Komives v Hick Lane Bedding Ltd & Anor

An insurer may avoid employers’ liability insurance for material non-disclosure or misrepresentation if the facts would have influenced a reasonably prudent underwriter and induced the insurer to contract. The compulsory insurance regime does not prevent avoidance on those grounds. ICOBS rule 8.1.1 adds a regulatory requirement to handle claims fairly and not unreasonably reject them, but operates principally on process. It does not replace the substantive common-law test or create a broad discretion requiring the insurer to consider the interests of injured third parties. The statutory protection gap for employees is a matter for legislation.

Two former employees of Hick Lane Bedding Ltd, who had been trafficked to the United Kingdom and subjected to exploitative working conditions, brought claims against the company and sought recovery from its employers’ liability insurer, Am Trust Europe Ltd, under the Third Parties (Rights Against Insurers) Act 1930. The employer was insolvent. AmTrust had avoided the policy for material non-disclosure and misrepresentation concerning trafficked labour, health and safety practices and wage costs.

The court tried preliminary issues concerning the validity of the avoidance, the claimants’ rights against the insurer and the effect of the insurance policy. The central questions were whether the common-law requirements for avoidance were satisfied and whether ICOBS made the avoidance unreasonable or ineffective.

1. Common-law avoidance. The insurer satisfied the two-stage test in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1994] 1 AC 501, as clarified in Assicurazioni Generali Spa v Arab Insurance Group [2003] Lloyd’s Rep IR 131. The undisclosed use of trafficked labour, the misleading health and safety presentation and the wage roll information were each material. The evidence established that the underwriter was induced to accept the risk. The limited information supplied to the insurer did not put it on inquiry and did not affect the right to avoid.

2. Criminal conduct and innocent employees. Hardy v MIB [1964] 2 QB 745 (CA) and Total Graphics Ltd v AGF Insurance [1997] 1 Lloyd’s Rep 599 did not establish that an insurer is precluded from relying on the insured’s undisclosed criminal conduct as a ground of avoidance. The claimants were not accused of illegality, but that did not prevent AmTrust relying on the material non-disclosure.

3. ICOBS. Rule 8.1.1 imposed a regulatory overlay requiring the insurer to handle claims fairly and not unreasonably reject them, including by avoiding a policy. Consistently with Parker v The National Farmers Union Mutual Insurance Society Ltd [2012] EWHC 2156 (Comm) and Bate v Aviva Insurance UK Ltd [2013] EWHC 1687 (Comm), the rule required fair and reasonable application of existing legal principles. It did not introduce a broad substantive reasonableness test capable of rewriting the common law or requiring the insurer to treat injured employees’ interests as determinative.

4. The process followed by AmTrust was not unreasonable. The insurer had been misled, had no reason to make further inquiries, and gave a sufficiently reasoned avoidance notice. The statutory protection gap identified in Dunbar v A. & B. Painters Ltd and Economic Insurance Co Ltd and Whitehouse & Co [1985] 2 Lloyd’s Rep 616 was a defect requiring legislative, rather than judicial, correction.

5. The preliminary issues were answered: questions (1) and (2), concerning entitlement to avoid and valid avoidance, were answered yes; question (3), concerning a valid claim against the insurer, was answered no; question (4) did not arise.