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

At all material times, Falcongate Freight Management Limited (“F”) operated an international road haulage business with centres in Liverpool and Great Yarmouth. It had two associate companies, Dursavel Shipping Limited (“D”), and Falcongate Scotland Limited (“S”). By a contract of employer’s liability insurance dated 2 June 2000, the defendant agreed to indemnify F in respect of claims made against it in the period of insurance by its employees in respect of injuries suffered while acting in the course of their employment. The contract of insurance has not been produced to this court, and its precise terms are not in evidence before us. The period of insurance expired on 2 June 2001. There had previously been in force a group policy issued by the defendant in respect of F, D and S. This policy had been placed by Heath Lambert Group Limited (“the brokers”).

On 2 May 2000 the defendant wrote to the brokers reminding them that the insurance was due for renewal. At the request of the brokers, the defendant provided separate quotations for F, D and S. The quotations in respect of F and D were accepted, but that in respect of S was not. The defendant accordingly issued policies in respect of F and D, but no policy was issued in respect of S.

F and S had common shareholders. In January 2000 they decided that the two businesses should be combined, using S as the corporate vehicle for doing so. All F’s assets and their employees were transferred to S. There is an issue as to when this transfer was effected. It is F’s case that the transfer took effect on 31 March 2000.

Stephen Toft had been employed by F as a heavy goods vehicle driver. On 19 July 2000 he was injured in an accident during the course of his employment. On 14 July 2003 he issued proceedings in the Norwich County Court against F, claiming damages for negligence. It was his case that his contract of employment was with F and he had not consented to its transfer to S. One of the defences raised by F was that Mr Toft was not its employee, his employment having been transferred to S on 31 March 2000. F took advice from specialist employment counsel on 13 April 2004. He advised that F should negotiate a settlement of Mr Toft’s claim since the claim had a good prospect of success on the merits. It seems that the principal reason counsel gave for this opinion was that the evidence of the transfer to S was disputed and was insufficient to consider F’s defence having a reasonable prospect of success. The claim was settled on 25 May 2005 by payment to Mr Toft of ₤70,000. The payment was funded by the brokers, who recognised that they had been responsible for the fact that S did not have the benefit of any employers’ liability insurance cover.

The payment by the brokers was made pursuant to an undertaking that had been given to F in a letter dated 22 December 2003. F sought an indemnity from the defendant under the insurance policy of 2 June 2000, but the defendant refused to pay. Its case was that at the time of the accident Mr Toft was employed by S and the insurance cover did not extend to that company. F started the present proceedings, in which it claims that the defendant acted wrongfully and in breach of contract in refusing to indemnify it against the sum paid to Mr Toft. At paragraph 5 of its Particulars of Claim it states that in settling Mr Toft’s claim it acted reasonably and in accordance with the advice given by apparently skilful and competent lawyers. The defendant denies that it was obliged to indemnify F under the insurance policy, on the grounds that (1) at the date of the accident Mr Toft was no longer an employee of F but an employee of S, his employment having been transferred on 1 April 2000 by reason of the Transfer of Undertakings with Protection of Employment Regulations 1981 (‘TUPE’); and (2) the settlement with Mr Toft was not a reasonable settlement.

F applied for summary judgment against the defendant. The main issue before District Judge Royall was whether Mr Toft had consented to the transfer of his employment to S. On behalf of F Mr Nicol argued that Mr Toft had not consented, so that he was still an employee of F at the date of the accident. On behalf of the defendant, it was argued by Mr Nixon that the effect of TUPE was that Mr Toft’s employment had transferred from F to S by reason of the transfer of the undertaking of F to S. The result was that, upon the transfer, Mr Toft’s contract of employment had effect as if it had been originally made between him and S. S’s rights under the contract of insurance with the defendant did not transfer to S with the transfer of the undertaking. The question was also raised as to who had suffered the loss represented by the sum paid to settle Mr Toft’s claim.

