INSURER WAS ENTITLED TO AVOID EMPLOYER’S LIABILITY POLICY: A RESULT THAT IS “DEFECTIVE AND UNFAIR”

The judgment of Master Davison in Komives v Hick Lane Bedding Ltd & Anor [2020] EWHC 3288 (QB) highlights an area of law which, as the Master stated, is “defective an unfair”- an insurer was entitled to avoid an employer’s liability policy.  This is not an area where the successful second defendant insurer can be said to be at fault. It is an issue that requires more detailed statutory intervention.

 

THE CASE

The claimants were a group of workers who had been “trafficked” into working for the First Defendant. They had been injured working for the first defendant, once claimant suffered a below knee amputation. Some of those involved in running the first defendant had been convicted of conspiracy to traffic individuals and imprisoned. The first defendant had gone into administration.

THE ACTION AGAINST THE SECOND DEFENDANT

The second defendant was the insurer who had provided employers’ liability insurance.  The issue that the Master had to determine was whether the second defendant was entitled to avoid the policy of insurance.

THE MASTER’S DECISION

The Master decided that the second defendant was entitled to avoid the policy, and could not be criticised for doing so. There had been major non-disclosure by the first defendant.  However he was not the first judge to note that this led to an unfair result.

THE JUDGMENT ON THIS ISSUE

The judgment contains a detailed consideration of the common law and statutory scheme and found in favour of the second defendant. This was not a judgment that the Master reached with any degree of pleasure.

    1. Given my interpretation of the effect of ICOBS, it is appropriate to look first at the process by which the second defendant incepted and subsequently avoided the policy.
    2. As noted in paragraphs 41 and 42 above, it seems to me that there is little to criticise in the second defendant’s enquiries into and acceptance of the risk. They were misled. There was nothing to put them on notice of the true position, which further enquiries would not have revealed. There is similarly little to criticise in the second defendant’s letter avoiding the policy. Mr Jupp pointed out that it contained no reference to the statutory scheme or to the fact that avoidance had the specific effect of rejecting these particular claimants’ claims. But the letter was (and could only be) addressed to the first defendant and, in that context, it is unsurprising that it was confined to the matters which entitled Am Trust to avoid.
General unreasonableness?
    1. The inelegant sub-heading ‘general unreasonableness’ is intended to address Mr Jupp’s wider points in support of a finding that his ‘broad test of reasonableness’ was not met. I have rejected the proposition that it was for Am Trust to satisfy a test so phrased. Nevertheless, out of respect for Mr Jupp’s arguments and in case these cases should go further, I should record my observations and findings on these points.
    2. If, contrary to my interpretation, rule 8.1.1 of ICOBS has introduced such a test, then the language strongly suggests that it would fall to be applied as between insurer and insured. That is the focus of the rule, which refers to ‘insurer’ and ‘policyholder’. It makes no reference to injured parties. There is an obvious contrast with rule 8.2, which does refer to ‘injured parties’and sets out a code for the handling of their claims. But rule 8.2 governs motor vehicle liability insurers and reflects the fact that in the field of motor insurance the law provides for injured parties to have a direct claim against the relevant motor insurer.
    3. If Mr Jupp’s ‘broad test of reasonableness’ under rule 8.1 were to be applied as between insurer and injured parties that would, in practical terms, assimilate the position of employers’ liability insurers to that of motor insurers. That is because from the perspective of an injured party it could never be reasonable to avoid the policy, save, perhaps, in the very rare case where the injured party had colluded in the non-disclosures or misrepresentations. Applied from this standpoint, the claims of an innocent third party would always trump all other considerations. Because they involve trafficking and modern slavery, the claims of Mr Komives and Mr Varhelyi would be particularly deserving. But any and all injured claimants, whether trafficked or not, could very justifiably label the avoidance of the insurance policy underwriting their claims as unreasonable and unfair if it left them without a remedy. I do not think that such an interpretation, which would, as Mr Brown observed, have the practical effect of imposing a ‘blanket ban’ on insurers exercising their legal rights in circumstances such as the present, can possibly have been the intention of rule 8.1.
    4. As between insurer and insured, I do not think that Am Trust can be said to have acted unreasonably, even if the parameters of the test of reasonableness were to be drawn more widely than I think is permissible.
Conclusion
  1. I have come to the reluctant conclusion that the second defendant was contractually entitled to avoid the policy and that it did not act unreasonably in doing so. I reach this conclusion with regret because the statutory scheme which has permitted that result is defective and unfair. The reasons were eloquently stated by the judge in the Dunbar case, and endorsed by the Court of Appeal and I will not repeat them.