Avoidance of EL Policies

There is a perception that employers' liability policies are not avoidable for non-disclosure or misrepresentation.  But that should not, in my opinion, be taken to be the legal position.

There are two striking features of the scheme of statutory regulation under the Employers' Liability (Compulsory Insurance) Act 1969 and the Employers' Liability (Compulsory Insurance) Regulations 1998.  The first of those being that these provisions do not actually proscribe avoidance.

The second striking feature is that Parliament has not intervened to change that statutory regime during the 35 years or so that have elapsed since the Courts noted, and indeed deplored, in the case of Dunbar v A&B Painters Ltd [1986] 2 Lloyds Rep 38 that the statutory scheme leaves injured employees exposed to the risk of avoidance.  That being something which could occur through no fault on the part of the injured employee.  This can be a particular concern where an employer has become insolvent.  For the statutory right given to an employee to sue the insurer direct under the Third Parties (Rights Against Insurers) Acts will be, in practice, worthless, if the insurer can validly avoid the cover.

What has happened during those intervening 35 years since the Dunbar case is the introduction of the Financial Conduct Authority's regime under the Insurance: Conduct of Business Sourcebook (ICOBS).  Section 8 thereof is headed, and is generally concerned with, Claims Handling.  But, if one looks at the wording of 8.1.1, it includes a reference to avoidance.  Its requirements at sub-paragraphs (1), (2) and (4) are concerned with insurers handling claims promptly and fairly, providing reasonable guidance to help policyholders make claims and appropriate information on progress thereof and settling claims promptly once settlement terms have been agreed.  But, in so far as sub-paragraph (3) imposes a requirement on insurers not unreasonably to reject a claim, there is effectively an extended definition given to what is meant by them rejecting a claim.  For that is stated to include "by terminating or avoiding a policy".  So, avoidance can fall within the scope of the requirement not unreasonably to reject a claim.  Such ICOBS requirements have been held to be binding on insurers in civil proceedings.  See Parker v NFU Mutual [2013] Lloyds Rep I.R. 253; Bate v Aviva [2013] EWHC 1687 (Comm).

One may, then, have a situation where it needs to be determined whether an EL insurer has acted unreasonably in avoiding a policy.

That was the issue at the heart of two recent cases tried before Master Davison (under his trial jurisdiction), Komives and Varhelyi v Amtrust, in which judgment was delivered on 12 March 2020, and in which I appeared for the insurer.

The facts of those cases were extreme.  They involved labour trafficking.  The claimants were Hungarian nationals who were put to work in the insured's factory under an arrangement which the insured had with the traffickers, being paid a pittance (via the traffickers) and effectively forming a sub-class of the workforce with no proper concern paid to their health and welfare.

The insurer avoided the policy on three grounds.  The first related to non-disclosure of the insured's involvement in labour trafficking.  The second was based on misrepresentation in regard to the insured having, supposedly, an exemplary approach to health and safety.  The third was concerned with the insured having given wage roll information which effectively concealed its use of trafficked labour.

The Court upheld the avoidance on all grounds.  This included the second ground relating to health and safety.  With the Court effectively distinguishing between breach of policy terms during the term of the policy in regard to such matters (which is ruled out by the statutory regime) and non-disclosure in regard to an insured's pre-inception approach thereto (which, on its approach would not be).

The Master took the view that that ICOBS 8.1.1 did not purport to change or modify existing legal principles but required insurers to apply those principles reasonably.  He did not consider the insurer to have acted unreasonably on the facts of the case.

A further issue raised in the case was whether the (un)reasonableness of an insurer's avoidance falls to be judged, for ICOBS purposes, as between insurer and insured or as between the insurer and the injured employees who claim directly against the insurer.  In principle, in my view, it should be the former.  The Master seemed inclined to the same view.

The outcome of the cases was that the claims against the insurer were dismissed.  There is the prospect of an appeal (although permission was refused by the Master).  Should the Claimants succeed in obtaining permission from a higher Court, the principal battleground seems likely to be as to whether ICOBS 8.1.1 in effect deprives an insurer of the right to avoid, where injured Claimants are considered deserving of protection.  But, at least for now, that is not the approved approach.