KR AND OTHERS VERSUS ROYAL & SUN ALLIANCE PLC [2006] EWCA Civ 1454
 
FACTS:-
 
This was an appeal from the judgment of Simon J in KR And Others Versus Royal & Sun Alliance Plc [2006] EWHC 48 (QB). The background to the case of widespread allegations of abuse in residential children’s home in North Wales between 1974 and 1997, many of which gave rise to civil claims against the Defendant, Bryn Alyn Community Holdings (now in liquidation), which was insured by the Royal and Sun Alliance. Fifteen lead cases were chosen to be tried by Connell J and judgment was given in favour of thirteen of those cases. There was then an appeal and cross appeal in which the thirteen Claimants were successful. The thirteen Claimants then brought proceedings against the insurer, the Royal and Sun Alliance. Several of the claims were settled, two failed entirely because all the abuse occurred before the 22nd August 1976, which was the date which (according to Justice Simon) cover was provided by the insurer to the company. Two of the Claimants had their damages reduced because their abuse occurred before and after the 22nd August 1976 and four succeeded entirely.
 
 
HELD:-
 
Lord Justice Scott Baker considered section 1 of the Third Parties (Rights against Insurers) Act 1930. It was common ground that the respondents could not be in a better position against the insurer than they were against the insured.
 
The policy of insurance was a Combined Insurances Policy and the relevant wording was as follows:-
 
“A. Indemnity to Insured
 

1. In the event of…..(b) bodily injury to any person not being an employee…..happening in the territorial limits and caused in the course of the business the insurers will subject to the limits of liability indemnify the insured in respect of any legal liability incurred in respect of such injury or damage.

 
D. Exceptions
 
1….
 
The insurers shall not be liable for
 
8. Injury or damage which results from a deliberate act or omission of the insured and which could reasonably have been expected having regard to the nature and circumstances of such act or omission.”
 
Scott Baker LJ said that there was a chance in the policy wording in 1981. The cover remained the same but the exception was broadened to include not just the insured but also partners, directors and managerial employees.
 
“C. Exceptions
 
This section does not cover liability in respect of…
 
4. Injury damage or financial loss which results from any deliberate act or omission of the insured his partners directors or managerial employees and which could reasonably have been expected having regard to the nature and circumstances of such act or omission….”
 
The trial judge, Simon J had found that from the 22nd August 1976, the Company was covered under the policy by the Insurer and that the facts did not fall within the exception both before and after its amendment in 1981.
 
Scott Baker LJ described the set of up of Bryn Alyn Community Homes (“Bryn Alyn”) covered some five children’s homes, four in North Wales and one in Shropshire. At the dissolution, there were two companies, Bryn Alyn Community Ltd and Bryn Alyn Community (Holdings) Ltd. There had been changes of name but these were of no significance for the purposes of the appeal. John Allen was the majority shareholder and chief executive in the company. He devised all the systems relating to childcare but devolved responsibility of implementation to senior staff. At all times he was the man in charge, and his decision was final. He remained in charge and the majority shareholder until 1989.
 
Scott Baker LJ considered the circumstances of each case:-
 
DK – placed at Pentre Saeson on the 7th June 1979 until the 29th January 1980. He was then moved to Cotsbrook Hall where he stayed shortly until discharge from care on the 12th July 1982. He suffered serious physical abuse.
 
GS – placed at Gatewen Hall for about 9 months until January 1989. It was found by the trial judge that GS had been assaulted by two members of staff.
 
DJ – placed at Bryn Alyn on the 27th March 1975 and remained there either at Bryn Alyn Hall or Bryntirion until the 6th January 1981. He was seriously physically and sexually abused.
 
GOM – placed at Pentre Saeson on 3rd January 1984 until 7th February 1986. He was sexually abused.
PS – placed at Bryn Alyn from 12th April 1976 to 17th September 1979, living either at Bryn Alyn or Brytirion. He suffered physical abuse.
 
JM – placed at Pentre Saeson Hall on the 2nd October 1985 and remained there until 30th May 1986. He was sexually and physically abused.
 
Scott Baker LJ considered the applicable law, Stubbings v Webb [1993] AC 498, A v Hoare [2006 1 WLR and Lister v Hesley Hall [2002] 1 AC 215.
 
