for damages based on his deceit. The Cambridge County Court held that the settlement agreement should be set aside and the settlement monies should be repaid to Zurich. The court’s reasoning was that Zurich only had to show that it had been influenced by Mr Hayward’s fraudulent misrepresentations and not that it had believed them. The court found that Zurich’s decision to settle, and the amount of settlement offered, was based on the possibility that Mr Hayward’s account of the seriousness of his injury might have been believed by a court and, consequently, that he may have been awarded damages of at least £420,000. Fundamentally, the court found that Zurich had been influenced by his fraud.
Mr Hayward appealed to the Court of Appeal which found in his favour, on the basis that Zurich had disbelieved Mr Hayward’s assertions about his injuries and had even alleged fraudulence prior to entering into the settlement agreement. The Court of Appeal noted that for the settlement agreement to be set aside, Zurich would have to establish that it had relied on the fraud. Unlike in the County Court, the Court of Appeal did not feel that having an influence was enough to amount to reliance. Zurich would need to have entered into the settlement agreement based on a belief that Mr Hayward’s representations were true rather than false, which was not what had happened.
Zurich appealed to the Supreme Court. The Supreme Court sided with the County Court and concluded that it was not necessary for Zurich to show it believed Mr Hayward’s representations about his injuries to be true in order for the settlement agreement to be set aside. The misrepresentations in this case were a material cause of Zurich entering into a settlement agreement with Mr Hayward and the Supreme Court considered that this was enough for the settlement agreement to be set aside. It recognised that a party may well settle for reasons other than a reasonable belief that the misrepresentation was true, as in this case where Zurich had settled on the basis it believed Mr Hayward would be believed by a judge. When it decided to settle, Zurich had suspected exaggeration but did not know the extent of the fraud which was later uncovered. The Supreme Court stated that it would be difficult to envisage a circumstance in “which mere suspicion that a claim was fraudulent would preclude unravelling a settlement when fraud is subsequently established”.
Zurich conceded that a party seeking to set aside a settlement agreement for fraud would need to prove the fraud by way of evidence that would not have been available to them at the time of settlement via a due diligence process. However, the Supreme Court did not make a decision on this point as it did not affect the outcome of the present case. Employers are, nonetheless, well advised, where settling personal injury claims, to be mindful that they or their insurers should be conducting detailed investigations to ensure that the claims are not fraudulent.