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	England and Wales High Court (Queen's Bench Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Queen's Bench Division) Decisions >> Kr & Ors v Royal & Sun Alliance Plc [2006] EWHC 48 (QB) (26 January 2006) URL: http://www.bailii.org/ew/cases/EWHC/QB/2006/48.html Cite as: [2006] Lloyd's Rep IR 327, [2006] EWHC 48 (QB)

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IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		26 January 2006

Mr Justice Simon:

Introduction

1. In this action 8 Claimants claim against the Defendant ("the Insurer") pursuant to s.1 of the Third Parties (Rights against Insurers) Act 1930 ("the Act").
2. From about 1969 until 1990 John Allen had operated a number of children's care homes in North Wales which became known, after the name of its first and main home, as "the Bryn Alyn Community" ("Bryn Alyn"). Bryn Alyn ran 5 homes: Bryn Alyn Hall, Cotsbrook Community Hall, Pentre Saeson Hall, Bryntririon Hall and Gatewen. In 1972 Bryn Alyn Community (Holdings) Limited ("the Company") was incorporated; and in 1973 it took over the operation of the business. Although the existence of the Company ended in financial failure in 1997, it operated successfully for over two decades, employed a large number of staff, and at times earned significant profit. The stated aim of the Company was to provide an alternative to the strict discipline and training regimes of approved schools for children. The majority of children in the Bryn Alyn homes were children who had been placed in the care of local authorities.
3. In 1995 John Allen was convicted of 6 offences of indecent assault against young male residents between 1972 and 1983, and was sentenced to a term of 6 years imprisonment. He and others also became the subject of allegations of abuse which were investigated by a Tribunal of Inquiry chaired by Sir Ronald Waterhouse. This Tribunal was set up to investigate allegations of child abuse in a number of residential homes in North Wales between 1974 and 1997, including Bryn Alyn.
4. Some of the allegations gave rise to civil litigation which was made subject to a Practice Direction dated 30 July 1998. 15 lead cases against the Company were chosen to be tried before Connell J; and 14 of these were heard between February and April 2001. The Insurer was, to an extent which is an issue in the present proceedings, the liability insurer of the Company.
5. The Company had gone into voluntary liquidation on 6 March 1997, did not attend during the trial before Connell J and took no part in the litigation. The Insurer attended and actively took part in the trial as described by Connell J in §3 of his judgment.

... in due course solicitors (for the Insurer) … gave notice to the claimants' solicitors of a potential conflict of interest arising out of an exception clause in the contract of insurance which they had entered into with (the Company). As a result (the Insurer) might be entitled to refuse to indemnify (the Company) against any judgment entered against them in these claims. Accordingly (the Insurer) was added as second defendant and it has contested each claim through leading and junior counsel. It has advanced no positive case, save in the claim by JS, but equally has made few concessions and has required each claimant to prove their claim.

6. On 26 June 2001 Connell J gave judgment in favour of 13 of the Claimants against the Company. He found that there had been extensive abuse at the institutions owned or managed by the Company. There was an appeal and cross-appeal. The Claimants were successful on the appeal and the cross-appeal, see KR and others v. Bryn Alyn Community (Holdings) Ltd and another [2003] QB 1441.
7. Following the appeal the 13 successful Claimants brought proceedings against the Insurer. They contend that (1) the Insurer was the Company's liability insurer, (2) the Company incurred liability to the Claimants by the judgment of Connell J and, (3) as a consequence of the Company's liquidation, are entitled to claim directly against the Insurer under the Act.
8. Five of the claims have been settled; and in relation to the remaining claimants the issues are confined.

The Act

9. Section 1 provides:

(1) Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then

…

(b) in the case of the insured being a company, in the event of a winding-up order being made, or a resolution for a voluntary winding-up being passed, with respect to the company …

if, either before or after that event, such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall … be transferred to and vest in the third party to whom the liability was incurred.

