Insurance: settlements obtained by fraud



In Zurich Insurance Co Plc v Hayward (2011), Zurich had previously advanced an allegation that the claimant had exaggerated his claim. Despite this, a settlement was agreed and later formalised in a Tomlin order (a court order recording a settlement where the settlement terms appear in a schedule to the order rather than the order itself).

Further evidence later came to light in relation to the exaggerated injuries and Zurich commenced an action based on Mr Hayward’s false representations. Mr Hayward pleaded that Zurich had previously brought into question Mr Hayward’s good faith and was therefore precluded from relying on bad faith in any new proceedings. He applied for strike out, alleging abuse of process.

Although the rationale of the Court of Appeal judges differed, they were unanimous in finding that Zurich was not precluded from continuing with the new proceedings. The Court warned that there would be a disincentive to plead defences fully and to settle claims if defendants and insurers were not entitled to bring further action where new facts were later discovered.

Other recent case law

Although the context is different, this is the latest in a series of recent cases in which the issue of fraud in the context of claims against insureds, and by insureds against insurers, has been considered.

In Sharon’s Bakery (Europe) Ltd v AXA Insurance UK Plc & Another (2011), the insured had fraudulently produced an invoice to substantiate the purchase of an insured property for a particular sum; the document was in fact merely a valuation of the property. It was used by the insured to obtain a loan and to substantiate its claim under the policy. It was held that the failure to disclose the fact that the fraudulent “invoice” had been used to obtain the loan was material to the “moral hazard” and insurers were entitled to avoid the policy. The court also found that the document had been used as a fraudulent device to substantiate a portion of the insured’s claim; therefore, all benefits under the policy were forfeited, even though a proportion of the claim was likely to have been genuine.

In another recent case, Aviva Insurance Ltd v Brown (2011), the insured claimed for alternative accommodation following subsidence damage to his property, fraudulently suggesting an alternative property that he owned. The entire claim was forfeited even though the insured never moved into his alternative property and there was no link between the fraud and the sum claimed. The court also noted that for a claim to be fraudulent, the insured must be dishonest meaning both that (a) the conduct was dishonest by the ordinary standards of a reasonable person (an objective test) and (b) the insured realised that his/ her conduct was dishonest (a subjective test).


The decision in Zurich v Hayward is another reinforcing the point that courts will not (and will not be seen to) support fraud on the part of claimants, whether they are claimants in litigation or claimants on insurance policies. This is, of course, right. For public policy reasons, fraud should be discouraged and any fraudulently obtained funds should, in the main, be recoverable if the fraud is discovered.

This specific case is helpful in clarifying the point that, just because a case has settled, this does not mean that insurers (or other defendants) will have no recourse if fraud is subsequently discovered. There are, though, a couple of notes of caution. The first is that if issues of fraud have been specifically settled, and that settlement is recorded in a settlement agreement, then the application might have been decided differently. Secondly, the decision itself related to a strike out application. The substantive hearing on the issues is still to take place. This means that the case could still ultimately be decided in favour of the alleged fraudster, with one judge also commenting that this could have adverse costs consequences for insurers.

Further reading: Zurich Insurance Co Plc v Hayward [2011] EWCA Civ 641

Sharon’s Bakery (Europe) Ltd v AXA Insurance UK Plc & Another [2011] EWCHC 210 (Comm)

Aviva Insurance Ltd v Brown [2011] EWHC 362 (QB)