Can insurers recover from fraudulent insureds after judgment or settlement?

The decision of the UK Supreme Court in Hayward v Zurich Insurance Company Plc[1] will be of interest to insurers who discover an insured’s fraud after a claim has been settled by agreement or a judgment.

The UK Supreme Court recently allowed Zurich to recover the difference between what it paid under a settlement agreement and what it would have paid had it known the true facts, following an exaggerated claim. But what can South African insurers expect to recover, if anything? Before answering this, let’s consider the facts and decision in Hayward.

Mr Hayward’s back was injured during a work accident. According to him, this caused him intense pain which limited his mobility and working ability, for which he claimed damages from his employer, who was insured by Zurich. Zurich controlled the litigation on behalf of the employer. In the plea, suspicion was cast over the extent of Mr Hayward’s injury due to a surveillance video which showed him to be in a better condition than he alleged. Mr Hayward nevertheless persisted with his version on the extent of his injury and, shortly before trial, and as usually happens, the parties signed a settlement agreement. A few years later, Mr Hayward’s neighbours approached his employer, disclosing that Mr Hayward had fully recovered at least one year before the settlement was reached and that they believed he had been dishonest. This prompted Zurich to bring an action for damages based on Mr Hayward’s fraudulent misrepresentations, alternatively a rescission of the settlement agreement and the repayment of the amount paid under it, but it later only persisted with the request for a rescission and repayment. Mr Hayward argued that Zurich was estopped from seeking a rescission of the settlement agreement because the issue of fraud had been compromised by signature of the settlement agreement.

After decisions in favour of Zurich in the Cambridge County Court and against them in the Court of Appeal, the matter came before the Supreme Court. It was common cause that Zurich had to show that Mr Hayward made a materially false misrepresentation which was intended to, and did, induce Zurich to act to its detriment. The court therefore limited itself to considering two issues. The first was whether it was necessary for Zurich to prove that it was induced into entering into the settlement agreement because it believed the misrepresentations were true or whether it is sufficient for them to simply prove that the misrepresentations were a material cause of the settlement agreement being entered into. The second was under what circumstances, if any, the suspicion of exaggeration for financial gain (which Zurich had following the surveillance footage) precludes unravelling a settlement agreement when fraud is subsequently established.

On the first issue, the court accepted that although Zurich had suspicions before the settlement agreement, it only became aware of the true position after the neighbours came forward. Suspicion, doubt and mistrust do not have the same consequences as full knowledge and Zurich had not had full knowledge. Zurich did not have to believe the misrepresentations, because it could well have settled because it thought the misrepresentations may be believed by the court. It is sufficient for the misrepresentations to have been a material cause of the concluded settlement.

As for the second issue, it was difficult to envisage any circumstances in which mere suspicion that a claim is fraudulent would preclude unravelling a settlement when fraud is subsequently established. Fraud was confirmed to be “a thing apart” which “unravels all”.

Zurich’s appeal was therefore successful and Mr Hayward was liable for the difference between the amount paid to him and that which represented fair compensation for the actual extent of his injury.

The Supreme Court wisely observed that personal injury claims, a category of claims where exaggeration is common, are usually paid by insurers and the ultimate cost is borne by policyholders through higher premiums. In that context, the issues raised by the dispute were found to be important as a matter of law and for their practical consequences for insurers and dishonest insureds.

But what is the position in South Africa? Can fraud discovered after a settlement agreement or a judgment give rise to a recovery?

A judgment of a High Court can be set aside on common law grounds, one of which is fraud. To prove fraud, the following requirements must be met:[2]

  • The successful litigant was a party to the fraud;
  • The evidence was incorrect;
  • The evidence was fraudulent and made with the intent to mislead;
  • It diverged from the true facts to such an extent that, if the court was aware of the true facts, it would have given a different judgment; and
  • But for the fraud, the court would not have granted the judgment.

These requirements show that inducement on the part of the other litigating party (for example, an insurer defending an action) is not a requirement. This is because rescission of a court order is based on the inducement of the court. The other litigating party would, however, still be the one who brings the rescission application and who must prove that the requirements are satisfied on a balance of probabilities.

Turning to settlement agreements, an insurer who seeks relief based on a fraudulent misrepresentation must prove the following:

  • A pre-contractual incorrect statement;
  • Which was material or wrongful;
  • Made by the other party to the contract;
  • Which was made fraudulently or with the intention of inducing the contract; and
  • Which caused the other party to suffer loss or induced the contract.

If an insurer would not have entered into a settlement agreement at all but for the misrepresentation, it can seek a rescission of the settlement agreement, but it is not settled law whether it can also do so if it simply accepted different terms (such as a higher settlement figure). The insurer will also have a delictual action with which it can recover the patrimonial loss it has suffered, whether it seeks to rescind the settlement agreement or not.

Our law on fraudulent misrepresentations might however make it more difficult to rely on them than in the UK. The test for inducement in our law was initially objective, the enquiry being whether the misrepresentation would have induced a reasonable person to enter into the contract. However, a few recent decisions have leaned in favour of a subjective test, changing the enquiry to whether the other person actually believed the misrepresentation.[3] That is unfortunate, for the reasons set out in Hayward.

Keep in mind that these remedies apply to an insurer who only obtains knowledge of fraud, or confirmation of its suspicions of fraud, after a court order or settlement agreement. An insurer who settles a claim with full knowledge, or which is aware of but does not adduce the relevant evidence at trial, will not have a remedy.

Insurers will be pleased to learn that their hands are not tied if fraud is discovered after a claim is settled by agreement or judgment. Caution should still be exercised though, to ensure there is adequate proof of the requirements for the rescission of either the judgment or settlement agreement, because if the allegation of fraud is unsuccessful, this could open the insurer up to a defamation suit.

Published on the ILASA website with kind permission from the Author:

Ina Iyer

Senior Associate, Clyde & Co

 

[1] [2016] UKSC 48.

[2] Erasmus Superior Court Practice.

[3] Orville Investments (Pty) Ltd v Sandfontein Motors 2000 (2) SA 886 (T).