Clarity on the Avoidance of Employer’s Liability Insurance Policies
03 December 2021
On the 24th November 2021, some clarity was provided by the High Court of England and Wales in relation to the avoidance of an employer's liability policy by insurers on the grounds of non-disclosure/misrepresentation.
The case of Komives and Another v Hick Lane Bedding (in administration) and Another  involved two claimants (Mr Komives and Mr Varhelyi), who were trafficked into the UK and sent to work under modern slavery conditions at Hick Lane Bedding ("HLB"). Physical and psychological injuries were sustained between January 2009 and October 2013, and the claimants sought recompense for their injuries via civil proceedings.
HLB went into administration on the 9th June 2015. Employers' liability insurance had been placed with AM Trust Europe Ltd ("ATE") for the period between July 2011 and July 2012 and the claimants attempted to make a claim on this policy under the Third Party (Rights against Insurers) Act 1930 ("the 1930 Act"). Presented with the claim, ATE purported to avoid the EL policy on the ground of material non-disclosure and/or misrepresentation on the part of HLB or its brokers at the time insurance cover was placed.
Policy avoidance by ATE was upheld by Master Davison, during a preliminary trial in March 2020. The Court held that an insurer was entitled to avoid an employer's liability insurance policy for non-disclosure and misrepresentation relating to the employer's criminal conduct. However, Master Davison reached his decision with some reluctance, stating that the scheme of compulsory employers' liability insurance, was "defective" and "unfair" as it left insurance policies vulnerable to be avoided for material non-disclosures not known to employees. By contrast, the Court noted that the Road Traffic Act 1988 severely restricted an insurer's right to avoid a policy for breach of the duty of fair presentation.
The claimants / appellants appealed, with the appeal decision handed down on the 24th November 2021.
Grounds of Appeal
The Master originally held that ATE had been entitled to avoid the policy and the claimants had no valid claim against ATE. The appeal addressed whether the Master had erred in his approach in relation to the interpretation and application of rule 8.1.1(3) of the Insurance Conduct of Business Sourcebook ("ICOBS"), which states that an insurer must not "unreasonably reject a claim (including by terminating or avoiding a policy)".
There were four primary grounds to the appeal:
1. Whether avoidance of the policy should be assessed objectively, rather than solely from the insurer's perspective;
2. Whether the High Court Master wrongly combined the reasonableness test with established grounds for avoidance under insurance contract law;
3. The Master failed to properly consider that ATE had made scant enquiries prior to placing cover (and the impact on the reasonableness of avoidance of the insurance policy); and
4. Whether factors such as the statutory scheme for the protection of employees under the Employers' Liability (Compulsory Insurance) Act 1969 had been properly considered, as well as the nature and circumstances of the claimants' injuries (which fell under the compulsory insurance scheme) and the fact the claimants / appellants did not know of the non-disclosure / misrepresentation by their employers, HLB.
Mrs Justice May DBE dismissed the claimants' appeal. The Court cited the well-established principle that:
"…a contract of insurance is a contract of the utmost good faith, engaging strict obligations on the insured to make full disclosure of all matters material to the risk which is to be covered. If, after the contract of insurance has been placed, insurers discover matters which should have been disclosed but were not, or if it becomes clear that material aspects of the risk were misrepresented, then insurers may have a right to avoid the policy. If the contract is avoided then it is as if it never existed."
While the Insurance Act 2015 introduced limitations on policy avoidance, the insurance policy relevant to this claim pre-dated that legislation. The claimants' claim was brought under the 1930 Act. In a detailed decision, the Court acknowledged the plight suffered by the trafficked claimants and noted that an avenue of recourse was the Criminal Injuries Compensation Authority. The Court in this appeal, was concerned only with the nature of the civil rights, if any, for the claimants / appellants to make a claim against ATE on the EL policy, under the 1930 Act
The Court held that the first two grounds of appeal failed. Although ICOBS rule 8.1.1(3) states that an insurer must not unreasonably reject a claim, it does no more than set out a process requirement, regulating how an insurer sets about rejecting a claim. It was held that engaging slave labour to work at HLB indisputably constituted non-disclosure / misrepresentation, entitling ATE to avoid the EL policy. On the basis of the Court's rejection of the first two grounds of appeal, it was also determined that the Master had properly assessed the enquiries made by ATE prior to placing cover, as well as the broad test of reasonableness. As such, the third and fourth grounds of appeal also failed.
Although this appeal relates to very specific circumstances (and the 1930 Act), it does serve as a useful affirmation that the ICOBS do not overrule the legal principles of insurance and that a contract of insurance is a contract of the "utmost good faith." It is a distinguishing factor that the non-disclosure / misrepresentation in this claim involved criminal conduct on the part of the policyholder. While fact specific, the case is a reminder that in some circumstances, an employers' liability insurance policy can be avoided by insurers.
This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.
If you have any queries or require further advice, please contact a member of the Carson McDowell Defence Insurance Litigation team.