…

(4) Upon transfer under subsection (1) … of this section, the insurer shall … be under the same liability to the third party as he would have been to the insured …

The Issues

10. By its Defence the Insurer raised the following issues:

i) Whether relevant cover existed prior to 22 August 1976? The Insurer accepts that cover incepted under an applicable Liability Policy on 22 August 1976, but contends that there was no Policy in respect of any prior period. This is relevant to 4 of the 8 Claimants who were abused wholly or partly outside the admitted period of cover. I shall refer to this as "the period of cover issue".

ii) Whether the claims are excluded under the terms of the Policy? Under the terms of s.1 of the Act a claimant is entitled directly to enforce the assured's rights under the Policy of Insurance. The Insurer contends that the assured could not have brought a claim under the relevant Policies because the Policies excluded liability for the deliberate acts of the assured and/or precluded the assured from relying on its own wrongdoing.

iii) Whether from 1981, when the Policy wording was changed, the claims are excluded on the additional basis that the terms now excluded the wrongdoing of the assured's partners, directors or managerial employers in the context of the deliberate acts of the assured?

I shall refer to issues (ii) and (iii) as "the exception issues"

The terms of the relevant policies

11. The relevant Policy wording for the Combined Insurances Policy – Liability Section from 1976 was:

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.

The relevant policy wording for the Combined Insurances Policy – Liability Section from 1981 was:

1. In the event of … (b) bodily injury to any person not being an employee … happening during the period of insurance 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 …

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 period of cover issue

12. The Company was incorporated on 10 November 1972 and started trading on 1 July 1973. As indicated above, some of the Claimants make a claim in respect a period prior to the date (August 1976) on which the Insurer accepts that there was cover. The Liquidators of the Company and the Company's brokers (Williams Financial Services Limited) have said that they do not have any relevant documents which might throw light on the cover before August 1976. The Insurers also say that they have no records of a policy which predates the August 1976 policy. In short, no relevant Policies have been produced from any source.
13. The lack of documentation, the adequacy of the search for them, and the inferences which can properly be drawn have formed the focus of the factual dispute between the parties.

The oral evidence

14. Mr Richard Prince is the Insurer's Liability Account Manager for the North of England. His evidence was that it was unlikely that any relevant Policy would have been non-standard. All relevant underwriting documents in respect of the assured would have been transferred to Liverpool in 1988 and thence to Manchester. However it is likely that the underwriting files for any significantly earlier period would have been destroyed since the Insurer's clerical procedures required papers in relation to combined policies to be kept only for 2 years. In any event, Policies on standard terms were not routinely kept and any documents which may have existed would have been destroyed when the Insurer's Manchester office was destroyed by a bomb in 1996.
15. In 1999-2000 Mr Prince was asked to create a computer search engine that would enable the Insurer to show compliance with the Employer's Liability Code of Practice. Under this Code of Practice an insurer was obliged to issue a statement stipulating the earliest date from which it was, or was not, an employer's liability insurer.
16. Until September 1974 the Royal Insurance Plc had a fairly basic accounting system. In September 1974 it introduced a more sophisticated computer system; and all commercial Policies in existence at September 1974 were entered on the computer system. During the early 1980's a new computer system was phased in. This provided greater sophistication in recording the existence and extent of cover. In 1996 the Insurer was formed by the merger of the Royal Insurance Plc with Sun Alliance.
17. In 2004 Mr Prince used his computer search engine in an attempt to trace any Policies issued to the Company by the Royal Insurance Plc. This search revealed 4 Policies, numbered: R5CR4324, RCR5951, R5CR6230 and RKH877613. The searches were designed to show Policies in which there was any element of employers' liability cover. They would therefore include combined Policies which contained an element of employer's liability cover as well as stand-alone employers' liability cover. The earliest inception date of any of the 4 policies was R5CR4324. This was a policy in the name of Bryn Alyn Community and incepted on 22 August 1976.
18. As already described, following implementation of the Employers' Liability (Compulsory Insurance) Act 1969, it became compulsory, from 1 January 1972, for employers to obtain employers' liability cover. In Mr Prince's view, if the Royal Insurance had provided the Bryn Alyn Community with employer's liability cover in any policy after 1 January 1972, information (at least a record of premium payable) would have been recorded on the original accounting system and would thence have been transferred to, and incorporated into, the computerised accounting system as from September 1974. Since there was no record of any employers' liability insurance cover prior to 22 August 1976, he deduced than none had existed.
19. At §19 of his statement Mr Prince set out his conclusions and reasons for them.

