Komives v Hick Lane Bedding Ltd & Anor

This is the polished version of a judgment which I gave orally on 12 March 2020.

These claims are part of a group of eight similar claims, all concerning the trafficking to the UK of Hungarian men, who were then put to work in manufacturing businesses in the north of England in circumstances amounting to modern slavery. Offers of employment and accommodation were made by a man named Janos Orsos, better known as “Kacsa”, (pronounced “Kotcha”). Though these offers were painted in attractive terms, the reality was very different. The claimants were paid negligible amounts of money, they were made to work excessively long hours and their accommodation was squalid and overcrowded. The employer in the two cases before me was Hick Lane Bedding, the first defendant, also known as Kozesleep Beds. This was, or had been, a legitimate business. It supplied a number of well-known high street retailers and had a substantial workforce. Its managing director was Mr Mohammed Rafiq. Mr Rafiq unfortunately succumbed to using cheap trafficked labour, which included these claimants, Mr Komives and Mr Varhelyi. Mr Rafiq, Janos Orsos and another man named Ferenc Illes were subsequently convicted of conspiracy to traffic individuals into the UK with intent to exploit them. All were sentenced to terms of imprisonment.

Mr Komives worked for the first defendant from the summer of 2009 to October 2013. Mr Varhelyi worked there from January 2009 to June 2013. Both suffered psychiatric injuries. Mr Varhelyi also suffered very serious physical injury in an accident which occurred on or around 23 May 2012. The forks on a forklift truck he was using failed, causing a large and heavy industrial bin to fall onto his left leg, resulting ultimately in a below knee amputation.

The first defendant went into administration on 9 June 2015 and is insolvent.

During the period 12 July 2011 to 11 July 2012, the first defendant had employers’ liability insurance with Am Trust Europe Ltd (‘AmTrust’), the second defendant. These claimants’ claims are advanced pursuant to the provisions of the Third Parties (Rights Against Insurers) Act 1930. However, by letter dated the 22 March 2018, the second defendant avoided the policy ab initio on grounds of material non-disclosure and misrepresentation.

By a case management order dated the 10 December 2018, I ordered the trial of the following preliminary issues:

I heard factual evidence on these issues from Mr James Carroll, an underwriter with the second defendant. I also heard evidence from experts in insurance broking and underwriting: Mr Miles Emblin for the second defendant and Mr Roger Flaxman for the claimants. Mr Carroll was not in post at the time that the policy was written. The underwriter at this time was Mr Keith Rutter, who left in 2012. The proposal came to Am Trust from a placing broker, Miles Smith. The placing broker’s information about the risk was derived from a retail broker, Bush and Associates. The contact there was Mr David Heap. The initial email enquiry was made on 16 June 2011. Mr Heap provided Miles Smith with a schedule setting out the claims experienced over the years from 2004 to 2010, and a document entitled ‘Liability Enquiry - Kozesleep Beds Ltd’, which described the business, gave wage roll details and annual turnover, and health and safety information. In its final form, the health and safety information was as follows:

Another insurer, Chartis, was potentially interested, and carried out a survey. Mr Heap reported favourably on this survey in an email dated 6 July 2011 to Miles Smith. He had the following things to say about health and safety:

Later the same day Miles Smith provided a quotation from the second defendant. There followed some negotiations about the premium. In the end, a premium of £31,500 was agreed, and cover was effected from 12 July 2011. AmTrust signed the placing slip on 13 July 2011. The placing slip contained the wage roll information. Somewhat unusually, there are no or no surviving emails or letters between Miles Smith and AmTrust. It seems likely that there would have been written communications of some kind which have subsequently been lost. However and in any event, I have no reason to doubt Mr Carroll’s evidence that Mr Rutter, the underwriter, would have assessed the risk on the information provided, and that there would, at some stage, have been a face-to-face meeting at Lloyd's where AmTrust had a box, or at AmTrust’s office.

Letters of claim on behalf of the claimants were sent on 30 August 2017 and 18 January 2018. Claim Forms were issued on 31 October 2017 (Varhelyi) and 11 December 2017 (Komives). Particulars of Claim followed in February and in April 2018. The letters of claim and the Particulars of Claim recited the treatment and the injuries that I have already briefly described. It is relevant to note that each of them alleged that the trafficked workers were treated as a sort of sub-class of employee, working 70 hours per week without rest breaks, given no induction or training and provided with no information about health and safety. Payment in respect of their services was made to Kotcha. There could scarcely have been a starker contrast between the rosy description of health and safety contained in the liability inquiry document and the actuality, which was simply a disgrace, and which provokes profound sympathy for the claimants and strong disapproval of the conduct of those who treated them in this way.

