KR & Ors v Royal & Sun Alliance Plc

A liability policy exclusion for injury or damage resulting from a deliberate act or omission of the insured must be construed according to its natural meaning. The court must identify the person who caused the injury and decide, in the context of the policy, whether that person is to be treated as the company. This attribution inquiry is distinct from vicarious liability. A controlling director may be the company in substance, so his deliberate abuse can fall within the exclusion. An amended clause extending the exclusion to directors and managerial employees covered heads of individual homes, but not lower-level team leaders. Where a loss has concurrent causes and one is wholly excluded, the policy does not respond to that loss.

Six respondents brought direct claims against Royal & Sun Alliance Plc under the Third Parties (Rights against Insurers) Act 1930, following findings that abuse had occurred in children’s homes operated by Bryn Alyn Community. The company had been found liable for systemic negligence, following earlier proceedings before Connell J and an appeal reported at [2003] QB 1441.

Simon J held that the policy’s deliberate-acts exception did not apply because the claims had succeeded on systemic negligence rather than on the deliberate assaults themselves. The insurer appealed. The central issue was whether the acts of John Allen and other individuals were attributable to the insured company, or fell within the amended reference to directors and managerial employees.

Disposition. The appeal was allowed to the extent indicated. The insurer was not liable for injury caused by deliberate acts falling within the policy exception, but remained liable for other acts of abuse. The parties were invited to make written submissions on costs.

1. The court treated the policy wording as decisive. Where loss is caused by concurrent causes and one is wholly expressly excluded, the policy does not respond: Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1974] 1 QB 57, followed in The Miss Jay Jay [1987] 1 Lloyds Rep 32 and The Aliza Glazial [2002] 2 Lloyds Rep 421.
2. The legal basis of the company’s liability did not determine the operation of the exception. Although the claims had been framed as systemic negligence, the court had to examine the injury suffered and ask whether the person causing it was to be equated with the company. The exception was not confined to acts performed in the operational management of the company. The additional wording concerning what could reasonably have been expected did not affect the result.
3. Attribution was distinct from vicarious liability. The relevant question was one of construction of the substantive rule, here the insurance policy, having regard to its language, content and policy. The court applied the principles in Lennard’s Carrying Company Limited v Asiatic Petroleum Company Limited [1915] AC 705, HL Bolton (Engineering) Co. Ltd v TJ Graham and Sons Ltd [1957] 1 QB 159, Tesco Supermarkets Limited v Nattrass [1972] AC 153, El Ajou v Dollar Land Holdings plc [1994] 2 ALL ER 685 and Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500. The scope of attribution depended on the particular act and the individual’s authority and position.
4. John Allen’s deliberate acts were attributable to the company. He was not merely its managing director and majority shareholder; in substance he was the company, treated it as his own and controlled matters of consequence. His deliberate sexual and physical abuse therefore fell within the exception from the commencement of cover in 1976. The court distinguished this attribution question from the vicarious-liability issue considered in Lister v Hesley Hall [2002] 1 AC 215.
5. The June 1981 amendment extended the exception to directors and managerial employees. The policy commentary referring to operational decisions explained the amendment but did not limit the clause to operational acts. Heads of individual homes were managerial employees, whereas team leaders and persons lower in the hierarchy were not.
6. Accordingly, abuse by Jeff Davies and Steve Ford was excluded in the relevant cases; abuse by Peter Steen, unidentified individuals and other lower-level staff was not. D.J., G.O’M. and P.S. could recover for abuse other than that inflicted by Allen, subject to the applicable deductions for periods before cover began. J.M. could not recover for abuse by Allen or Taylor, the head of Pentre Saeson.

• Court of Appeal (Civil Division): In [2006] EWCA Civ 1454, the appeal was allowed to the extent that the policy exception applied to specified deliberate acts by the insured, directors and managerial employees. The insurer remained liable for other abuse.
• High Court, Queen’s Bench Division: Simon J gave judgment on 26 January 2006 for the six successful claimants, holding that the policy exception did not apply to the systemic-negligence claims.
• Earlier proceedings: Connell J had found the company liable in negligence for the operation of the homes. The resulting appeal and cross-appeal were reported at [2003] QB 1441.