Stubbings decided that claim against abusers personally can only be brought in assault where the limitation period was a non extendable one of 6 years. That was criticised in A v. Hoare but it remained the law. Lister decided that vicarious liability could be established when the abuse was closely connected with the abuser’s employment.  
 
The basis of the trial judge’s finding against the Company was systemic negligence in the operation of the homes and not vicarious liability. The critical question under the policy was the extent to which, if at all, the activities of the abusers could, in the case of each respondent, be regarded as the “deliberate acts of the insured” before 1981 or the deliberate acts of “the insured, its directors or managerial employees” after 1981.
 
Simon J had decided that there had been no finding by the original trial judge, Connell J that damage any had resulted from any deliberate act or omission in respect of which liability attached. The claim succeeded on the basis of systemic negligence and therefore the exception clause did not apply.
 
The insurers had argued firstly that the abuse consisted of deliberate acts, and was part of a regime which was the responsibility of John Allen, the chief executive, majority shareholder and director of the company. Therefore Bryn Alyn, the company was fixed with all of the abuse within the meaning of the exception to the policy.
 
Secondly they argued that the abuse was perpetrated by John Allen and other directors or managerial employees of Bryn Alyn.
 
In relation to the insurers’ first argument, Scott Baker LJ said that in the Court of Appeal’s view, the insurer was fixed by the finding of the original trial judge. Connell J found that damage had resulted from systemic negligence.
 
However in relation to the insurers’ second argument Scott Baker said that the Court of Appeal took a different view. The pre 1981 policy exception had stated that the insurers were not liable for:-
 
“Injury or damage which results from a deliberate act or omission of the insured and which could reasonably have been expected having regard to the nature and circumstances of such act or omission.”
 
The policy wording had then changed in 1981.
 
4. Injury damage or financial loss which results from any deliberate act or omission of the insured his partners directors or managerial employees and which could reasonably have been expected having regard to the nature and circumstances of such act or omission….”
 
Simon J had said that the root of the claim was the negligence that permitted deliberate acts of abuse to occur, but the acts of abuse were not the acts of the company. The precise status of the abuser within the Company was not the material issue, but the role of the abuser was significant. In each case they were not acting in a managerial role, but for their own ends.
 
Scott Baker LJ said that the Court of Appeal could not accept this analysis. What was critical was the true meaning of the policy and in particular the exception clause. There was no reason to read the exception as applying only to acts done in the course of the operation or management of the company.
 
The starting point was to look at the injury. It was for that which the insurer was not liable if it resulted from a deliberate act or omission. The critical question was whether the person who caused the injury or damage was to be equated with the company, and therefore the insured within the meaning of the policy. That would mean looking at the findings of Connell J, the original trial judge.
 
The next question was whether as a matter of law an act or intention of an individual was to be treated as the act or intention of a company. This was the doctrine of attribution which was distinct from the doctrine of vicarious liability.
 
Scott Baker LJ then looked at the doctrine of attribution, the principle upon which an act of an individual is attributed to a company. He considered a number of cases, Lennard’s Carrying Company Limited v Asiatic Petroleum Company Limited [1915] AC 705, HL Bolton (Engineering) Co Ltd v T J Graham and Sons [1957] 1 QB 159, Tesco Supermarkets Limited v Nattrass [1972] AC 153, El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 and Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500.
 
Lennard’s concerned the construction of section 502 of the Merchant Shipping Act 1894 and the words “any loss of damage happening without (the ship owner’s) actual fault or privity.” The court had said that it was not enough that the fault should be the fault of the servant in order to exonerate the owner.  The fault had to be one which was not the fault of the owner, or a fault to which the owner was not privy. 
 
In HL Bolton the court likened the company to a human body, with a brain and nerve centre. Some of the people in the company are mere servants and agents who were nothing more than hands to do the work. Others are directors or managers who represent the directing mind and will of the company. The state of mind of these managers is the state of mind of the company and is treated by the law as such.    
 