By their letter dated 22 March 2018, AmTrust avoided the policy. The letter was written by Mr Stuart Marshall, a solicitor and senior claims adjuster. It was a lengthy and detailed letter. It recited the lamentable facts which had emerged and continued as follows:

The claimants have challenged Am Trust’s right to avoid the policy in that way. The grounds of the challenge were complex, but in their essentials came down to the propositions that firstly, in some respects the second defendant could not satisfy the common law requirements of a valid avoidance and, secondly, in any event, the common law was now subject to a regulatory overlay, introducing a reasonableness requirement which, on the facts of these cases, was not made out.

Before coming to these points I will give a brief summary of the evidence, including the expert evidence, little of which was in dispute. I will also give an overview of the relevant legal principles.

I have already referred to those aspects of Mr Carroll's evidence dealing with the inception of the policy. He readily agreed that trafficking had become more prevalent in recent years and that insurers had a role to play in discouraging it. However, he maintained that here there had been nothing to put the underwriter, Mr Rutter, on notice. He agreed that the second defendant had not undertaken its own enquiries. But he pointed out that Chartis had visited and given the first defendant “a clean bill of health” and that there was information from the broker which Mr Rutter would have relied upon. Mr Carroll surmised that Mr Rutter “felt he had sufficient information that it was a well enough run operation to provide cover”. As to avoidance, he accepted that insurers took this step rarely and that, even where the legal right to avoid had arisen, an insurer would sometimes pay the claim, recover from the insured, if solvent, or “take the hit” if not. It was implicit in his answers that the circumstances of these two cases were so extreme that the insurers were not willing to do that on this occasion and had chosen to stand on their legal rights.

Mr Emblin gave evidence remotely by video link, and I record my gratitude to him for doing so when he was frail and unwell. In the normal way, he and Mr Flaxman had provided written reports and a joint statement. They helpfully summarised the grounds for avoidance under three heads:

By the time Mr Emblin and Mr Flaxman had concluded their oral evidence, I could detect no real difference between them as to the significance of the above. Subject to the court’s factual findings, they agreed that these matters were highly material and that had the true state of affairs been known, no insurer would have ‘touched it’. Mr Flaxman, the claimant's expert, accepted that in the true prevailing circumstances the first defendant was uninsurable and that, placed in the scale of non-disclosures or misrepresentations, ‘it couldn’t get much worse’. They differed in two respects. Mr Flaxman's view was that the second defendant had made scant enquiries, (though that was not in itself abnormal – ‘lots of presentations these days are pretty scant and underwriters have different appetites for detail’). He felt that some of the assertions as to health and safety practices were obvious moonshine and should have prompted further investigations. He also took the view that, as a matter of market practice, the insurer should have paid the claims. In paragraphs 7 and 8 of the joint statement he said:

The reference there to ‘moral hazard’ was a refrain of the point he had made at paragraph 4.12 of his report. In that paragraph he said this:

Notwithstanding the phrasing of those paragraphs, Mr Flaxman accepted that this was the only case of trafficking he had come across and that he could give no example of an insurer forbearing to avoid in such a case. He accepted that it depended on the attitude of the insurer and the facts of the individual case. At one point, he said that to pay the claim and to recover, if feasible, from the insured was the ‘thing to do’.

In order to avoid a contract of insurance, the insurers have to satisfy the two-stage test laid down by the House of Lords in Pan Atlantic Insurance Co Ltd and Another v Pine Top Insurance Co Ltd [1994] 1 AC 501:

Turning specifically to employers’ liability insurance, since the Employers’ Liability (Compulsory Insurance) Act 1969, this has been compulsory. The Employers’ Liability (Compulsory Insurance) Regulations 1998, made under the powers conferred by the 1969 Act, require the insurer to issue a certificate of the Employers Liability Insurance and display it in the workplace. Regulation 2 is in these terms:

This statutory scheme is noticeably less comprehensive than the scheme which applies to motor insurance. Colinvaux and Merkin's Insurance Law, at paragraph D-0456 makes these observations:

Mr Jupp’s skeleton argument, also referred to an article in the Industrial Law Journal by Professor Chris Parsons, in which the same point was made:

