no bar to pursuing fraudulent claimants
1 June 2011
The Court of Appeal has clarified the law in relation to when an
insurance company can pursue an action alleging that settlement of
an earlier claim for personal injury was obtained by fraud.
Last week, the Court of Appeal in Zurich
Insurance Co PLC v Colin Hayward [2011] EWCA Civ
641 allowed Zurich’s appeal against a decision
striking out its claim that settlement of an earlier claim for
personal injury had been obtained by false representation, which
had induced Zurich to make a greater offer of settlement than it
would otherwise have done.
Background
Hayward had been injured in an accident at work in 1998. The
defendant’s insurers, Zurich became suspicious that he was
exaggerating his injuries and in 1999, obtained video surveillance
of him. Proceedings were subsequently issued in which Hayward
alleged he had sustained a spinal injury and had a depressive
disorder. His claimed damages amounting to just under £420,000
which included a claim for loss of earnings on the basis that he
would remain unfit for any work.
In the defence it was admitted that Hayward had suffered a back
injury but it was alleged, in the light of the video evidence, that
the injury was not as bad as claimed and went so far as to state
that “The claimant has exaggerated his difficulties in recovery
and current physical condition for financial gain”.
After accepting a 20% reduction for contributory negligence the
claim was compromised in October 2003 for just under £135,000, with
the settlement embodied in a Tomlin order.
The second claim
Two years later, Hayward’s neighbours approached his former
employers to allege that they believed that he had acted
dishonestly in relation to his claim in that they thought there was
nothing wrong with him from 2002 but he was pretending that there
was.
In 2009 Zurich commenced an action against Hayward alleging that
the settlement of the claim had been obtained by false
representation, so that Zurich had offered more in settlement than
it would otherwise have done and that by reason of this, Zurich had
suffered loss, paying at least £72,000 more in damages than it
would otherwise have done. Costs had also been increased.
Hayward filed a defence denying that Zurich had a cause of
action because the cause of action had been compromised by the
agreement embodied in the Tomlin order of October 2003 and that, as
Zurich had put Hayward’s good faith in issue during the first
action, it had voluntarily compromised all the issues of bad faith
in the earlier settlement.
Hayward applied to strike out the claim alleging abuse of
process and that the issues were res judicata.
First instance decision
The application came before a Deputy District Judge who
considered two important but conflicting principles: the need for
finality in litigation and the need for the court not to be misled,
which he found outweighed the first and as such, Zurich’s claim was
allowed to proceed.
Hayward’s appeal to His Honour Judge Yelton succeeded who struck
out the claim, holding that the Tomlin order created estoppel by
res judicata. He thought that the defence in the first
action which had expressly pleaded that Hayward had exaggerated his
difficulties for financial gain amounted to the same allegation of
fraud now being pursued.
Before the Court of Appeal
Estoppel
In the leading judgment, Lady Justice Smith did not consider
estoppel arose merely because there was an allegation of fraud in
the first action. Before estoppel could arise, there must be
congruence between the allegation of fraud determined or
compromised in the first action and the allegation of fraud made in
the second action: there must be a specifically identifiable
allegation of fraud and an attempt to repeat that very allegation,
in other words, the two allegations must be essentially the
same.
Abuse of process
Smith LJ went on to consider the two conflicting principles of
finality of litigation and the need to protect the administration
of justice from the effects of fraud.
She did not consider Zurich’s action, prompted by fresh evidence
received from Hayward’s neighbours of which it was previously
unaware, and could not with reasonable diligence have been expected
to discover at the time of the first action, to be harassing of
Hayward.
Smith LJ also considered the need to protect the administration
of justice from the effects of fraud, highlighting the vital role
of statements of truth which parties must be able to rely upon in
reaching settlement.
She warned that there would be a disincentive to plead defences
fully and to settle claims if following a settlement, a defendant
or insurer was to be prevented from raising a subsequently
discovered fraud merely because it pleaded fraudulent exaggeration
in the first action and settled the claim leaving the extent of
fraud undecided.
She did not consider Zurich’s action to be an abuse of
process.
Implications
This is a welcome decision for defendants and their insurers
who, even though they have suspicions about claims, even raising
allegation of fraud exaggeration, can settle claims on the best
evidence available at the time, safe in the knowledge that if fresh
evidence later comes to light, they will not be prevented by the
courts from pursuing claimants for damages.
It also serves as a reminder to those claimants who make
miraculous post-settlement recoveries that they can still be
pursued if they have induced settlement through deceit.
The content of this bulletin is provided for the purposes of
general interest and information. It contains only brief summaries
of aspects of the subject matter and does not provide comprehensive
statements of the law. It does not constitute legal advice and does
not provide a substitute for it.