On 29 October 2007, District Judge Royall dismissed the claim for summary judgment. There was an appeal to HHJ Darroch. The grounds of appeal were that the defendant was obliged to indemnify F because (1) “the only conclusion open to the judge on the evidence was that Mr Toft was employed by F at the time of the accident” and (2) even if by virtue of TUPE Mr Toft was an employee of S at the time of the accident, F retained the benefit of the insurance policy.

On behalf of the defendant it was submitted that the effect of TUPE was that Mr Toft was employed by S at the time of the accident, and S did not have the benefit of the defendant’s insurance policy. It was also submitted that F had suffered no loss because Mr Toft’s claim had been settled by the brokers and not by F.

The judge held that it was at least a strongly arguable case that Mr Toft’s contract of employment was transferred by virtue of TUPE, and that therefore he was employed by S at the time of the accident. He also referred to the decision of this court in Bernadone v Pall Mall Services Group Ltd [2001] ICR 197 and held that, if there was a transfer of Mr Toft’s employment to S, the benefit of F’s insurance was also transferred to it. The judge also then dealt with the subrogation argument. This turned on the effect of the broker’s letter of 22 December 2003. Since the subrogation issue has not featured in the arguments before this court, I say no more about that. The judge therefore allowed F’s appeal and gave judgment against the defendant in the sum claimed. The defendant appeals with the permission of Jacob LJ.

Mr Nicol seeks to uphold the judge’s decision in the following way. First, he submits that, regardless of whether F in fact had any legal liability to Mr Toft, it is entitled to be indemnified by the defendant under the contract of insurance because the sum claimed was paid pursuant to a bona fide reasonable settlement to pay. Counsel has referred us to a decision of Moore-Bick J in Structural Polymer Systems v Brown [2000] Lloyd’s Rep IR 64. In that case, the insurance policy provided an indemnity against all sums which the insured “may become legally liable to pay”. It was held that in order to recover under the policy for the settlement, the claimant had to show that (a) they were under a legal liability to one or more of the claimants for an amount not less than paid under the settlement; (b) the liability was covered by the policy; and (c) the settlement of the liability was reasonable. It is clear, therefore, that whether an insured is entitled to be indemnified under an insurance policy in respect of sums paid to a claimant for which there was no legal liability to pay depends on the terms of the policy. As I have said, we have not seen F’s insurance policy of 2 June 2000, or indeed that in respect of the period after 2 June 2001. We do not know whether either policy provides cover in respect of legal liability. For that reason alone, I would not give judgment in favour of F on the reasonable settlement point. But I would go further. Mr Nicol relied on the fact that settlement was advised by specialist counsel. We have not seen the instructions that were sent to counsel to advise or any of the material on the basis of which he gave his advice. All we know is that the factor which he seems to have regarded as decisive was that the evidence relating to the transfer was insufficient to knock out Mr Toft’s claim. In my judgment, the defendant is entitled to test the reasonableness of this advice and to investigate it in the usual way at a trial. A summary process is not appropriate for doing this.

This brings me naturally to Mr Nicol’s next point, which is that it has not been clearly demonstrated by the defendant that the transfer by F of the undertaking to S was effected before the date of Mr Toft’s accident. We were shown a good deal of material by Mr Nixon which points to the conclusion that the transfer was effected on or about 31 March 2000: see the evidence of Mr Beddows and Mr Hannant. It is true that there is a letter from Mr Hannant dated 10 August 2000 addressed to a company called Paperclip (East Anglia) Ltd signed on behalf of S which states:

“As previously advised, our company changed its name to Falcongate Scotland Ltd back in April of this year, so could you please re-invoice accordingly.”

A point can properly be made that, speaking as it does of a company change of name in April, this is not consistent with or certainly does not point to there having been a transfer of undertaking at about that time.

It is accepted on behalf of F that the transfer had taken effect by the end of 2000. Mr Nicol cannot point to any date between 31 March and the end of 2000 as a possible candidate for the date of transfer: that is to say, a date different from 31 March, the date contended for by the defendant. The judge said that it was at least “strongly arguable” that F’s undertaking had been transferred to S by the date of the accident. I agree. The question of when the transfer was in fact made is a triable issue, which cannot be resolved by Part 24 proceedings.