I cannot completely exclude the possibility that Royal Insurance may have insured Bryn Alyn in relation to risks other than employers' liability prior to 22 August 1976. However in my view this is extremely unlikely as Bryn Alyn was legally required to have employers' liability cover after 1 January 1972 and took out combined policies that included employers' liability cover at all times from 22 August 1976 until Bryn Alyn went into liquidation in March 1997.

20. The inception date for the 3 other policies were as follows: R5CR5951 (30 September 1981), R5CR6230 (30 September 1982) and RKH877613 (28 February 1995). This latter policy also included business interruption damage cover which, from 30 September 1985 until 28 February 1995, had been the subject of separate stand-alone policies. Mr Prince was asked by Mr Owen QC to explain why, according to the records that he produced, Policy R5CR6230 was shown as incepting on 30 September 1982, whereas a document which came from the brokers suggested an inception date of 17 January 1980. Although Mr Prince pointed out that the preceding policy (R5CR5951) would have been in force, he was unable to offer an explanation for this, although he reiterated that he had "complete faith" in the system.
21. None of the 4 Policies which provided cover for the Company could be produced; but in Mr Prince's view it was possible to identify their terms by reference to contemporary Policies issued to other assureds which were still available.
22. Mr Randal Magowan began full-time employment with the Bryn Alyn Community on 1 September 1976; and acted as Company Secretary from 26 April 1977 until 8 April 1982. One of his tasks as Company Secretary was to liaise with the brokers and to arrange liability insurance. He took over as Company Secretary from Mr William Merrett whom he regarded as conscientious. He was sure that it would have stuck in his mind if there had not been existing insurance in place when he took over.

The written evidence

23. Written evidence as to the existence of a prior Policy covering the period 1973-76 came from the brokers, Williams Insurance Brokers Limited; and, in particular from the principal, Mr Williams, and the claims handler, Ms Addis.
24. On 3 October 2002, in response to a letter from the Insurer's solicitors about the insurance of the Company, Ms Addis wrote as follows:

We have very few paper records in relation to the insurance arrangements for this client and indeed our computer records date back to 1995 only.

From recollection, this client was insured with the Royal & Sun (and its predecessors) virtually all of its existence, but of course we no longer have any documentation.

25. On 12 December 2005, Mr Uppal (the Claimants' solicitor) spoke to Mr Williams. His Attendance Note reads as follows:

(Mr Williams) recalled:

a. That they had taken over the brokerage for Bryn Alyn from another local firm called Evans & Rowe. The principal of Evans & Rowe was Mr Geoffrey Evans, but he told me that he did not know where Mr Geoffrey Evans was. Evans & Rowe had ceased to trade …

b. I asked him whether it was fair to assume therefore that if they had taken over the brokerage service from Evans & Rowe there was something to broker, in other words there was an insurance policy in place. He said that that was correct. His recollection was that they took over the brokerage service on a best price policy, each broker being able to secure different terms and prices.

26. The Claimants obtained written statements from Mr Williams and Mr Addis dated 5 January 2006. Mr Williams described setting up his insurance business in 1973. In §2 he stated,

I do believe that my business took over brokering services for Bryn Alyn Community Limited at some point in the 1970's but I am unable to say when.

Ms Addis's statement dealt with the contents of her letter of 3 October 2002 to the Insurer's solicitors,

Unfortunately, I must admit that statement was poorly worded. I only started working with Williams Insurance Brokers Limited in 1985 and therefore had no direct knowledge of anything that occurred prior to that date. The only basis I had for making that statement was hearing discussion in the office that Bryn Alyn Community Limited had moved their insurance requirements to Barry Williams at some point in the 1970's. However, I had not seen any documentation that substantiated that and have not seen anything subsequently.