That this constitutes a significant gap in the protection available to employees was recognised by Mr Michael Pratt QC, sitting as a Deputy Judge of the Queen's Bench Division in the case of Dunbar v A. & B. Painters Ltd and Economic Insurance Co Ltd and Whitehouse & Co [1985] 2 Lloyd’s Rep 616. The Deputy Judge described the certificate of insurance displayed in the workplace as ‘nothing more than a snare and a delusion’ if the insurance was vulnerable to be avoided for material non-disclosures of which the employees were ignorant and in which they were in no way complicit. The Court of Appeal endorsed these remarks. However, it is to be noted that Mr Pratt QC nevertheless felt himself constrained to apply the normal rules relating to contracts of insurance. It is also relevant that, with the exception of Insurance Conduct of Business Sourcebook (ICOBS), which I will come to, the statutory position remains very much as it was in 1985.

Under powers conferred by the Financial Services and Markets Act 2000, the FSA, (now the FCA), was permitted to make binding rules to be followed by insurers. The relevant rules for present purposes were contained in the Insurance Conduct of Business Sourcebook (ICOBS). Non-compliance with ICOBS would expose the insurer to a right of action in favour of private persons under section 138D of FSMA. The specific provision of ICOBS engaged in the present cases is Rule 8.1.1 of Chapter 8, which is titled ‘Claims Handling’. This states as follows:

The legal effect of these provisions was considered by Teare J in Parker Anor v The National Farmers Union Mutual Insurance Society Limited [2012] EWHC 2156 (Comm). At paragraph 197 he said this:

I turn then to the claimants’ submissions. For the purposes of this judgment, I have condensed and slightly re-ordered them.

As to avoidance at common law, in brief summary Mr Jupp submitted that the insurers had closed their eyes to the criminality, that there was no evidence that the health and safety information had ever been passed on to the insurer, and that the wage roll information, even if truly stated, would have been too marginal to have satisfied the requirement of materiality. In relation to the criminality ground, he additionally argued that even if the insurers had not closed their eyes to the criminality, as regards ‘innocent third parties’, they were not entitled to rely on it. The authority for this proposition was Hardy v MIB [1964] 2 QB 745 (CA). In that case, the Court of Appeal upheld a claim by a person injured by the negligent and criminal driving of a motorist (who had stolen the car) whilst observing that the motorist himself would not have been entitled to recover under the policy.

In any event, relying upon the expert evidence of Mr Flaxman, there was a market practice to pay the claims in circumstances such as these and the avoidance of the policy was contrary to that market practice.

Mr Jupp went on to submit that even if, applying ordinary common law principles, the second defendant was prima facie entitled to avoid the policy, that right was now subject to rule 8.1.1 of ICOBS. This required them to act ‘reasonably’. (It is, in fact, phrased as a negative, namely a duty not unreasonably to reject the claim, including by avoiding the policy.) In the circumstances of this case, avoiding the policy transgressed that requirement of reasonableness for the following reasons.

The 1969 Act and the 1998 Regulations provided for compulsory employers’ liability insurance, which was intended to ensure that employees injured at work receive compensation for workplace injuries. The 1930 Act was intended to ensure that an employer’s insolvency did not defeat that entitlement. The 1998 Regulations contained particular anti-avoidance provisions directed to terms or conditions which purported to exclude liability for non-observance of proper health and safety standards after inception. In these circumstances, an insurer which sought to avoid a policy, would be running a coach and horses (a phrase that originates with Mr Pratt QC in the Dunbar case) through the statutory scheme. That was especially the case in relation to avoidance or misrepresentation or non-disclosure in respect of health and safety shortcomings. Under the 1998 Regulations, these could not have been made the subject of a condition post-inception. It was therefore unreasonable to avoid on the ground of the like failings pre-inception.

Put more shortly, there was a statutory scheme with a clear policy objective, and to permit avoidance, ‘created a lacuna’ in the scheme and a ‘protection gap’ for employees. To put that slightly differently, Mr Pratt QC in the Dunbar case had said that ‘seemingly, if there is to be a solution that will be a matter for the legislature rather than the courts initially’. The combination of rule 8.1.1 of ICOBS and section 138D of FSMA were, Mr Jupp submitted, that legislative intervention and if they were not recognised as such, then the lacuna in the statutory scheme for the protection of employees was perpetuated.

This was Mr Jupp’s ‘overarching point’. Other grounds why he said that the insurers had acted unreasonably in avoiding the policy were as set out in the following paragraphs.

