In their article last month, Mr Patrick Perry and Mr Michael Maguiness, from Clyde & Co Hong Kong, examined the English law principle relating to fraudulent claims and devices. That principle is relevant in respect of fraudulent statements made prior to litigation. In this article, Mr Brian Nash and Mr Nicholas Sykes of Clyde & Co Clasis Singapore, consider the English law position in respect of fraudulent misrepresentation made during the course of litigation resulting in the compromise of a disputed insurance claim, and the English Court of Appeal’s recent decision in Hayward v. Zurich Insurance Co. Plc.
It is well understood that an insured owes its insurer a duty of utmost good faith, including in respect of any claims presentation and co-operation. That includes not making fraudulent claims or using fraudulent devices.
It was in respect of that duty that the English Court of Appeal in Versloot Dredging1 upheld the dismissal of an insured’s claim which had been promoted pre-litigation by a recklessly made untrue statement. The duty applies throughout the parties’ relationship but only up and until the commencement of litigation.2 Once litigation has commenced, the parties’ relationship and any settlement of a disputed claim is governed by the relevant Civil Procedure Rules, the court’s own procedures and common law.3
Claims promoted by fraudulent statements
To briefly summarise last month’s article, the English Court of Appeal in Versloot Dredging held that a pre-litigation statement is fraudulent if:
1) It is directly related to the claim, as opposed to some dispute with a third party [objective test];
2) It was intended by the insured to promote its prospects of success [subjective test]; and
3) Believed, it would tend to yield a significant improvement in the insured’s prospects of success prior to any final determination of the parties’ rights [objective test].
In respect of law reform on this issue, Section 12 of the UK Insurance Act 2015 (not yet in force) confirms that if the insured makes a fraudulent claim, insurers: (i) are not liable to pay the claim; (ii) may recover from the insured any sums paid in respect of the claim; (iii) may treat the policy as having been terminated with effect from the time of the fraudulent act (but not affecting the rights and obligations of the parties prior to the fraudulent act); and (iv) if the policy is terminated, are not obliged to return any of the premium paid.
However, there is no definition of “fraudulent claim” in the Act and the UK Law Commission had taken the view in its July 2014 Report that that is a matter for the Courts to determine. That said, the notes to the initial draft Bill indicated that one of the acts which would make a claim fraudulent would be the use of fraudulent means or devices to support a genuine claim.
The test approved in Versloot Dredging does not however apply in respect of fraudulent misrepresentations made by an insured in the course of/or compromise of litigation.
Settlements induced by false statements
The general position is that following the compromise of a disputed claim, defendant insurers are not entitled to seek to have the settlement agreement set aside at some later date only on the basis that they can now prove that the insured’s factual statements in its pleadings and/or witness statements were false.
In deciding to settle, insurers take the risk that the insured’s statements may not be proved at trial, and pay a sum commensurate with the assessment of that risk. Insurers could have taken the case to trial to disprove the statements in question but, by settling, relinquished that opportunity and cannot reserve the right to come back later to reopen the settlement. Otherwise, no settlement would ever be final.
However, the position is different where the claimant’s statements are fraudulent, not merely false, and insurers had not pleaded or were otherwise unaware of the possibility of such fraud when entering into the settlement agreement. That position was considered in the recent English Court of Appeal case of Hayward v. Zurich Insurance Company Plc.4
Hayward v. Zurich: The facts
In June 1998, the insured’s employee sustained injuries whilst at work. In May 2001, the employee sued his employer for GBP420,000 (US$620,500) and liability, subject to a 20% deduction for contributory negligence, was admitted with quantum to be determined.
The defence was conducted by insurers. Insurers disputed the level of claimed quantum on the basis of a 1999 surveillance video which appeared to show the claimant undertaking heavy lifting at home, whereas he asserted in his claim that his injuries were such that he would have been unable to have undertaken heavy lifting.
In the Statement of Defence, insurers pleaded. “[t]he Claimant has exaggerated his difficulties in recovery and current physical condition for financial gain.” On 3 October 2003, shortly before trial, the parties entered into a settlement agreement in the sum of GBP134,973 in full and final settlement of the claim.
About two years later, the employee’s neighbours provided a statement to insurers alleging that the employee’s statements in his claim about his injuries were dishonest. In February 2009, insurers commenced proceedings against the employee claiming damages for deceit or in the alternative, a rescission of the settlement agreement and the repayment of the sums paid under it.
Following the trial of insurers’ claim, the judge found that the employee had dishonestly exaggerated the effects of his injury (which was not challenged on appeal) and proceeded to set aside the settlement agreement on the basis that “…although Zurich was aware at the time of the settlement of the real possibility of fraud here, [the employee] had continued his deliberate misrepresentations even after the disclosure of the [surveillance video] and those continuing misrepresentations did influence Zurich into agreeing a higher level of settlement than it would otherwise have made.”
The Judge reassessed quantum and held that the amount to which the employee was entitled was GBP14,720, not the GBP134,973 at which insurers had compromised. The employee was ordered to repay the difference.
Hayward v. Zurich: Court of Appeal
The employee successfully appealed to the Court of Appeal which dismissed the trial judge’s orders, holding that a defendant aware of the possibility of fraud, but knowingly enters into a settlement agreement, cannot later seek to rescind that agreement if and when the fraud is established.
One of the judges observed that “whilst it may be fair to treat a defendant as having taken the risk of the claimant’s statements in support of his claim being wrong, it would not – absent any indication to the contrary – be fair to treat him as having taken the risk of them being dishonest”.
In respect of wrong, but not dishonest statements, the judge undertook the analysis we set out in the section above (Settlements induced by false statements). The rationale for treating fraudulent statements differently from merely wrong statements is that the courts will not normally accept that a defendant has taken the risk that the claimant’s case is dishonest.
But what risk the defendant is to be treated as having accepted must depend on the circumstances of each case. The judge commented that “[i]f it is in any case sufficiently apparent that the defendant intended to settle notwithstanding the possibility that the claim was fraudulently advanced, either generally or in some particular respect – the paradigm being where he has previously so asserted – there can be no reason in principle why he should not be held to his agreement even if the fraud subsequently becomes demonstrable…It cannot be right that a defendant who has made an allegation of fraud against the claimant but decided in the end not to have it tested in the court should be allowed, whenever he chooses to revive that allegation as a basis for setting aside the settlement.”
In this instance, insurers had pleaded that the claimant had exaggerated his physical condition for financial gain, which was tantamount to an allegation of fraud. The Court concluded that against that background, it was necessarily implicit in the full and final settlement agreement that the insured employer and insurers gave up the right to set aside that agreement if they were subsequently in a position to prove the identical dishonesty alleged in the Statement of Defence.
Observations
Had the insured/insurers not investigated and discovered a suspected fraud, and pleaded such, prior to the settlement, the later discovery of fraud could have allowed them to seek to rescind the settlement agreement.
However, as a general principle, if fraud is suspected, insurers should be cautious of entering into a standard settlement agreement without reserving their rights should fraud be later proved.
Mr Brian Nash is Managing Partner and Mr Nicholas Sykes is Senior Associate, both at Clyde & Co Clasis Singapore.