Fraud unravels all


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When is the settlement of a claim between two parties not final?  When there has been fraud involved.  In what is being hailed as a landmark judgment for the insurance industry, the Supreme Court decided in the case of Hayward v Zurich Insurance Company Plc last month that where an insurer suspects fraud but nevertheless settled a claim, it would be entitled to set aside the settlement if it subsequently discovered that there had indeed been fraud involved.

In 1998 Mr Hayward suffered a back injury at work and pursued a claim against his employer for £420,000.  The claim was settled in 2003 for £134,973.11 after the employer’s insurers, Zurich, obtained video surveillance evidence showing that Mr Hayward had exaggerated his injuries.  However, two years after the settlement, Mr Hayward’s neighbour provided evidence that Mr Hayward had actually made a full recovery from his injury at least one year before the settlement.  Zurich therefore issued proceedings to set aside the settlement and to recover the sums which they had paid on the grounds of Mr Hayward’s fraudulent misrepresentation.

The Judge found that Mr Hayward had dishonestly exaggerated the effects of his injury and ordered that the settlement be set aside and that 90% of the original settlement sum be repaid leaving Mr Hayward with the amount actually found to be due to him, £14,720.

However, the Court of Appeal overturned the County Court decision and held that, given that Zurich was aware of the fraud at the time of the settlement and had pleaded fraud in the original case, it could not now set aside the settlement agreement when proof of fraud was eventually obtained.  The Court of Appeal stated that “parties who settle claims with their eyes wide open should not be entitled to revive them only because better evidence comes along later”.  The Court of Appeal found that Zurich had settled the claim with the risk that the claim may be fraudulent and it therefore had to live with the consequences of that bad bargain.  Zurich appealed to the Supreme Court.

The Supreme Court unanimously allowed Zurich’s appeal, restoring the Judge’s decision.  The Supreme Court was not prepared to allow Mr Hayward to profit from his fraud at the expense of the insurer stating that “it is difficult to envisage any circumstances in which mere suspicion that a claim was fraudulent would preclude unravelling a settlement when fraud is subsequently established”.

Although this case relates to a personal injury claim, it is likely to apply to other types of settlements.  It is not unknown for parties to settle cases even though they have doubts about the veracity of what they have been told by the other party.  If that initial suspicion subsequently proves to be true then the deceived party may now be able to set aside the settlement on the ground of misrepresentation by the other party.

If you are involved in any dispute, contractual or otherwise, then Blacks Solicitors can assist.  Please contact Luke Patel on 0113 227 9316 or email him at “LPatel@LawBlacks.com”.

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