Eyes Wide Shut – Insurance Ruling Sets a Game Changing Precedent

An insurer cannot use the law of misrepresentation to unpick a personal injury settlement made with its "eyes wide open", the Court of Appeal has ruled.

Zurich Insurance argued that a claimant's exaggerated statements on the extent of his back injury and accounts given to medical experts constituted fraudulent misrepresentation yet had settled the case almost six years earlier.

However, delivering the leading judgment in Hayward v Zurich Insurance Company Lord Justice Underhill said, "It cannot be right that a defendant who has made an allegation of fraud against the claimant but decided in the end not to have it tested in the court should be allowed, whenever he chooses, to revive that allegation as a basis for setting aside the settlement…….the defendant will have made the deal with his eyes open to the possibility of fraud, and there is an important public interest in the finality of settlements."

Zurich admitted liability, but contested quantum on the basis that Mr Hayward had exaggerated the consequences of his injury. The insurer relied on video surveillance, which, "appeared to show," Mr Hayward doing heavy work at home. But shortly before the trial on quantum in 2003, the case settled.    Two years later the Plaintiff's neighbours approached his employers to say they believed his claim to have a serious back injury was dishonest and the accounts given by him constituted, 'fraudulent misrepresentations'.

Underhill LJ ruled that, "parties who settle claims with their eyes wide open should not be entitled to revive them only because better evidence comes along later". He said the insurance company had not only made an issue of the misrepresentations before the settlement, but, "positively asserted that they were dishonestly made".

This judgement underlines the fact that there is a public interest in the finality of settlements, a settlement agreement is a contract and the rules applying to contracts of all types need to be applied and developed with clarity and consistency. Where the defendant is already aware that the claim may be dishonestly exaggerated and pleads such a defence, it will not be able to reopen a settlement agreement if further evidence demonstrating the full extent of the fraudulent exaggeration emerges. 

If you have any queries about how this ruling will affect your practices please get in touch with Chris Ross (cross@jmckee.co.uk) or Leonard Edgar (ledgar@jmckee.co.uk)