Although this was not a public law claim and the insurer was not an emanation of the state, insurers (as Mr Carroll had acknowledged) had a role to play in combating modern day slavery. Mr Carroll had accepted that this included being astute to make enquiries where appropriate. Mr Jupp submitted that that might reasonably also have included having regard to the trafficked status of the injured claimants in deciding whether or not to avoid the policy. He pointed out that the public policy interest in protecting victims of trafficking had been recognised by the Supreme Court in the case of Hounga v Allen & Anor [2014] UKSC 47 as a legitimate reason to give effect to an employment contract that would otherwise have been defeated by illegality. For similar reasons, it should, he submitted, be recognised as a factor to which an insurer would have to have regard in deciding whether to avoid a policy.

To the extent that the insurers found themselves saddled with a liability that was more than they had bargained for this was at least partly the product of their own failure to make fuller enquiries. They incepted the policy on scant information and, having done so, it was unreasonable to avoid it.

Mr Jupp pointed to the nature of the injuries and the nature of the accident to Mr Varhelyi, which were not unusual in the employment context.

He relied upon the market practice referred to by Mr Flaxman.

He said it was illogical to avoid in circumstances where the worse the employer's conduct was the more likely an injury would follow.

He criticised the letter of avoidance as failing to address relevant matters, in particular the special position of the claimants.

Mr Geoffrey Brown’s submissions, which I have substantially accepted, appear sufficiently from the discussion and conclusions which follow.

I accept that it is surprising and a little unsatisfactory that the second defendant did not field the witnesses responsible for accepting the risk and avoiding the policy. I accept also that there is a surprising lack of paperwork between the placing broker and the insurer. However, it is very likely that Mr Rutter, the underwriter, saw the liability enquiry and the email regarding the Chartis visit. If he did not see them, it is inconceivable that he was not informed of their contents. They contain precisely the information he was interested in and was required to consider. That being the case, and having regard to the unanimous views of the experts, that there can be no question that there were material non-disclosures and material misrepresentations which influenced the second defendant to accept the risks.

To repeat Mr Flaxman’s remark, it could not ‘get much worse’. Any one of the non-disclosures would obviously have justified avoidance at common law. The contrary is not really arguable. I include the wage roll representations in that conclusion. It is correct that the true amounts would have increased the overall total by only a small amount. But that adjusted figure would still have been seriously misleading because it would have disguised the fact that a component of the workforce, i.e. those in the position of Mr Komives and Mr Varhelyi, were not being paid the National Minimum Wage.

I have not been able to discern anything in the Liability Enquiry document or the emails that could realistically be said to have put the second defendant on inquiry. Further, it is in the nature of the case that enquiries would not have been likely to have revealed the true position. That is also apparent from the fact that Mr Heap of Bush & Associates and the person who carried out the survey for Chartis were both, it seems, deceived. If the material which the second defendant had was relatively scanty, there was nothing unusual or untoward in that and, subject to Mr Jupp’s arguments about ICOBS, the scantiness of the material has no bearing on the materiality of the non-disclosures, or on the right to avoid.

Neither Hardy v MIB nor Total Graphics Ltd v AGF Insurance [1997] 1 Lloyd’s Rep 599 (the other case relied upon by the claimants) are authority for the proposition that an insurer cannot effectively avoid a contract of insurance where the insured has been guilty of criminal conduct which is material to the risk to be insured and which has not been disclosed. The second defendant has never said that these claimants should be denied recovery because of illegality on the part of the insured and Mr Rafiq. As in Hardy and Total Graphics, they were not in any way associated with that illegality. But it does not at all follow that Am Trust were precluded from relying on the illegality as a ground of avoidance.

Finally under this heading, it is obvious from the evidence of Mr Emblin and Mr Flaxman that there was no established market practice whereby it was incumbent on the insurer to pay the claim and recover, if feasible, from the insured. Their evidence, the extracts from Colinvaux and the article by Professor Parsons referred to at paragraphs 21 & 22 above all recognised that there was no such practice. The case of Dunbar was a specific example of an insurer avoiding under circumstances similar to the present and that avoidance was upheld at first instance and on appeal.

Because there can be no doubt that Am Trust was entitled to avoid at common law, it follows that Mr Jupp’s submissions about ICOBS are central to the preliminary issues. Broadly speaking, Mr Brown was content to approach the impact of ICOBS paragraph 8.1.1 on the same basis as Mr Jupp, namely that it imposed a requirement on the insurer not unreasonably to reject a claim by avoiding the policy and that this requirement, if contravened, could preclude the insurer from relying on the avoidance. The overall effect would be to force the insurer to accept the claim.

