Falcongate Freight Management v Zurich Insurance Company (t/a Zurich Commercial)

Entitlement under employers’ liability insurance to recover a settlement depends on the policy’s terms. Where the policy requires legal liability, the insured must establish legal liability, policy coverage and a reasonable settlement. Specialist legal advice does not justify summary judgment where the advice and underlying material require investigation. A disputed undertaking transfer date, and the resulting transfer of employment under the Transfer of Undertakings with Protection of Employment Regulations 1981, are triable issues. Under Regulation 5(2), an indemnity right connected with an employment contract may transfer with the employment. That principle does not create cover under a policy made after the transfer for injuries suffered by a former employee. An unpleaded contention that earlier group cover continued likewise required trial.

Falcongate sought indemnity from Zurich under an employers’ liability policy after its former employee, Stephen Toft, was injured and his claim was settled. Zurich argued that Toft’s employment had transferred to Falcongate Scotland under TUPE before the relevant policy was made, and that the settlement was unreasonable.

District Judge Royall dismissed Falcongate’s summary judgment application. HHJ Darroch allowed Falcongate’s appeal and entered judgment against Zurich, relying on Bernadone v Pall Mall Services Group Ltd. The Court of Appeal considered whether the policy covered the liability, whether the employment transfer occurred before the accident, whether any insurance right transferred, and whether earlier group cover continued. The central issue was whether those matters could properly be determined summarily.

Appeal allowed. Dyson LJ gave the principal judgment. Jackson LJ agreed, and the Master of the Rolls also agreed while encouraging a commercial resolution.

1. Zurich could not be required at the summary stage to indemnify Falcongate in respect of the settlement. The policy was not before the court, so it was unknown whether it covered legal liability. As shown by Structural Polymer Systems v Brown [2000] Lloyd’s Rep IR 64, where policy wording covers sums for which the insured may become legally liable, recovery requires proof of legal liability, policy coverage and a reasonable settlement. Zurich was entitled to investigate the instructions, underlying material and specialist advice at trial.
2. The evidence supported the contention that the undertaking transferred around 31 March 2000, but an inconsistent letter created a proper issue. The date of transfer was therefore triable and could not be resolved in Part 24 proceedings.
3. Applying Bernadone v Pall Mall Services Group Ltd [2001] ICR 197, a transferor’s vested or contingent right to recover an insurance indemnity for liability connected with an employee’s contract transfers to the transferee under Regulation 5(2) of the Transfer of Undertakings with Protection of Employment Regulations 1981. However, if the employment transferred before Zurich’s policy was made, the policy covered Falcongate’s liability for injuries suffered by its employees during the policy period, not injuries suffered by a person who was no longer its employee. The policy therefore did not establish Falcongate’s entitlement.
4. The alleged continuation of the earlier group policy was unpleaded and required factual investigation. If pursued, it would raise a further triable issue.

The Master of the Rolls suggested that the insurers should consider a compromise, with or without mediation. The formal order was that the appeal be allowed.

• Court of Appeal (Civil Division): [2008] EWCA Civ 1644. Allowed Zurich’s appeal.
• Norwich County Court, HHJ Darroch: Allowed Falcongate’s appeal from District Judge Royall and entered judgment against Zurich.
• Norwich County Court, District Judge Royall: On 29 October 2007, dismissed Falcongate’s application for summary judgment.