Tort of deceit, reopening a claim and setting aside settlements: deterring fraudulent claims – Part 2, Chapter 2
My recent series of blogs have looked at deterring fraudulent claims, firstly by way of industry-wide measures and secondly focusing on enforcement options in the form of adverse costs orders. In this blog I consider some of the further civil sanctions available to insurers.
Tort of Deceit
Bringing a claim for damages in the tort of deceit can present a tactical advantage to an insurer. The damages recoverable if the claim succeeds can be considerable and do not require the claimant to have issued proceedings. The losses for which compensation can be sought include:
- Repayment of sums already paid: an action against the claimant for repayment of interim payments, including where payment is made to another who is not party to the original claim. So for example in a motor claim, where insurers have sensibly made a pre-accident value (PAV) payment to bring the claimant out of hire, repayment of that sum could be sought at a later date. Similarly, if the claimant has extracted a payment from the compensating insurer whilst the claim is pre-issue only to then abandon his claim following a repudiation alleging fraud, an insurer could seize the initiative.
- Exemplary damages: damages over and above and individual’s actual loss. Such damages are intended to be punitive. They are a punishment to the claimant and significant sums can be awarded.
- Costs of defending the claim: these are the costs incurred in maintaining the repudiation and/or settling of certain parts of the claim before the deceit was uncovered.
- Internal investigation costs: it is often the case that insurers have dealt with the case for some time and investigated the claim to show the claimant’s deceit.
AXA Insurance UK plc v Financial Claims Solutions Ltd 
On this case, the respondents had devised a complex fraud, resulting in attempts to enforce default judgments against AXA. The fraud was uncovered and AXA avoided any insurance loss, but incurred significant costs. They initially just recovered compensatory damages in respect of those costs. Subsequently however, on appeal, they were awarded exemplary damages, specifically a further £20,000 from each respondent.
Naturally each case will turn on its facts but it does seem that courts are more likely to award exemplary damages where there is evidence of outrageous conduct and abusive behaviour, as was the case here, where the respondents had set up a fake law firm and created two fictitious RTA claims, worth in excess of £85,000, against individuals indemnified by AXA.
It is a fairly high threshold to meet and there are several barriers to cross in order to bring a tort of deceit claim. The following several key elements will be required:
- False representations are made to the insurer,
- The party making the representation knows it to be false, or alternatively is reckless as to whether it is true or false,
- The party intends that the insurer should act in reliance on it, and
- The insurer does act in reliance on the representation and in consequence suffers loss.
Without those key elements present, it will be very difficult to bring a tort of deceit claim.
Reopening a claim and setting aside settlements
Fraud is covert. Uncovering fraud can happen at any stage, even after a claim has been concluded.
Unpicking a compromise or the contract that is formed when parties settle a claim is possible, but only in specific circumstances. One of these is where the contract is established on the misrepresentations of one of the contracting parties and those misrepresentations are relied upon to the detriment of the receiving party.
The leading case is the Supreme Court decision of Hayward v Zurich Insurance Company PLC, which set out the criteria for a defendant seeking to undo a settlement where fraud is subsequently evidenced.
Hayward v Zurich Insurance Company plc 
Hayward was injured at work and claimed for negligence against his employers. Zurich, their insurers, agreed settlement. Subsequently, Hayward’s neighbours contacted his employers to inform them that they did not believe that he was being honest about the state of his injuries, and that he had recovered in full at least a year before settlement was agreed.
At first instance the Court found Hayward to have deliberately and dishonestly exaggerated the effects of his injuries and that the settlement agreement had been entered into on the reliance of his false representations, and therefore should be set aside.
Hayward’s appeal - in which he argued the settlement agreement should be set aside - was successful, the Court of Appeal considering that Zurich had been aware of the exaggeration at the time that the settlement agreement was entered into.
Zurich successfully appealed to the Supreme Court who found that regardless of whether Zurich had believed his representations regarding the effects of his injuries, they had been induced to enter into the settlement agreement as a result of fraudulent representations.
Generally therefore, compensating insurers should not have to show that they believed that the representations were true; merely that they were induced to enter into the settlement agreement by the misrepresentations, which have caused them loss.
Courts appreciate that only a claimant can be expected know if his claim is fraudulent, though a compensating insurer cannot have it both ways; it is one thing using fraud concerns to secure a low settlement but another to then “cry foul” when the evidence improves post-settlement.
Lapse of time is not necessarily a barrier to having a settlement set aside. In the case of Takhar v Gracefield Developments Ltd & Ors , for example, a judgment obtained 10 years previously was successfully set aside.
The extent to which each of these measures is appropriate will depend on the individual facts of each case as well as what exactly it is you want to achieve. However, numerous options are also available by way of punitive civil sanctions, all of which offer robust fraud deterrents. These will be covered in my next blog in the series, so watch this space...