27. Both sides accepted that this written evidence was relevant and admissible, and relied on it.

The parties' submissions

28. For the Claimants, Mr Owen QC submitted (in summary) that the totality of the evidence indicated that there was insurance in place, underwritten by the Royal from 1972/1973 to August 1976. The evidence of Mr Prince did not exclude the possibility of liability cover from the Royal; and the evidence of Mr Williams and Ms Addis suggested that such cover had existed prior to August 1976. He also relied on the evidence of Mr Magowan that there was employer's liability cover in place when he took over from Mr Merrett. Finally he relied on the fact that the point about the lack of cover for the period 1973-August 1976 was not taken until the Defence was served on 12 November 2004; and that prior to this, at a Board Meeting of the Company on 26 May 1997, it was reported that: "Royal have reserved 10,000,000 (sic) against 100 potential claims of 10000 each".
29. For the Insurer Mr Faulks QC submitted (in summary) that it was for the Claimants to show that the Company was, on the balance of probabilities, insured against liability by a Policy issued by the Insurer in the period before August 1976; and that they had failed to do so. He relied on the Mr Prince's evidence as to the unlikelihood that there was a prior Policy issued by the Insurer in relation to liability cover; and also on the evidence from the brokers (Mr Williams and Ms Addis) which, far from assisting the Claimants on this issue, indicated that there had been no liability Policy at the relevant time which was underwritten by the Insurer.

The law

30. In his Written Opening Mr Owen QC relied on a 'presumption' that the insurance during the admitted period of insurance between 1976-1997 was a continuance of a preceding of insurance, supported by a reference to a passage from Phipson on Evidence, 16^th Edition §7-20. The relevant passage reads as follows:

States of mind, persons, or things at a given time may in some cases be proved by showing their previous or subsequent existence in the same state, there being a probability that certain conditions and relationships continue.

Mr Owen QC relied on 'subsequent' existence as showing prior existence.

31. In his closing submissions Mr Owen QC drew back from relying on a presumption of continuance. In my view he was right to do so. As the editors of Phipson observe:

While it is preferable to characterise this as a presumption of fact and not a presumption of law (that is a true presumption), it is more sensible and more accurate to regard it as a type of ordinary reasoning which applies in circumstances of the utmost frequency and diversity.

An obvious example of this type of reasoning might arise where someone was recorded walking between points B and C. If B and C were part of a road which ran from A to D, one might conclude (depending on the circumstances) that the person had earlier been present at point A and would later be present at point D. Much will depend on the circumstances. However the existence of a Policy of insurance in 1976 does not, in the circumstances of the present case, assist in concluding whether there was pre-existing cover with the same insurer.

Conclusions

32. One of the difficulties in deciding this issue is that it relates to a period over 30 years ago. Neither the assured nor the brokers have any documentation which assists; and I accept the evidence of Mr Prince that a thorough search has been carried out by the Insurers, and that there is no relevant documentation relating to cover for the Company.
33. The relevant question is what can properly be deduced from the limited material now available? In my view the starting point is the likelihood that after 1972 the Company had employer's liability cover, and that this would have been part of a Combined Policy insuring general liability risks. I accept Mr Prince's evidence that, if the Royal had been the employer's liability insurer before 1976 (either alone or as part of a Combined Policy) there would probably be some evidence of this on the computer records. In fact there is none. The evidence of the brokers must be treated with caution in view of the time that has elapsed. However, the evidence does not assist the Claimants. Mr Williams started his broking business in 1973, but does not describe the Company as one of his first clients. This suggests that, if the Company had the mandatory employer's liability cover from 1 January 1972, it had not been brokered through Williams Insurance Brokers Limited. This view is reinforced by the evidence of Mr Williams that his firm 'took over' broking for the Company in the 1970's; and Ms Addis's statement in October 2002 that the Company had been insured with the Insurer, not for all of its existence, but for 'virtually all of its existence'.
34. This evidence suggests that there was a prior Policy of some sort which had been broked through Evans & Rowe, and that this had been superseded by the August 1976 policy with the Insurer which had been broked through Mr William's firm. Furthermore the likelihood is that the prior Evans & Rowe policy was not with the Royal since as, Mr Williams said, his firm took over the broking of the policy on a best terms basis. All this indicates that the Company was not insured against liability risks under a Policy to which the Insurer subscribed prior to the August 1976; and I so find.
35. The fact that the cover point was taken late, and that the Insurer was reported to have reserved against the claims, adds little to the argument. The period of cover issue did not emerge until after a relatively late factual enquiry; and the statement about the reserve does not suggest, let alone establish, knowledge of the existence of a Policy covering the period 1973-August 1976. I should add that (at least in retrospect) it was unfortunate that the Insurer participated in the trial before Connell J on the (at least implicit) basis that they were the Insurer of the Company throughout the period of the claims.

