Liars, cheats and thieves

The recent judgment handed down in Hayward v Zurich Insurance Company PLC [2015] EWCA Civ 327 (31 March 2015) is food for thought for short- and long-term insurers in South Africa when managing their risks relating to suspected fraudulent claims.

In this English case, Hayward sued his employer after allegedly sustaining serious back injuries from an occupational accident. His claim was supported by an orthopaedic surgeon’s expert evidence.

The employer’s insurer (Zurich) defended the claim. Liability was admitted and an apportionment for contributory negligence was agreed. The quantum of Hayward’s claim remained disputed in view of video footage depicting Hayward doing ‘heavy work’ at home. Despite the video, Zurich’s own medical expert could not conclude with certainty that Hayward’s claim was fraudulent.

Because of the footage, Zurich pleaded that Hayward “exaggerated his difficulties in recovery and current physical condition for financial gain”. This was tantamount to a plea of fraud against Hayward’s claim.

Before trial, the parties concluded an agreement in full and final settlement of Hayward ‘s claim. Two years later, Hayward’s neighbours came forward alleging that Hayward had fully recovered long before the settlement was concluded.

Zurich then applied to court to rescind the settlement agreement and recover the amount paid out, alternatively claiming the difference between the settlement paid and the damages which Hayward may truly have been entitled to.

On appeal, the court ruled that Zurich only needed to show that it had been influenced by Hayward’s false allegations, rather than having believed the truthfulness thereof. The court found that Zurich had proven this.

On further appeal, the England and Wales Court of Appeal (EWCA) confirmed that settlement agreements may be rescinded upon uncovering a fraudulent representation on a material fact which induced a party to conclude a settlement. However, to rescind the agreement, the innocent party must have believed the truthfulness of the misrepresentation and this belief must be a factor which influenced it to conclude the settlement.

The EWCA found Zurich had not believed Hayward’s fraudulent contentions to be true and had thus concluded the settlement with “eyes wide open” to the fraud as a risk management exercise. Accordingly, Zurich was precluded from crying foul when better evidence later arose.

The ruling highlights the commercial importance of legal certainty and finality of settlement agreements and that, in the absence of a true fraud, a settlement agreement must be upheld.

In South Africa fraud must be proven by showing, amongst other elements, that the false representation induced the innocent party to act. To have done so, the representation must have been believed.

The Hayward judgment – although not binding on South African courts – will likely guide our courts’ reasoning in dealing with fraudulent insurance claims. The harsh reality: by settling, insurers agree to forego the opportunity to disprove false statements made by the claimant and cannot reserve the right to come back later for another attempt.

Insurers should weigh their options carefully when considering a settlement of a suspected (or known) fraudulent claim – as a settlement of such a claim cannot easily be undone.