MODERN SLAVERY AND THE LIABILITY OF AN INSURER: COURT REJECTS ARGUMENT THAT INSURERS ARE LIABLE TO INDEMNIFY “EMPLOYERS” IN MODERN SLAVERY CASE

In the decision today in Komives & Anor v Hick Lane Bedding Ltd & Anor [2021] EWHC 3139 (QB) Mrs Justice May refused the claimants’ appeal on the issue of whether an insurer was entitled to avoid an employer’s liability policy when the employer had been involved in “modern slavery”.   The judge stated that to hold otherwise was to effectively drive a coach and horses through many of the established tenets of insurance law.  The judgment at first instance was considered in an earlier post on this blog.

“The result of Rafiq’s criminal activity in engaging slave labour to work at HLB indisputably constituted non-disclosure/misrepresentation entitling ATE to avoid the EL policy. The Master’s decision in that respect is not challenged. The effect of avoidance is to annul and remove the policy altogether, for all purposes and against all persons. Under the 1930 Act the appellants only had such claim under the EL policy as HLB would have had. The policy having been (validly) avoided, HLB would have failed in any claim which it brought under the policy and thus the appellants’ claims must also fail. That is the effect of the statutory subrogation under the 1930 Act: the appellants stand in the shoes of HLB, having no better claim than HLB would have had.”

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 Master came to that conclusion with no great pleasure, describing the “defective and unfair”.

THE UNSUCCESSFUL APPEAL

Mrs Justice May dismissed the Claimants’ appeal. Their arguments, to succeed, required amendment to primary legislation.

