Hayward v Zurich Insurance Company plc

For deceit, belief in the truth of a fraudulent representation is not an independent requirement. The representation must have induced the representee to act to its detriment, but it need only be an inducing cause rather than the sole cause. A material fraudulent statement supports a strong inference of inducement, although causation remains a question of fact.

Mere suspicion that a claim is exaggerated or fraudulent does not preclude rescission of a settlement when fraud is later proved. Qualified disbelief and reasonable investigation are also compatible with inducement. The court left open whether complete knowledge of falsity invariably defeats a claim, particularly where a litigant must account for the risk that a court will accept the false representation.

Hayward v Zurich Insurance Company plc concerned a personal injury claim which the respondent had deliberately and dishonestly exaggerated. Although the insurer suspected exaggeration and had obtained surveillance evidence, it agreed to settle the claim for £134,973.11 through a Tomlin order. Further evidence obtained from the respondent’s neighbours later established the scale of the fraud.

The insurer brought proceedings in deceit and alternatively sought rescission of the settlement. The county court set aside the compromise, assessed the underlying claim at £14,720 and ordered repayment of the excess. The Court of Appeal allowed the respondent’s appeal in [2015] EWCA Civ 327.

The Supreme Court had to determine whether inducement required the insurer to have believed the fraudulent representations and whether its prior suspicion of fraud prevented the settlement from being unravelled.

1. Appeal allowed unanimously. Lord Clarke delivered the principal judgment, with Lord Neuberger, Lady Hale and Lord Reed agreeing. Lord Toulson agreed and gave additional reasons, with the same three Justices also agreeing. The order of Judge Moloney setting aside the settlement was restored.

2. To establish deceit, the claimant must prove a materially false representation, dishonesty and an intention to induce, actual inducement to act to the claimant’s detriment, and resulting loss. Belief in the representation’s truth is not a separate legal ingredient. The relevant inquiry is whether the representation influenced the representee’s decision and thereby caused the detrimental act. The representee’s belief or disbelief may nevertheless be highly relevant evidence on causation: paras 18–25, 58–71.

3. The fraudulent representation need not be the sole or predominant cause. It is sufficient that it was an inducing cause. A material false statement which was likely and intended to induce supports a strong inference of causative effect, especially where it was fraudulent. That inference is one of fact, not law, and is difficult to rebut. The trial judge was entitled to find that the continuing misrepresentations caused the insurer to settle for substantially more than it otherwise would have paid: paras 26–38.

4. Mere suspicion of exaggeration or fraud does not prevent rescission once fraud is proved. A representee has no duty to the fraudster to be careful, suspicious or diligent in investigation. Qualified disbelief and an unsuccessful investigation do not preclude inducement. In litigation, a party may be influenced by the risk that the court will accept a representation even though the party doubts its truth: paras 39–48.

5. The insurer did not have full knowledge of the respondent’s dishonesty or its extent. It had done what it reasonably could to investigate and obtained decisive evidence only after the settlement. Lord Clarke therefore left open whether complete knowledge of falsity always defeats inducement. He considered that, in some litigation, even a representation known to be false might influence settlement because of the risk that it would be accepted at trial: paras 43–45.

6. Lord Toulson confirmed that proved fraud may vitiate judgments, contracts and settlements, consistently with HIH Casualty and General Insurance Ltd v Chase [2003] UKHL 6. The court expressed no view on the insurer’s concession that rescission required evidence which could not have been obtained through due diligence at the time of settlement. Any such opinion would have been obiter: paras 53, 72–73.

1. United Kingdom Supreme Court: In [2016] UKSC 48, unanimously allowed the insurer’s appeal and restored Judge Moloney’s order setting aside the settlement.
2. Court of Appeal: In [2015] EWCA Civ 327, allowed the claimant’s appeal and reversed the order setting aside the settlement.
3. Cambridge County Court: Judge Moloney set aside the compromise, assessed the original personal injury claim at £14,720 and ordered repayment of the excess settlement sum with associated amounts.
4. Court of Appeal: In an earlier appeal, [2011] EWCA Civ 641, restored the Deputy District Judge’s refusal to strike out the insurer’s proceedings. It held that the settlement created no estoppel and that the proceedings were not an abuse of process.