Insurers, settlement agreements and fraud

Donald Dinnie

Insurers should remember that, in the absence of fraud, settlement of an ill-founded claim is nonetheless binding and if you settle despite a reasonable suspicion of fraud you will be bound by the settlement.

That was confirmed as a well-established principle of English law recently in Hayward v Zurich Insurance Co.

It is also a principle of South African law.

The plaintiff had sued its employer for an occupational injury. The employer admitted liability with a reduction for contributory negligence but contended that the employee had exaggerated the consequences of the injury. It had obtained video-surveillance evidence, apparently showing the employee undertaking heavy work at home.

The matter, however, was settled before quantum was decided. The settlement was paid in full settlement of the claim.

Sometime after that settlement, witnesses came forward to demonstrate that the claim of the serious injury was dishonest and that the employee had fully recovered from his injury well before the claim was settled. The employer sought damages on the basis of the deceit, alternatively, rescission of the settlement and repayment of the settlement sum.

The court emphasised that if a party makes a statement about a claim that the other party thinks is genuine and which turns out to be fraudulent, that may entitle a rescission of the settlement. Where, however, as in the present case the employer was doubtful about the extent of the injury, and gathered evidence in respect of those suspicions but nevertheless settled, one cannot at a later stage complain. Where a reasonable suspicion of fraud and dishonesty exists at the time of the settlement, one cannot re-open a case when better evidence comes along. It is usually only possible to rescind a fraud-induced settlement if it is shown there was no knowledge or suspicion of fraud or dishonesty at the time of settling.

The same principles apply, absent fraud, in respect of any disputed claim. So for example when an insurer argues breach of a provision of a policy entitling rejection of a claim, or disputes the quantum, but nevertheless settles, it cannot re-open the case at a later stage when evidence of breach of the policy, or of the quantum originally contended for by the insurer, turns up.

First published by: Financial Institutions Legal Snapshot