English Law's Response To An Insured's Fraudulent Representations – Part 2

In our last article, we reviewed the current English law position and pending future reform in respect of fraudulent claims and devices. In this article we consider the effect of an insured's fraudulent statement in litigation which ultimately results in settlement.

1. Introduction

   The duty of utmost good faith applies throughout the insured's/insurers' relationship but only up and until the commencement of litigation.1 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.2

   The test approved in Versloot Dredging, and as discussed in our last article, does not however apply in respect of fraudulent misrepresentations made by an insured in the course of or compromise of litigation.

2. 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.3

3. 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 (the insured) for £420,000 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...