    1. I have no doubt at all that the Master correctly decided the preliminary issues. In my view Mr Jupp’s submissions as to the ambit of ICOBS rule 8.1.1(3) are untenable.
    1. First, I agree with Mr Brown that notwithstanding the absence of the word “policyholder” from rule 8.1.1(3), this provision is apt only to deal with the position as between insurer and insured. In reaching this decision I have had particular regard to the following
(i) use of the term “policyholder” in the preceding sub-rule, 8.1.1(2);
(ii) subsequent rules 8.1.2 and 2A, which are clearly couched in terms of policyholders;
(iii) the fact that avoidance and termination are by their nature matters as between the parties to the contract, insurer and insured, here ATE and HLB;
I conclude that the absence of the word “policyholder” from (3) signifies nothing, since the scope of the rule – covering the relationship between insurer and insured – is implicit.
    1. Next, I accept Mr Brown’s submission that rule 8.1.1 as a whole is intended to express a process requirement, each of the sub-rules regulating how an insurer is to deal with a claim. This interpretation is consistent with the title of the section of ICOBS where the rule is located, namely “Claims Handling”. To the extent that the provisions of subsequent rules 8.1.2 and 8.1.2A extend beyond strictly claims handling, this is in a limited and specific way which encapsulates commitments previously signed up to by insurers (as per rule 8.1.2, covering the position before the 2012 Act) or subsequently imposed by legislation (rule 8.1.2A applicable to insurance contracts entered into after the 2012 Act). I acknowledge Mr Jupp’s point concerning the weakness of examples suggested by Mr Brown (premature avoidance/delayed avoidance), but the rule is a general one, drafted to cover how claims are handled in many different situations, under many different sorts of policies. Moreover avoidance and termination are only given as examples of the ways in which an insurer might seek to reject a claim on a policy.
    1. Further if Mr Jupp were right that Parliament sought to address the concerns raised in Dunbar by means of the rules set out in ICOBS, then it might be expected that any change would be effected through rules contained in the section of ICOBS dealing with Employer’s Liability, yet there are no relevant provisions to be found in that part of ICOBS.
    1. I come to the principal consideration which has persuaded me that Mr Brown is right: this is the driving of a coach and horses through many decades of well-established insurance law which Mr Jupp’s construction of rule 8.1.1(3) demands. If Mr Jupp is right, then rule 8.1.1(3) not only strikes through well-known and long held principles of avoidance but also formidably expands the law relating to the rights of third parties; doing so, moreover, through a single sentence buried within a section of ICOBS dealing with claims handling.
    1. The inherent unlikelihood of this increases when one considers how much time and attention – of commentators, academics, the insurance industry, the Law Commission, the FCA and Parliament, over many years – has been given to addressing what limitations might sensibly be placed on insurers’ right to avoid; likewise to defining the rights of third parties to claim on a contract of insurance when the policyholder has ceased, through insolvency, to be able to do so. Yet none of the legislative changes has introduced a fetter upon an insurer’s right to avoid for non-disclosure by reference to the circumstances of a person or persons not parties to the contract, and none has sought to expand the rights of third parties beyond the rights which the policyholder itself/themself would have had. If public policy in relation to trafficked persons demanded that such significant changes be made to the law of insurance then, as Mr Brown rightly observed, one would expect to find them in primary legislation.
    1. The cases of Parker and Bate relied upon by Mr Jupp are not directly on point, as he acknowledged, since each concerns a claim made by the policyholder, not by a third party. I do not read either decision as authority for an objective approach to the application of rule 8.1.1(3). In Parker Teare J was dealing with a breach of condition (to provide information, here bank statements), which necessarily engaged consideration of whether there was a connection between the nature of the breach and the insurer’s concern. Interestingly Teare J then went on to look at the process by which insurers had taken up the breach of warranty, noting that the insurer had made clear to the insured what the consequences of not disclosing the bank statements would be – a clear warning – before taking the point and refusing the claim.
    1. Bate concerned a retail policy, where the claimant was held to be a consumer, to whom the more detailed ICOBS provisions (forerunners of rules 8.1.2 and 2A) applied. Mr Jupp relied upon this authority as demonstrating that the court took into account the insured’s own professional experience and his dishonest role in the material non-disclosure, but these were considerations which the relevant ICOBS rule in that case (relating to consumer policies) explicitly engaged.
    1. I concluded that neither of these authorities provided support for Mr Jupp’s contention that rule 8.1.1(3) engaged a broad reasonableness test.
    1. Mr Jupp’s timing point was irreconcilable with his acceptance of ATE’s right to avoid as against HLB. He appeared to be saying that ATE could reasonably have avoided the policy before they were aware of claims by these appellants, but not afterwards. But if there is material non-disclosure/misrepresentation justifying avoidance then (subject to any waiver argument, which does not arise here) it makes no difference when insurers take the point and avoid the policy, a point which Mr Jupp himself made when seeking to refute the claims handling examples raised by Mr Brown in argument.
    1. Nor do I read the decision in Total Graphics as providing support for an application of rule 8.1.1(3) which would result in the finding that avoidance was valid in response to any claim made by HLB as policyholder, but invalid when meeting a claim by these appellants under the 1930 Act. The situation in Total Graphics was entirely different: in that case the clients of a broker sought to make a claim under the broker’s liability policy, for damages arising from the broker’s failure to obtain valid insurance for the client. The failure had been due to the dishonesty of the broker. On the claim by the client against the broker’s liability insurers under the 1930 Act, Mance J found that liability for dishonest activity by a director (as in that case) was excluded under the terms of the liability policy, accordingly the claim failed. However he went on to observe (at p.606) that if the terms had been apt to cover the loss, then although public policy would have imposed a “personal disability” on the broker himself, preventing him from successfully claiming on the policy, it would not have precluded the client from claiming under the 1930 Act. A “personal disability” imposed by public policy to prevent a claim is not at all the same as saying (as Mr Jupp sought to do) that public policy acts to enable a claim by deserving third parties through the means of preventing insurers from implementing what would otherwise be a valid right to avoid. In the first place Mance J was dealing with a theoretical position (since he had found that the terms of the policy did not provide cover anyway); in the second, there was no question in that case of the broker’s liability policy being avoided for non-disclosure/misrepresentation. Mance J was considering the (hypothetical) effect of public policy on a claim made under a valid contract of insurance, not a claim made under a contract of insurance that had been validly avoided vis a vis the policyholder. The case is not authority for a general approach which seeks to put a person claiming under the 1930 Act (or the 2010 Act), in a better position that the insured.
    1. Mr Jupp’s first two grounds of appeal must therefore fail. In my view rule 8.1.1(3) does no more than set out a process requirement, regulating how an insurer sets about rejecting a claim. Where, as in this case, an insurer is entitled to avoid the policy by reason of non-disclosure/misrepresentation on the part of the policyholder, rule 8.1.1(3) does not act to remove or limit that right by reference to other (unspecified, apparently at large) considerations, including the circumstances of third parties seeking to claim under the policy. Were it to be otherwise then I agree with Mr Brown that employer’s liability risks, probably other types of risk also, would become unrateable and thus uninsurable, having too many unknown, and unknowable, variables. As Mr Brown asked rhetorically in argument – how indigent would an employee have to be before an avoidance that would otherwise be reasonable would be rendered unreasonable?
    1. The result of Rafiq’s criminal activity in engaging slave labour to work at HLB indisputably constituted non-disclosure/misrepresentation entitling ATE to avoid the EL policy. The Master’s decision in that respect is not challenged. The effect of avoidance is to annul and remove the policy altogether, for all purposes and against all persons. Under the 1930 Act the appellants only had such claim under the EL policy as HLB would have had. The policy having been (validly) avoided, HLB would have failed in any claim which it brought under the policy and thus the appellants’ claims must also fail. That is the effect of the statutory subrogation under the 1930 Act: the appellants stand in the shoes of HLB, having no better claim than HLB would have had.
Ground 3 – scantiness of placing information and enquiries
    1. The Master’s finding (at [42] of his judgment) that scant enquiries made by ATE at the time of placing had no bearing on the materiality of the non-disclosure is not challenged on this appeal. Given my decision on the first two grounds, above, this ground must fail.
Ground 4 – matters to be taken into account under a broad test of reasonableness
    1. Since I have rejected Mr Jupp’s “broad reasonableness” test it follows that in my view the Master did not err in failing to take account of the matters raised by Mr Jupp under his fourth ground of appeal.
    1. Mr Jupp’s policy arguments, made by reference to the cases of Hough and Rantsev, together with an examination of the UK’s obligations under the European Convention against Trafficking, took the matter no further. He suggested that a policy calling for proper treatment and compensation of trafficking victims should “feed into” how rule 8.1.1(3) is interpreted but I simply could not see how this would work. As Mr Brown observed, properly understood what Mr Jupp appeared to be saying was that such a policy should affect how the rules are interpreted for the appellants. Yet there is nothing whatsoever in the ICOBS rules which could justify drawing such a distinction.
Conclusion
  1. For the reasons set out above the appeal is dismissed.