The exception issues

The facts

36. Both sides relied on the findings in the judgment of Connell J; and, it is convenient at this stage to set out his findings in §18-19 of the judgment.

18. Now in the 21^st century a good deal more is known about child abuse than was known in 1973 when the oldest of the claimants went to live in the Community. Nonetheless any organisation to whom the care of problematic children was regularly entrusted must be taken to have known that certain basic skills and understanding would be required of those caring for the children. The Community Homes Regulations 1972 which applied to community homes provided by local authorities required proper provision for the care, treatment and control of children accommodated there, which control was to be maintained on the basis of good, personal and professional relationships between staff and children. In my view equivalent standards were reasonably to be expected of privately run community homes. Further the first defendants set themselves standards which they believed to be appropriate (see for example the Bryn Alyn Care Information Booklet No. 34/1978 which set out guidelines for the standards and quality of care). The aims of Bryn Alyn for the children in their care were, inter alia, "building up their self image, increasing their self discipline and enabling them to make a better adjustment to present day society". The first defendant recognised that each living unit within the organisation would need to establish a clear policy and procedure to ensure that the right persons are selected as residents and that the reception into care of each child is carried out sensitively. All workers must have a real concern for the individual personalities and idiosyncrasies of the residents, an acceptance of their problems and weaknesses and a belief in their strong points as a potential for growth and change. Where at all possible no action should be taken that is likely to diminish the child's self respect or to humiliate him in his own eyes or in the eyes of others. Bryn Alyn was opposed to the use of physical punishment, which was seen as contrary to the total caring process. The possible need for the physical restraint of an aggressive or uncontrolled child was foreseen. Supervision sessions for junior grass roots workers should not be less than two per week for the first 12 months. The document entitled "Bryn Alyn Community - The Alternative" shows clearly the profile of the community, the range of services available and the philosophy of the first defendants. It included the assertion, "The corner stone of the whole developmental process is rooted in the formation of good relationships between adult workers and the young people in their care".

