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Posted in Case reports, UK

UK: What level of dishonesty counts as fraud? An analysis of recent Supreme Court judgments

The Supreme Court published two judgments on how dishonesty affects insurance claims before the end of the most recent Trinity term:

Hayward (Respondent) v Zurich Insurance Company plc (Appellant) [2016] UKSC 48 and Versloot Dredging BV and another (Appellants) v HDI Gerling Industrie Versicherung AG and others (Respondents) UKSC 2014/0252 (The Merwestone).

The factual background in Hayward:

Hayward concerned a claim which had already been settled. Mr Hayward had suffered a workplace injury in 1998. He brought proceedings and the employer admitted liability. However, he exaggerated the extent of his injuries (to the tune of £419,000) in order to achieve a higher settlement figure from his employer’s insurer, Zurich. Five years later, Zurich had gathered sufficient undercover surveillance evidence to show that Mr Hayward had grossly and dishonestly exaggerated his injuries. A settlement for just under £135,000 was reached in 2003.

However, a further five and a half years after the settlement, Zurich had gathered even more evidence – enough to show that Mr Hayward had not just slightly exaggerated his injuries, but that he had fully recovered from his injuries by the time of the settlement. The tip-off came from Mr Hayward’s neighbours, who had observed him in his daily life.

Zurich sought to set aside the settlement agreement on the ground that Mr Hayward’s statements of case and accounts to medical experts were fraudulent misrepresentations. At issue was whether Mr Hayward’s lies had caused the settlement, whether Zurich needed to have believed in the lies and whether Zurich should have fought the case on the basis of their suspicions rather than settling.

Unbelievable misrepresentations:

Zurich’s appeal was unanimously upheld by the Court and the settlement agreement was set aside. Mr Hayward’s lies had induced Zurich into settling. That Zurich did not believe in the lies was irrelevant. Zurich were not under any duty to investigate their suspicions further and fight the case in court. Mr Hayward could therefore not retain settlement moneys which he had only obtained by fraud, meaning that he was only entitled to £14,720, some 4% of his original exaggerated claim.

A key point arising from the judgment is this: the claimant alleging deceit does not have to show that he believed the misrepresentation. However, irrespective of whether he believed the misrepresentation, the rule  on causation remains the same: the misrepresentation must have been at least one cause which induced the claimant to act. Zurich did not wholly believe Mr Hayward’s statements in 2003, but unable to prove further exaggeration of his injuries, had cause to settle to their detriment.

The judgment in Hayward can be found here.

Collateral lies:

In Versloot the Court held that “collateral lies” made in support of an otherwise honest claim do not invalidate the entire claim on the grounds of fraud. Collateral lies are lies as to facts which are “immaterial” to the Insured’s right to recover – irrelevant, in other words. A director of the Insured had embellished his story about how the crew of The Merwestone had heard, and ignored, the bilge alarm as the vessel’s engine room flooded. It was a story which was held to have no effect on an otherwise honest and valid claim.

You can find our full blog post on the facts and implications of the Versloot judgment here.

Commentary – considering the effect of Versloot, Hayward and the Insurance Act 2015 together:

Following Versloot, Insureds will now not be penalised for embellishing a claim by telling lies that are immaterial to the recoverability of the claim. Of course, Insureds should continue to be careful to present their claims honestly and temptations to tell “white lies” and embellish narratives should still be avoided, lest they risk straying into an exaggeration of the claim. As before, an exaggerated claim will fall under the rule on fraudulent claims and so be invalidated. Hayward provides a recent example of a gross exaggeration.

Underwriters will no longer be able to rely on finding any fraudulent device as a justification to avoid paying out on an otherwise valid claim. If an Underwriter comes across a lie or other fraudulent device when investigating a claim, as happened in Versloot, he should consider whether it is an irrelevant lie or a lie that goes to the recoverability of a claim, such as an exaggeration of the extent of the loss, and decide whether to pay out or not accordingly.

However, Underwriters can take some comfort from Hayward: where an Underwriter’s claims handling team are faced with a claim about which they are suspicious – but which they cannot show to be fraudulent – they are free to settle that claim and, if post-settlement evidence proves the claim to have been fraudulent, the Underwriter can later reclaim much if not all of the payout. It is not relevant whether the claims handlers believed the misrepresentation, nor how suspicious they were of them.

Underwriters are not under any duty to be “careful, suspicious or diligent” in researching claims post-Hayward. However, they should continue to do as much as they reasonably can to investigate claims before paying out – if only because it is still likely to be quicker and cheaper. From the employer’s admission of liability to the Supreme Court judgment, the Hayward claim took 18 years to resolve.

Under the Enterprise Act 2016, which amends the Insurance Act 2015 (the “Act“), Underwriters will be required to settle claims within a reasonable time and Insureds will be entitled to claim damages for late payment (note: although the Act comes into force this Friday, these provisions will not come into force until 4 May 2017). The Hayward judgment allows for Underwriters to comply with their forthcoming statutory obligation to pay out in reasonable time without compromising their ability to fully investigate potential fraud. Before Hayward and the Act, Underwriters may have had greater incentive to delay paying out in order to investigate all suspicions of exaggeration. Now, Underwriters can be more comfortable that they may settle claims and later reopen them if evidence of fraud comes to light.