In Tesco Supermarkets the court said that a corporation has no mind or hands, but must act through living persons, though not always one or the same person. The person who then acts is not acting for the company but is acting as the company. There is no question of the company being vicariously liable. If he has a guilty mind, that guilt is the guilt of the company. Normally the board of directors and perhaps other superior officers carry out the functions of the company, but their subordinates do not. The directors can delegate some part of their functions of management giving to the delegate full discretion to act independently of their instructions. They have thereby put such a delegate in their place. It would not always be easy to draw the line.
 
In El Ajou, the court said that it was necessary to identify the natural person or persons having management and control in relation to the act or omission in point. Status, authority, the articles of association, services contracts and so on might not be decisive.
 
In Meridian Lord Hoffman said that the company’s “primary rules of attribution” will generally be found in its constitution, but these are not enough to enable the company to do business. A company will also appoint servants and agents whose acts count as the acts of the company. By taking that course, the company makes itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as vicarious liability or tort and it builds on its own primary rules of attribution. However there would be exceptional cases where the company’s primary rules of attribution and general principles of agency, vicarious liability and so forth are not sufficient to provide an answer to the case in question.
 
One possibility might be to say that a particular rule of law was not intended to apply to a company, i.e. a law for which the only offence was community service. Another possibility was that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. the act giving rise to liability was specifically authorised by a resolution of the board. However there would be cases where neither of those possibilities would be satisfactory. In such cases the court should fashion a special rule of attribution for the particular substantive rule. This would be a matter of interpretation.
 
The questions would be; how was the rule intended to apply? Whose act was intended to count as the act of the company? The answers to these questions are found by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.
 
Lord Hoffman had added a word of caution. A company’s employee may be authorised to drive a lorry, but if he kills someone by reckless driving, the company will not necessarily be guilty of manslaughter.
 
Scott Baker LJ said the true intention of the exclusion clause was to exclude liability for damage or injury caused by deliberate acts of the person who was to be regarded as, in effect the company, as opposed to the acts of those who were mere employees. The deliberate acts of abuse by John Allen fell to be attributed to the company, since he was Bryn Alyn.
 
It was a well established principle that a man cannot recover under a policy of insurance for his own deliberate act, and Scott Baker LJ referred to the case of Beresford v Royal Insurance Co. Limited [1938] AC 586, 595. This was the reason behind the exclusion clause – to stop an abuser from claiming under his insurance policy and so profiting from his own wrongs. If John Allen had deliberately burnt down one of the homes, the Court of Appeal could not see how the company could recover under the policy. If the company were solvent, then John Allen would benefit from his own illegal act and that could not be right. Consequently the exclusion clause applied to all deliberate acts committed by John Allen prior to 1981.
 
In relation to the 1981 amendment, Scott Baker LJ considered the clause again and explanatory notes that appeared after the policy. Those notes defined what was meant by “managerial employees.” The Court of Appeal regarded these notes as an aid to the construction of the clause, although they would not permit the insurer to utilise the notes to give the exception clause a meaning that would not otherwise be apparent from its wording.
 
The question was therefore who fell within the expression “directors” or “managerial employees”. John Allen fell within the definition, but he was already the company in any event. There was a document headed “Bryn Alyn Structures” dated October 1991, which states that each unit was semi – autonomous and run by a unit Head appointed by the Board. Therefore any such person fell within the definition “managerial employees”. Any one further down the list would not qualify.
 
Scott Baker LJ considered the individual cases:-  
 

• GS was abused by the head of the home at the material time, so that abuse fell to be excluded. However GS was also abused by a “team leader” and other unidentified persons. That abuse did not fall within the exception.
• DJ left in January 1981 before the amendment to the policy. He could not recover in respect of abuse by John Allen but could recover for other abuse subject to the 25% deduction for the pre 1976 abuse when the insurers were not on cover.
• GOM was at the home between 1984 and 1986. He could not recover for the abuse by John Allen, but could recover for the abuse by others.
• PS was at the home between 1976 and 1979. He could not recover for the abuse by John Allen, but he could recover inflicted by other staff and residents, subject to the necessary 10% deduction.
• JM was at Pentre Saeson for just over 3 years after 1981. He was abused by John Allen and by the head of that home. He could not recover for abuse by either, and that left minimal physical abuse.

 
 The Court of Appeal had been told that the parties would be able to agree the financial consequences in relation to each Claimant, although the issue of costs remained open, and that was a matter on which the Court of Appeal invited written submissions.