19. In the result I conclude that on the evidence placed before me these worthy aspirations were not met in very many respects. First the staff were not trained, nor experienced in dealing with damaged children. Keith Evans came via the Army and a civil engineering company to Bryn Alyn in 1974. as it happened he had a certain aptitude for dealing with difficult children, and over the 24 years that he worked in the Community he developed that aptitude through experience rather than training. He said of himself, "In 1974 I had no experience of dealing with young people. I had been a corporal in the Army and I had two children". He described the training in the Community in his early days as, "pathetic", although it improved considerably over time. The employment contract was "absolute rubbish". He was shocked by the violence and addictive tendencies of the children in his care. The training offered was "in service" training only which was very poor until the mid 1980's. the complaint system started off ok. but fizzled out. Nonetheless he said, and I accept, that a lot of good things were done in the Community. Peter Steen came to Bryn Alyn from his own steel erecting business. He had had no formal training for working with difficult children. No training was available until Steve Elliot started some in the 1980's. John Jeffreys had worked for Rolls Royce before working in a local authority children's home and a multi racial youth club for about 12 months leading up to joining the first defendants in the 1970's. He was not trained at Bryn Alyn. He found you could not get hold of senior staff if you had a problem and staff morale was not good. In my view the probability is that these were three of the better care workers employed by the first defendants. In the light of all the evidence I have heard, and despite the denials of unnecessary violence by the three witnesses just referred to, I am satisfied that the homes run by the first defendants were overcrowded with too many difficult children; that the staff were expected to deal with such children with no adequate instruction or training; that the staff were so busy dealing with day to day problems that they failed to heed obvious warning signs about the principal, John Allen (e.g. John Jeffreys said that he knew the children called Allen a bender, a brownie, a queer; Peter Steen knew Allen bought presents for his favourites; Keith Evans heard references to children "bending down for John") and that the use of violence on residents, although forbidden in the first defendants literature, was common place and often excessive; not so much out of malice but because the untrained and uninformed staff could not cope without it. I have no doubt that many of the children living in the Community presented real problems, and could be violent. However the use of the "Top Dog" system, whereby the strongest children were used to control other children by force if necessary was entirely inappropriate; and the evidence satisfies me that the use of violence by staff and by fellow residents on these children was far too frequent and on occasions excessive. Keith Evans specifically denied that this was so. In repeating his denial, I do not believe that he was intentionally misleading the court. Rather he was so occupied with producing pragmatic solutions to difficult situations that over time he had come to forget what had actually occurred on a regular basis. The staff employed by the first defendants failed to prevent other staff from resorting to violence as a matter of course; they failed to keep a proper ear open for indications of improper practice; and they tolerated practices such as the "Top Dog" system which were clearly inappropriate. In passing I observe that the imposition of the punishment called the Scrubs (whereby the miscreant had to dress in T shirt, shorts, and shoes without socks and scrub the floor) was not in my view inherently improper; since some deterrent punishment was necessary from time to time; but the frequency of its automatic use, e.g. for absconders, in my view was inappropriate when some of those punished had absconded for reasons of fear or despair, rather than for the fun of it. Humiliation of a miscreant may be unavoidable at times; but its wholesale automatic use had no place in a properly run system of discipline. In summary the evidence that I have heard supports the conclusions of the Waterhouse Tribunal at paragraphs 21.131, 21.132, and 21.133. Had the staff been properly selected, trained and supervised, I also conclude that they would have questioned John Allen's use of favourites, his giving of gifts to particular children, and his frequent night time presence around the dormitories; with the result that many of his acts of sexual abuse would have been prevented. In summary the system of care operated in the first defendants Community was neither adequate nor properly organised and supervised. In this way the first defendants in my view are proved to have been negligent.

In §21 Connell J found:

In the case of the sexual assaults which I have found proved it is difficult to see how they can form the basis of vicarious liability in negligence. In every case the sexual assault was a deliberate act, not a negligent act, and the assault could properly form the basis for an allegation of breach of duty based on trespass to the person.

Later in his judgment Connell J made findings in relation to the individual cases of the claimants, to which I shall return later in this judgment.

37. The Insurers called David Russell Evans who worked at Bryn Alyn Hall from 1969 until August 1983, and from November 1985 until 1987. In 1987 he became the Company Secretary; and from December 1990 until the dissolution of the Company was a Director. He described the roles of John Allen, Jeff Davies, Ken Taylor, Steven Ford and Derek (Del) Jones at Bryn Alyn. John Allen was the Company Managing Director and took the leading role in the running of Bryn Alyn. Jeff Davies was the officer in charge of Cotsbrook Hall from 1976 to 1982, when he became John Allen's deputy. He was appointed a director of the Company in October 1987. Ken Taylor was the officer in charge of Pentre Saeson Hall from 1983 to 1992. Steven Ford was officer in charge of Gatewen Hall from 1983 to 1993. Derek (Del) Jones was the deputy officer in charge of Cotsbrook Hall from about 1977 until about 1982.

The arguments

38. For the Insurers Mr Faulks QC submitted, in summary, as follows:

i) The Claimants can be in no better position under the Act than the Company would have been if it had claimed under the Policies.

ii) The exception in the 1976 Policy excluded liability for loss which resulted from any "deliberate act or omission of the insured".

iii) The exclusion of indemnification for loss caused by an assured when the assured has itself caused the loss reflects public policy considerations and general principles of insurance law which prevent a party relying on their own deliberate wrongful act, see for example Gray v Barr [1971] 2 QB 554 and Allstate Ins.Co. v. Mugavero 581 NYS 2^nd 142 (Ct. App. 1992), cited in Clarke, The Law of Insurance Contracts §19-2E6.

