The High Court has upheld a decision that an insurer was entitled to avoid an employer's liability insurance policy for non-disclosure and misrepresentation relating to the employer's involvement in trafficking and forced labour.
The Claimants in this case were two Hungarian nationals, Atilla Komives and Joseph Varhelyi. They were trafficked to the UK, and worked for Hick Lane Bedding Limited (Hick Lane), a mattress manufacturer owned by Mohammed Rafiq.
The Claimants' work for Hick Lane was in conditions amounting to modern slavery: they worked excessive hours, living in squalid accommodation, for negligible payment. Both Claimants suffered psychiatric injury, and Mr Varhelyi suffered severe physical injury following a workplace accident – resulting in a below-knee amputation.
Mr Rafiq was convicted for his part in the trafficking and forced labour of Mr Komives and Mr Varhelyi, and others (along with two further individuals involved in the trafficking, Janos Orsos and Ferenc Illes). In June 2015 Hick Lane went into administration and is now insolvent.
Hick Lane had employer's liability insurance in place with AM Trust Europe Limited (AmTrust) for the 2011–2012 policy year (the EL policy). Employer's liability insurance has been compulsory for employers since the Employer's Liability (Compulsory Insurance) Act 1969.
Mr Komives and Mr Varhelyi issued proceedings against both Hick Lane and against AmTrust (under the EL policy via the Third Party (Rights Against Insurers) Act 1930 (1930 Act)) in relation to their various injuries.
AmTrust sought to avoid the EL policy ab initio on the ground of material non-disclosure in relation to the use of trafficked labour, material misrepresentation in relation to Hick Lane's health and safety regime, and a material misrepresentation in relation to wage costs.
In March 2020, there was a trial of preliminary issues before Master Davidson. The issues were directed at determining whether the Claimants were entitled to recover under the EL policy pursuant to rights conferred under the 1930 Act.
The Claimants argued that insurers had closed their eyes to the criminality of Hick Lane's operations (and that in any event, they were not entitled to rely on it), that there was no evidence that health and safety information had ever been passed on to the insurer, and that non-disclosure of wage roll information was immaterial. They argued that there was market practice to pay claims in circumstances like these. They also argued that that the policy was subject to ICOBS rule 8.1.1(3) which requires that an insurer must "not unreasonably reject a claim (including by terminating or avoiding a policy)".
Master Davison held that as AmTrust had been entitled to avoid the policy, and it had reasonably done so, Mr Komives and Mr Varhelyi could not make a claim under the EL policy via the 1930 Act. He therefore dismissed the Claimants' claims against the EL policy. Mr Komives and Mr Varhelyi appealed this decision to the High Court.
The appeal was heard by May J in the High Court. The Claimants, now the Appellants, did not challenge Master Davison's findings of fact nor his finding that AmTrust was entitled to avoid the EL policy on grounds of non-disclosure and/or misrepresentation.
Instead the Claimants argued that Master Davison had erred in his approach to the interpretation and application of ICOBS rule 8.1.1(3). They argued that the 'consumer protection objective' behind rule 8.1.1(3) was to give protection to those who take out insurance and those who have acquired rights or interests under the policy. They argued that the ICOBS rules represented Parliament's intention to ensure that employees who believed that they were protected at work would not have their claims rejected. The Claimants also argued that the 'reasonableness' test in rule 8.1.1(3) is broad, and should take into account the effect of rejecting the claims of innocent third parties.
AmTrust argued that there was no extant policy, since it was avoided ab initio: this meant that the Claimants were trying to pursue payment under a policy did not exist. They argued that since the Claimants had accepted that it was not unreasonable for AmTrust to avoid the policy, AmTrust could not be considered unreasonable to have rejected Mr Komives' and Mr Varhelyi's claim. AmTrust also pointed out that reliance on the Claimants' status as trafficked employees left doubts as to the status of potential claims from other employees.
The Claimants' appeal was rejected.
May J observed that "if [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."
May J concluded that in fact ICOBS rule 8.1.1(3) does no more than set out a process requirement, regulating how an insurer sets about rejecting a claim.
May J held that Mr Rafiq's criminal conduct indisputably represented non-disclosure/misrepresentation on the part of Hick Lane. AmTrust was therefore entitled to avoid the policy (and in doing so, the policy was annulled and removed, for all purposes and against all persons). ICOBS rule 8.1.1(3) did not remove this entitlement by reference to other considerations, such as the circumstances of third parties seeking to claim under the policy. If ICOBS did operate in this way, it might render employer's liability risk (and potentially other kinds of risks) unrateable and therefore uninsurable.
The appeal was therefore dismissed.
This is undeniably a very sad case. The Court was sympathetic to Mr Komives and Mr Varhelyi, but ultimately concluded that the approach they sought was not supported by the current legislative framework surrounding Employer's Liability insurance. Indeed, the meaning of the ICOBS rule for which the Claimants argued would have been a significant change, altering long-established principles of avoidance and third party rights, in an area where there has been recent legislative reform which did not effect the change which they advocated. The judgment effectively confirms that ICOBS rules do not overrule principles of insurance law.
More generally, this judgment re-affirms some of the circumstances in which an Employer's Liability policy can be avoided by insurers (in this case, material non-disclosure and misrepresentation in relation to the undisclosed use of trafficked labour).