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Employers' Liability Insurance - High Court Pinpoints Unfair Defect in the Law

The High Court has drawn attention to a defect in the law that unfairly undermines the position of injured workers if the employers' liability insurance of the business they work for is cancelled. The case concerned two foreign nationals who were illegally trafficked to Britain to work in a factory in conditions that amounted to modern slavery.

Both men were lured to this country by promises of a better life but were paid far below the National Minimum Wage and suffered psychiatric injuries due to the conditions of their employment. One of them also sustained a serious workplace accident that resulted in a below-knee amputation.

The company they worked for was, on the face of it, legitimate – supplying a number of well-known high street retailers. Its managing director, however, had succumbed to using cheap trafficked labour. He and others were convicted of people trafficking offences and sentenced to terms of imprisonment.

The men launched damages claims against the company and its insurer. However, their cases encountered a major difficulty after the company entered administration and the insurer avoided its employers' liability insurance policy on grounds of non-disclosure and misrepresentation.

The men argued that the insurer had closed its eyes to the company's criminality and that there was an established practice in the insurance market that claims brought by innocent third parties in such circumstances would be paid. They pointed to the claims handling section of the Insurance Conduct of Business Sourcebook (ICOBS), which states that claims must not be unreasonably rejected.

Ruling on the matter, the Court found that, given the established criminality on the part of the company's management and its failure to disclose information to the insurer that was relevant to the assessment of risk, the insurer had a clear common law entitlement to avoid the policy.

There was no market practice whereby it was incumbent on the insurer to pay the men's claims and to recover its outlay, if feasible, from the company. ICOBS did not assist the men in that the requirement to act reasonably referred to the relationship between insurer and policyholder, making no reference to injured third parties.

The Court acknowledged that the case had exposed a long-standing protection gap in the statutory scheme for employers' liability. The men were particularly deserving and anyone in their position could very justifiably label the avoidance of an insurance policy underwriting their claims as unreasonable and unfair if it left them without a remedy. It could not, however, be argued that ICOBS imposed a blanket ban on insurers exercising their legal right to avoid policies in such circumstances.

The Court reluctantly found that the insurer was contractually entitled to avoid the policy and that it did not act unreasonably in doing so. Reaching that conclusion with regret, the Court acknowledged that the statutory scheme which led to that result was defective and unfair. The ruling effectively stymied the men's claims against the insurer.

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