iv) The cause of the loss was the assaults. The controlling mind of the Company was John Allen. At all material times, he was the chief executive, majority shareholder and a director of the Company. He was responsible for setting up and maintaining the system or regime at the homes. The losses which occurred resulted from the systemic failures of the Company. The system allowed the children to be abused by deliberate acts. These systemic failures were known to, and acquiesced in by, John Allen and other managers of the Company. This constituted a deliberate act or omission within the meaning of the policy exception.

v) Although the finding of Connell J was of negligence, the effective causes of the loss were deliberate acts and omissions for which the Company was vicariously liable. This was a case, like Lister v. Hesley Hall Ltd [2002] 1 AC 215 in which there was a close connection between the employment of John Allen and the managers (Jeff Davies, Ken Taylor, Steven Ford and Derek (Del) Jones) and the torts which caused the loss.

vi) From 1981 the exclusion was expressly extended to the deliberate acts and omissions of those who carried out a senior management role, 'management employees'.

vii) Connell J's findings in relation to the individual Claimants were findings of physical and sexual assaults by John Allen and other managers.

39. Mr Owen QC accepted, at least at first instance, that the Claimants could not be in a better position under the Act than the Company would have been if it had claimed against the Insurer for an indemnity. However he submitted:

i) The cause of the Claimants' loss was the exposure to the abuse in the homes managed by the Company. This was the result of the negligence of the assured, its servants or agents, see the Judgment of Connell J at §18-19. There was no finding that the abuse was caused by the deliberate act or omission of the assured. On the contrary the Judge's findings were that there was negligence in relation to the adequacy of the system, its organisation and supervision.

ii) The generic findings of Connell J were applied by him to the individual claims in which he held that the individual's injury and damage resulted from the negligence of the assured, their servants and agents. In each case the judge found that the relevant circumstance in which the injury or damage occurred resulted from the negligence; and that by reason of this neglect the acts complained of occurred.

iii) Connell J did not find that that the injury or damage resulted from the deliberate act or omission on the part of the assured, its servants or agents, in respect of which liability attached.

iv) The Policy Exception is confined to injury and damage which results from the deliberate act or omission of the assured. It is not concerned with deliberate acts or omissions of servants or agents who might have been acting in the course of their employment, and in respect of whose acts or omissions vicarious liability might attach.

v) Whether the acts or omissions were those of the Company would depend on the nature of the activity, the relevant position of the person against whom complaint was made within the Company and the relevant or surrounding facts and circumstances, see for example, Lennards Carrying Company Ltd v. Asiatic Petroleum Company Ltd [1915] AC 705, 713-4, Rainham Chemical Works Limited v. Belvedere Fish Guano Co Ltd [1921] 2 AC 465, 476, HL Bolton (Engineering) Co Ltd v. Graham and Sons Limited [1957] (CA) 1 QB 159, 172-3, Tesco Limited v. Nattrass [1972] AC 153, 170D-173G, El Ajou v. Dollar Land Holdings plc [1994] (CA) 2 All ER 685, 685j-696b, and Meridian Global Funds Management Asia Ltd v. Securities Commission [1995] (PC) 2 AC 500, 511G-512B.

vi) Throughout the period 1973-1991, the sexual and physical abuse by specific individuals occurred in circumstances in which it could not be said that they were the acts of the Company. On the contrary the acts of physical and sexual abuse by (for example) John Allen were plainly carried out for his own reasons and gratification. The Insurer's case involves the implication that everyone associated with the company was involved in the abuse. This was plainly unsustainable: for example, there could be no basis for saying that Mr Russell Evans was involved.

vii) Although the wording of the exclusion was changed from 1981, the alteration does not significantly change the factual analysis. In order to exclude liability the Insurer has to show that those who carried out the deliberate acts of assault were acting within an operational role and exercising a management responsibility. In this context Mr Owen QC relied on a booklet issued by the Insurer at the time, "Royal's New Liability Policy: Explanatory Notes for the Assistance of Brokers and Agents."