This is certainly in line with the approach taken by Teare J in the Parker case. Nevertheless, this part of ICOBS is concerned with claims handling and does not purport to change or modify existing legal principles, but, rather, to require the insurer to apply those principles fairly and reasonably. There is nothing in Parker or Bate v Aviva Insurance UK Ltd [2013] EWHC 1687 (Comm) to suggest otherwise. Therefore, whilst I agree with Mr Jupp that rule 8.1.1 of ICOBS has introduced a regulatory overlay to insurers’ decisions to reject or avoid, that overlay is fundamentally concerned

I acknowledge that there is what Mr Jupp has reasonably labelled a ‘protection gap’ in the statutory scheme for employers’ liability. But that gap or lacuna has existed for many years and is well recognised by courts and commentators as a matter which would benefit from legislation. It is not realistic to submit that the combination of ICOBS and section 138D of FSMA constitute that legislative intervention. And I would add that, if it were, it would rectify what is acknowledged to be a general defect in only a proportion of cases. The statutory lacuna works general unfairness to injured workers. From their perspective, their remedy should not depend on it being shown in any individual case that the insurer has acted unreasonably. From the perspective of a legislator, it would be a somewhat haphazard and arbitrary remedy, not at all in line with, or as effective as, the prevailing statutory scheme for motor insurance. This is another reason to reject Mr Jupp’s analysis.

Given my interpretation of the effect of ICOBS, it is appropriate to look first at the process by which the second defendant incepted and subsequently avoided the policy.

As noted in paragraphs 41 and 42 above, it seems to me that there is little to criticise in the second defendant’s enquiries into and acceptance of the risk. They were misled. There was nothing to put them on notice of the true position, which further enquiries would not have revealed. There is similarly little to criticise in the second defendant’s letter avoiding the policy. Mr Jupp pointed out that it contained no reference to the statutory scheme or to the fact that avoidance had the specific effect of rejecting these particular claimants’ claims. But the letter was (and could only be) addressed to the first defendant and, in that context, it is unsurprising that it was confined to the matters which entitled Am Trust to avoid.

The inelegant sub-heading ‘general unreasonableness’ is intended to address Mr Jupp’s wider points in support of a finding that his ‘broad test of reasonableness’ was not met. I have rejected the proposition that it was for Am Trust to satisfy a test so phrased. Nevertheless, out of respect for Mr Jupp’s arguments and in case these cases should go further, I should record my observations and findings on these points.

If, contrary to my interpretation, rule 8.1.1 of ICOBS has introduced such a test, then the language strongly suggests that it would fall to be applied as between insurer and insured. That is the focus of the rule, which refers to ‘insurer’ and ‘policyholder’. It makes no reference to injured parties. There is an obvious contrast with rule 8.2, which does refer to ‘injured parties’and sets out a code for the handling of their claims. But rule 8.2 governs motor vehicle liability insurers and reflects the fact that in the field of motor insurance the law provides for injured parties to have a direct claim against the relevant motor insurer.

If Mr Jupp’s ‘broad test of reasonableness’ under rule 8.1 were to be applied as between insurer and injured parties that would, in practical terms, assimilate the position of employers’ liability insurers to that of motor insurers. That is because from the perspective of an injured party it could never be reasonable to avoid the policy, save, perhaps, in the very rare case where the injured party had colluded in the non-disclosures or misrepresentations. Applied from this standpoint, the claims of an innocent third party would always trump all other considerations. Because they involve trafficking and modern slavery, the claims of Mr Komives and Mr Varhelyi would be particularly deserving. But any and all injured claimants, whether trafficked or not, could very justifiably label the avoidance of the insurance policy underwriting their claims as unreasonable and unfair if it left them without a remedy. I do not think that such an interpretation, which would, as Mr Brown observed, have the practical effect of imposing a ‘blanket ban’ on insurers exercising their legal rights in circumstances such as the present, can possibly have been the intention of rule 8.1.

As between insurer and insured, I do not think that Am Trust can be said to have acted unreasonably, even if the parameters of the test of reasonableness were to be drawn more widely than I think is permissible.

I have come to the reluctant conclusion that the second defendant was contractually entitled to avoid the policy and that it did not act unreasonably in doing so. I reach this conclusion with regret because the statutory scheme which has permitted that result is defective and unfair. The reasons were eloquently stated by the judge in the Dunbar case, and endorsed by the Court of Appeal and I will not repeat them.

I would, therefore, answer the questions framed in the preliminary issue as follows; question (1): yes; question (2): yes; question (3): no; question (4) does not arise.