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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 Zurichs 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 defendants 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, Haywards 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 Haywards 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, Zurichs claim was allowed to proceed.

Haywards 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 Zurichs action, prompted by fresh evidence received from Haywards 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 Zurichs 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.

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The content on this page 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.

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