Reassurance for insurers on policy avoidance

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The case of Komives v Hicks Lane Bedding Limited and AM Trust Europe Limited [2021] EWHC 3139 centres on an insurer’s avoidance of an employer’s liability policy due to non-disclosure and misrepresentation by the insured. The Court was asked to decide whether an insurer is liable for a claim where the policy has been avoided after it was found that the insured had not provided all the relevant information to the insurer before inception.

The claimants had been trafficked to the UK, worked for the business in conditions of modern slavery and suffered psychiatric and physical injuries as a result. They brought a claim for their injuries against the business and its employer’s liability insurer under the Third Party (Rights against Insurers) Act 1930 because the business was in administration. The insurer avoided the employer’s liability policy given the business’ non-disclosure of its criminal activity.

The claimants in the case argued that by writing the policy, the insurer had failed to take account of the possibility of criminal conduct. They also cited the legislative scheme set out in the Employers Liability (Compulsory Insurance) Acts of 1969 and 1998, which aims to prevent insurers from writing in conditions or warranties that would be detrimental to the protection of employees. The claims were rejected by the insurer, so the claimants brought the case to the High Court, who determined that the insurer had not acted unreasonably in the way the policy had been incepted and avoided.

The claimants cited the Insurance Conduct Of Business (“ICOBS”) 8.1.1, which states that an insurer must:

  • handle claims promptly and fairly;
  • provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress;
  • not unreasonably reject a claim (including by terminating or avoiding a policy); and
  • settle claims promptly once settlement terms are agreed.

They argued that this section introduces a requirement for insurers to accept claims from innocent employees. The claimants argued that the purpose of ICOBS 8.1.1, combined with the legislative scheme of employer’s liability insurance, was to ensure that employees who are injured at work maintain their right to compensation.

The Court did not agree. It asserted that ICOBS 8.1.1 did introduce regulatory considerations for insurers avoiding policies, but that this was as between the insurer and the insured and did not go further to introduce a test of reasonableness for the insurer. Therefore, it found that the insurer had not acted unreasonably in avoiding the policy.

The case will likely be welcomed by insurers as it demonstrates that there is protection in place for the insurer who writes a policy without full information or facts from the insured. However, the Court did indicate that the case may highlight shortcomings in the employer’s liability legislation from the point of view of the employee, but made it clear that its role is to assert the law in the way it is written, rather than to remedy any such shortcomings.