Fraudulent claimants: no hiding place in a compromise

Hayward v Zurich Insurance Company plc [27.07.16]

Supreme Court allows insurer to set aside a settlement where a claimant’s fraudulent misrepresentations had induced it to settle at a higher level.


The claimant brought a claim against his employers arising from an injury at work in 1998. Proceedings were commenced in 2001. The special damages claimed were just under £420,000.

Video surveillance evidence of the claimant in 1999 suggested that he was exaggerating the extent of his injuries. The defence alleged that the claimant was exaggerating his injuries for financial gain.

In 2003, just before trial, the insurers settled the claim for £134,973.11 by way of a Tomlin order. Two years later the claimant’s neighbours gave statements confirming their belief that he had recovered from his injuries a year before the settlement. In 2009, the insurers brought an action against the claimant in deceit.

At first instance, the judge ordered that the settlement should be set aside and the claimant’s losses were assessed at £14,720 at trial. The claimant appealed the rescission of the settlement and Court of Appeal agreed, refusing to set aside the settlement. It held that by pleading fraud the insurer had shown that it believed that the claimant’s statements of case were untrue. It had chosen not to have that tested at trial. It therefore followed that the insurer had settled the claim at a reduced level with its “eyes wide open”.


The Supreme Court has unanimously overturned the Court of Appeal’s judgment and allowed the insurer to set aside the settlement. In a leading judgment given by Lord Clarke, the court ruled that the claimant’s fraudulent misrepresentations had induced the insurer to settle at a level far higher than it would have done, had it known that the misrepresentations were false.

The court ruled that there was no need for the insurer to have believed that the misrepresentations were true; it was entitled to set aside the award because it did not know that they were false. Suspicion, or a qualified belief that a misrepresentation had been made, did not prevent the insurer from setting aside the award.

Lord Toulson stated that the question of whether the insurer was induced by the misrepresentation to settle the claim was fact specific. It was accepted by the court that the insurer was induced to make the settlement by the risk that the misrepresentation may have been believed by the court. However on the facts of the case, the court ruled that had the insurer known that the claimant had lied when it settled the case, it would not have been allowed to set the award aside.


The Court of Appeal decision narrowed the scope for reopening compromised fraudulent claims as only a fresh allegation of fraud could have been used. The Supreme Court judgment widens the scope to include misrepresentations previously challenged, so long as there was only suspicion, and where the misrepresentation induced the insurer to settle.

It has always been deemed to be contrary to public policy and natural justice that a claimant who manages to conceal fraud at first should be allowed to profit when his dishonesty is discovered. Whilst an insurer may have suspicion, unless it can uncover good evidence of fraud, ultimately only the claimant truly knows whether their claim is genuine or not. This decision addresses that imbalance.

The judgment does not establish blanket authority for all such settlements to be set aside. Establishing causation of the inducement to settle will turn on the facts and also the mindset of a party compromising a claim. Where a party acts on a misrepresentation they believe to be untrue, they may not be able to establish that they were induced by that misrepresentation to settle or suffered a loss and the settlement would not be set aside. However, the court held there was “no duty to be careful, suspicious or diligent in research.”  As such, whether the insurer had done all it could to investigate was not relevant; the key issue was what it knew. The fact that the insurer could not have known the full extent of the claimant’s dishonesty, however diligent its enquiries, was also relevant.

Insurers engaged in cold case reviews or who receive a tip-off or new information, for example via enquiries made under s.29 Data Protection Act 1998 by other insurers, can continue to investigate fraud on concluded cases. Assuming that the fraudulent misrepresentation made by the claimant induced the insurer to settle the claim (regardless of any suspicion), the key questions in seeking to reopen settlements will be twofold:

  • Was the fraud uncovered known to the insurer prior to settlement?
  • Was the fraud pleaded specifically (even if subsequently not proven)?

If the answer to either of these questions is “yes” then it is unlikely that a court will set aside the settlement. However, it is important to note that the Supreme Court did not rule that knowledge of the fraud prior to settlement would be fatal.

Related item: Fraud: setting aside settlement