Kr & Ors v Royal & Sun Alliance Plc

An insurer’s deliberate-act exclusion applies only where the loss results from a deliberate act or omission which is, as a matter of law, the act or omission of the insured company. It does not generally exclude liability for deliberate assaults committed by employees or agents merely because the company is vicariously liable for them. The relevant question is whether the conduct is attributable to the company, having regard to the nature of the activity, the person’s position and the surrounding circumstances. Negligent systems, organisation or supervision which permit abuse do not themselves become deliberate acts of the company.

Eight former residents of children’s homes operated by Bryn Alyn claimed directly against the defendant insurer under section 1 of the Third Parties (Rights against Insurers) Act 1930. The underlying company had been found liable for negligence in permitting physical and sexual abuse, and had subsequently entered liquidation.

The insurer disputed whether cover existed before 22 August 1976 and relied on deliberate-act exclusions in policies from 1976 and 1981. The central issues were whether earlier cover was proved and whether the claimants’ losses resulted from deliberate acts or omissions of the insured company or persons whose conduct fell within the policy wording.

1. Outcome. The claimants established cover from 22 August 1976, but not before that date. The insurer’s defence based on the policy exceptions failed.
2. Under section 1 of the Third Parties (Rights against Insurers) Act 1930, the claimants obtained the insured company’s rights under the policies. The insurer therefore had to establish that the exclusions applied to the individual claims.
3. The findings in the underlying proceedings were findings of negligence in the company’s system, organisation and supervision. Staff were inexperienced and inadequately trained, the homes were overcrowded, warning signs were missed, and inappropriate violence was tolerated. The damages were awarded on the basis of that neglect, rather than for deliberate harm inflicted by the company.
4. The deliberate-act exclusions required the loss to result from a deliberate act or omission of the company. The acts of abuse were the acts of the abusers. Negligence by the company which permitted those acts to occur did not convert them into deliberate acts of the company.
5. The attribution question depended on the nature of the activity, the relevant position of the person concerned, and the surrounding circumstances. The court accepted the approach stated in HL Bolton (Engineering) Co Ltd v Graham and Sons Ltd [1957] (CA) 1 QB 159 and referred to the reasoning in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] (PC) 2 AC 500.
6. The 1981 wording, which referred additionally to directors and managerial employees, did not materially alter the analysis. The insurer still had to show that the deliberate acts were committed by persons acting in an operational role and exercising management responsibility. The abusers were acting for their own ends, not in a managerial role.
7. The court rejected the insurer’s attempt to characterise the abuse as a deliberate regime established by the company. The factual findings did not support that case. The United States authorities relied upon did not materially assist because the result depended on the particular policy wording.
8. The court made an alternative observation that, had pre-1976 cover been proved, the earlier policy wording would also have covered the claims because the injury was accidental from the assured’s perspective and was not caused by a deliberate act of the company. That observation was unnecessary to the result.

The judgment records that the underlying claims against the operating company were determined by Connell J on 26 June 2001. The claimants succeeded on appeal and cross-appeal in KR and others v Bryn Alyn Community (Holdings) Ltd and another [2003] QB 1441. The present proceedings were then brought directly against the insurer under the Third Parties (Rights against Insurers) Act 1930.