The High Court provides clarity on the avoidance of employers’ liability policies
Komives and Varhelyi v Hick Lane Bedding Limited (in administration) and AmTrust Europe Limited [24.11.21]
This article was co-authored by Geoffrey Brown, Counsel, 39 Essex Chambers, and David Armstrong, Trainee Solicitor, London.
This case involves a successful avoidance of an employers’ liability (EL) policy on grounds of misrepresentation and on disclosure, in a case involving labour trafficking, in which Kennedys (together with Geoffrey Brown of 39 Essex Chambers) acted for the insurers.
In a judgment handed down today, a High Court Judge has dismissed an appeal against the original decision upholding insurers’ right to avoid and an attempt to impugn the same under the Insurance Conduct of Business Sourcebook (ICOBS).
The tragic underlying case concerns two victims of trafficking and modern slavery, who were sent to work at a company, Hick Lane Bedding (HLB), owned by Mohammed Rafiq. Despite being a seemingly reputable business with regular employees, Rafiq supplemented his staff with illegal cheap trafficked labour.
Both victims, Mr Komives and Mr Varhelyi, suffered psychiatric injury due to their degrading treatment. Further, Mr Varhelyi suffered physical injury after a forklift truck failed, causing an industrial bin to fall onto his left leg, leading to a below-knee amputation.
Aside from the criminal proceedings against Rafiq, HLB became insolvent, with the victims being unable to recover financial recovery direct from HLB. At the time of the incident, HLB had cover under an employers’ liability policy from its insurer, AmTrust Europe Limited (ATE). However, ATE had avoided the policy with HLB due to material non-disclosure and misrepresentation as a result of the undisclosed trafficking of labour.
Despite this, the victims sought to make a claim on the policy, relying on the Third Party (Rights against Insurers) Act 1930 (although the position would have been much the same, had the 2010 Act applied instead).
A trial of preliminary issues took place in March 2020 to consider the ability for the victims to make a claim on the employers’ liability policy. Master Davison held that ATE were entitled to avoid the policy and there was no valid claim against ATE under the Third Party (Rights against Insurers) Act 1930.
The victims appealed this decision. There was no challenge to the Master’s findings of fact nor to his finding that (at least so far as HLB was concerned) ATE was entitled to avoid the EL policy on grounds of non-disclosure and/or misrepresentation. Instead, the claimants argued that the Master had erred in his approach to the interpretation and application of Rule 8.1.1(3) of the ICOBS which states that an insurer must “not unreasonably reject a claim (including by terminating or avoiding a policy)”.
Mrs Justice May DBE rejected the appeal.
The claimants argued that the intention behind Rule 8.1.1(3) was to offer substantive rights to them rather than simply providing guidance as to claims handling as between an insurer and an insured. The Judge rejected this argument, confirming that the essential function of the Rule is to impose a process requirement regulating how an insurer is to deal with a claim (aside from the limited and specific respects in which a contrary intention is expressed). This is consistent with the placing of Rule 8.1.1 under the heading “Claims Handling”.
The claimants further argued that the test of unreasonable conduct in ICOBS Rule 8.1.1(3) is a broad one, extending beyond the insured and insurer and as such, should take into account the effect that rejecting a claim may have on innocent third parties. If accepted by the court, this would convey broad new rights to third parties. However, this line of argument was also rejected by the Judge who found that the relationship between the insured and insurer should only be considered when considering unreasonableness in rejecting a claim.
As the Judge commented:
If [the claimants’ Counsel] 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.
Whilst the facts of this case were very specific, this judgment serves as a useful reminder of the not always appreciated point that in appropriate cases, an employers’ liability policy can be avoided by insurers. Here, the material non-disclosure and misrepresentation by the insured regarding its use of trafficked labour and modern slavery provided sufficient grounds for an insurer to avoid the employers’ liability policy. To the extent that the claimants did not have recourse open to them under the Criminal Injuries Compensation Authority (CICA), the Judge commented that judicial review proceedings of the CICA’s rules may be available to them.