By John M. Collins
- The recent case of Zurich Insurance Co v Hayward  3WLR 637 undoubtedly strengthens the hand of insurance companies. It resolves certain issues of uncertainty, but, as I shall indicate, appears to create further problems.
- The facts of the case were essentially simple. The Claimant claimed over £400,000 damages in respect of injuries he had suffered at work. He alleged that ever since his accident he was unable to work or carry out the normal activities of daily living without assistance. He brought a claim and shortly before the trial of the issue of quantum, the insurance company agreed to pay a sum of about £135,000 in full and final settlement and this was embodied in a Tomlin order. However, his neighbours, who had been made aware of his substantial claim, contacted his employers and told them that Mr Hayward had recovered in full from his injury at least a year before his claim was settled. So Zurich claimed damages against Mr Hayward for deceit. They also claimed in the alternative rescission of the settlement agreement and repayment of the sums paid under it. The judge held that the agreement had been produced by fraudulent misrepresentation by Mr Hayward and he rescinded it. He held that the proper sum for damages was £14,720. Mr Hayward was ordered to repay the balance together with interest.
- Mr Hayward appealed on the basis that when the insurers entered into the agreement which became a Tomlin order, they were if not well aware, at least clearly of the opinion, that the claim was fraudulent. In other words, his false representations did not induce the agreement. They were not influenced. All that could be said was that they believed that there was a real risk that the court would not share their beliefs that the claim was grossly exaggerated.
- The Court of Appeal held that as it was a clear principle that even a fraudulent misrepresentation must be shown to have induced the contract before the promisor has a right to avoid it, where, as it was clear in this case, the insurers already did not believe the representations, the insurers could not later rescind the contract. Once a representee discovers the truth, said Briggs LJ, he must elect whether to rescind or to proceed with the contract. If he already knows or perceives the truth by the time of the contract and elects to proceed by entering into it, he cannot later seek rescission merely because he later obtained better evidence of that which he already believed.
- The Supreme Court disagreed. They held that even though it was clear that Zurich suspected and indeed believed that Mr Hayward was exaggerating his disabilities and that he was being dishonest, they had to assess the chances of his misrepresentation being wholly or partly believed and that was a matter which clearly influenced them in their decision to settle the claim. They were therefore induced to reach the settlement by his misrepresentations. It was sufficient for the defrauded representee to establish that the fact of the misrepresentation had been a material cause of his entering into the settlement. If he did establish that, he was entitled to rescind the contract. The amount of the settlement was very much greater (10 times greater) than it would have been but for the fraudulent misrepresentations. Mr Hayward’s deceit was intended to influence the mind of the insurance company, not necessarily by causing them to believe him, but by causing them to value his litigation claim more highly than what it was worth if the true facts had been disclosed, because the value of a claim for insurers’ purposes is that which the court is likely to put on it.
- Fair enough. But let us consider where that leaves us in a typical case of this kind with which we are all familiar. The Claimant puts forward a claim. The insurers allege that the claim is fraudulent. They set out the grounds – often, one suspects, through the ingenuity of counsel – which they have calculated might amount to evidence of fraud. As the case approaches trial, the Defendant insurers assess their case. They realise that the material that they have put forward is such as is unlikely to persuade a judge that this really is a fraudulent claim. So they settle the case. It may be that they do it by an agreement or by a Tomlin order or simply accept judgment in the particular sum which has been agreed. Then, months – or it may be years later, they discover some further evidence. That suggests that some aspect of the claim was indeed fraudulent. So they seek rescission of the agreement and repayment of the money. Let us assume – as may well be the case in a number of instances – that when fully investigated, this additional evidence does not establish fraud. The insurers accordingly come to some agreement or arrangement whereby their claim is discontinued and they pay the costs. Then some months or years later again, they discover further evidence which this time they feel is likely to convince the court there has been fraud. On the basis of the Supreme Court’s decision, it must surely follow that they are entitled to yet another bite of the cherry.
- That is a simple example. One could think of more complicated cases. The point however is surely of importance, that there should be an end to litigation. One can understand the reluctance of the courts to leave a situation in being whereby a fraudulent person has retained the ill-gotten gains of his fraud. But could it not be said that the decision of the Supreme Court as distinct from that of the Court of Appeal was rather too tender towards insurance companies? It is their responsibility before the trial of a claim to make as full enquiries as possible if they wish to allege fraud. If they have failed to find the evidence to justify their suspicions of fraud, then there is surely some justification for saying, “you must pay up”. The alternative position whereby somebody who is not necessarily fraudulent, may be subjected to a whole series of claims, none of which may be successful, simply because someone in the insurance company has got the idée fixe that that particular Claimant was fraudulent and should lead to that person being beset again and again as the insurers produce further material, which may or may not be reliable, but which could be interpreted as supporting an allegation of fraud, seems utterly intolerable. Yet this is the logical outcome of the Supreme Court decision. The balance achieved by the Court of Appeal seems in retrospect the more practical solution to the problem.
- Whilst therefore the particular decision of the Supreme Court seems unassailable, the reasoning by which the Supreme Court have come to their decision seems to me to be a good illustration of how the best of intentions may lead to opening the door to the very worst of outcomes.
JOHN M. COLLINS
10 Park Square
15th September 2016