Mr Nicol has raised other arguments on the hypothesis that his first two arguments are rejected. He relies on the Bernadone case. In that case, while the claimant was employed by the first defendant, she suffered an accident during the course of her work. After the second defendant had taken over the first defendant’s undertaking, the claimant brought proceedings against both defendants. The second defendant brought third party proceedings against the first defendant’s insurers, contending that the rights of the first defendant under the insurance policy had transferred to the second defendant by virtue of TUPE. That argument succeeded. It was held that the first defendant had a vested or contingent right to recover from its insurers under the employers’ liability policy in respect of its liability to the claimant. Since that liability, being “in connection with” the claimant’s contract of employment, transferred to the transferee the transferor’s right to recover from the insurers an indemnity in respect of a liability arising in connection with the contract, and as such a right arising in connection with the contract of employment, which transferred under Regulation 5(2) of TUPE.

Applying that reasoning, it seems to me that the position in the present case is this: if Mr Toft had been injured after 1 April 2000 but before the expiry of F’s insurance on 2 June 2000, the defendant would have been liable to indemnify S. F’s right to be indemnified would have transferred to S as a right in connection with Mr Toft’s contract of employment, that contract being transferred by virtue of TUPE. But in the present case, ex hypothesi the accident occurred after S had the benefit of any insurance in respect of Mr Toft. The insurance policy relied on by F was for the period 2 June 2000 to 1 June 2001. Mr Toft was not an employee of F during that period. The right to be indemnified by the defendant was not a right in connection with the contract of employment between F and Mr Toft, because that contract had been transferred before the relevant insurance contract was made between F and the defendant. That contract covers F’s liability for injuries suffered by those who are employees during the period of insurance. It does not cover liability for injuries suffered by those who were its employees during the currency of earlier insurance policies, and who no longer are its employees. All of that, it seems to me, would flow from an application of the principles stated in Bernadone.

Mr Nicol submits, however, that the reasoning in Bernadone can be relied on in a different way. He says that Mr Toft, whilst employed by F, had the benefit of an employer whose employment liability was protected by insurance. That benefit was a right under or in connection with his contract of employment. If there was a transfer, he submits, then that right was transferred so that the employee, Mr Toft, had the benefit of an employer, S, who also had the protection of that insurance. I confess that I have had difficulty in following this argument, and I may not have reproduced it accurately. If I have understood it correctly, it seems to me that Mr Nicol faces an uphill struggle at trial. But this is not the place at which to decide that point finally.

Lastly, Mr Nicol seeks to argue that, at the time of the accident, S still had the benefit of the group insurance policy which, although it formally expired on 2 June 2000, was held over until it was superseded by the policy in favour of F and D but not S. This point has not been pleaded, and if it were to be pleaded it would require a careful investigation of the facts leading up to the date of the accident. It is impossible to decide this point on the material that has been placed before us. It seems to me that if this point is to be taken, then it would raise a triable issue which could only be determined after a trial.

For all these reasons, it seems to me that this is not a case for Part 24 proceedings, and I would allow the appeal.

I agree.

I also agree that this appeal should be allowed, for the reasons given by Dyson LJ. I would like to add just a few words on the way forward.

This is a dispute between insurers. On the one hand there are the brokers’ insurers, who pursue a subrogated claim in F’s name, having discharged the liability of F and perhaps S to Mr Toft. They did so because of a claim against the brokers for negligently failing to arrange employer’s liability cover on behalf of S. On the other hand, there are F’s liability insurers, Zurich. It is plain that a trial will involve the expenditure of considerable further legal costs. It would surely be more sensible for these insurers to stop incurring legal costs and to reach a compromise agreement. Would the best course not, for example, be for the claims managers or other suitable officers of the two insurers to meet, with or without the assistance of a mediator? The answer is surely “Yes”.

However that may be, this appeal is allowed.