The High Court Affirms Avoidance of EL Policy

Komives and Varhelyi v Hick Lane Bedding Limited (in administration) v Am Trust Europe Limited [24.11.21]

This case features a successful avoidance of an employers' liability (EL) policy on grounds of misrepresentation and non-disclosure, in a case involving labour trafficking, in which Geoffrey Brown, instructed by Rachel Moore of Kennedys, 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 rejected an attempt to impugn the same under the Insurance Conduct of Business Sourcebook (ICOBS).

The facts of the case involved labour trafficking, with the Claimants having been used by the insured to supplement their labour force in an otherwise reputable business.  The EL insurers avoided cover by reason of the undisclosed trafficking. The victims sought to make a claim against them, 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 before Master Davison, who held that the insurers were entitled to avoid the policy and that they were not precluded from resisting the Claimants' claims by Rule 8.1.1(3) of ICOBS, which states that an insurer must: "not unreasonably reject a claim (including by terminating or avoiding a policy)".

In a detailed judgment, Mrs Justice May DBE has dismissed an appeal brought by the Claimants on the basis that (so it was argued) the ICOBS Rule precluded rejection of their claim.

The Judge accepted 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).

She also rejected the argument that the test of unreasonable conduct in ICOBS Rule 8.1.1(3) is a broad one, extending beyond the insured and insurer, such that it could benefit Claimants under the rights against insurers legislation.

Whilst the facts were out of the ordinary, the case serves as a useful reminder of the not always appreciated point that, on appropriate facts, an employers' liability policy can be avoided by insurers, and it confirms that the applicable legal principles are not fundamentally changed by ICOBS.