Deliberate Acts Excluded

This has been modified in two respects

(a) Since most operational decisions are taken by senior officials we have amended the wording to read "any deliberate act or omission of the Insured, his partners, directors or managerial employees …" We accept that there is an element of imprecision about the term "managerial employees" but we think that in practice this should not create a difficulty because the level at which operational management responsibility is exercised will usually be capable of identification in specific sets of circumstances. (Emphasis added)

He submitted that Connell J had not found that the abuse had occurred while the perpetrators were exercising operational management responsibility.

40. Both sides referred to Connell J's findings in relation to the individual cases of Claimants in support of their submissions.

Conclusion

41. It is common ground that it is for the Insurer to prove the application of the exception to the individual claims.
42. In my view it is clear from §18-19 of his Judgment that Connell J found that the abuse was the result of the Company's negligence in relation to the adequacy of the system, its organisation and supervision. In particular, (1) members of staff were inexperienced and not properly trained; (2) the Homes were overcrowded, with too many difficult children; (3) members of staff were too busy to notice that violence was becoming too frequent and, on occasions, excessive; (4) inappropriate practices became tolerated as the norm. As the Judge expressed it:

Had the staff been properly selected, trained and supervised, I also conclude that they would have questioned John Allen's use of favourites, his giving of gifts to particular children, and his frequent night time presence around the dormitories; with the result that many of his acts of sexual abuse would have been prevented.

43. These findings were applied by Connell J to the individual claims. The Judge identified the circumstances in which the injury or loss occurred in enumerated paragraphs:

KR (37-39) Sexual abuse by John Allen

DK (47) Physical abuse by staff, including Jeff Davies

GS (73) Physical abuse by staff, including Steven Ford

DEJ (88-89) Sexual abuse by John Allen

KM (103 &108) Sexual abuse by John Allen

GOM (130-131) Sexual abuse by John Allen

PS (158) Physical abuse by staff generally

JM (187) Sexual abuse by John Allen and Ken Taylor

He then he held that, in each case, the individual's injury and damage resulted from the negligence of the Company, its servants and agents:

KR (39-40)

DK (47-48)

GS (73)

DEJ (94)

KM (106 & 108-9)

GOM (132 & 136)

PS (156 & 158)

JM (187 & 190)

44. There was no finding that the injury or damage resulted from the deliberate act or omission on the part of the assured, its servants or agents, in respect of which liability attached. On the contrary the Judge referred back to the earlier generic findings of neglect in relation to the adequacy of the system, its organisation and supervision; and damages were ordered to be paid on the basis of the neglect and not for the infliction of deliberate harm.
45. The findings of Connell J are a significant difficulty in the way of the Insurer's case. This is implicitly recognised by the Insurer's pleading in §11.2 of the Defence, where it is said:

John Allen was the [Company's] "alter ego" and by his own personal acts or omissions he devised and implemented or otherwise established a regime in homes operated and managed by the Assured which involved the deliberate infliction of physical and/or sexual and/or emotional abuse on the children (including the Claimants) who resided there. (Emphasis added)

46. There is little, if any, support for this allegation in the findings of Connell J; a fortiori Insurer's submission that the regime 'enabled' or 'was calculated to permit' abuse to occur.
47. In any event, in order to avoid liability the Insurer has to show that the loss and damage resulted from "the deliberate act of (the Company)" (under the 1976 policy) or "the deliberate act of (the Company) its … directors or managerial employees" (under the 1981 policy). I accept Mr Owen's submission that whether the relevant act or omission was the act of the Company, depends on the nature of the activity, the relevant position of the person against whom complaint was made within the Company and the relevant or surrounding facts and circumstances. In the words of Denning LJ in HL Bolton (Engineering) Co Ltd v. Graham and Sons Limited [1957] (CA) 1 QB 159, 173

… the intention of the company can be derived from the intention of its officers and agents. Whether their intention is the company's intention depends on the nature of the matter under consideration, the relative position of the officer or agent and the other relevant facts and circumstances of the case.

48. As Lord Hoffmann observed in the Meridian Case (p.512A-B), the fact that a company's employee is authorised to drive a lorry does not in itself lead to the conclusion that if he kills someone by reckless driving, the company will be guilty of manslaughter.
49. The acts of sexual and physical abuse which were found by Connell J to have occurred during from 1973 to 1991 were not the acts of the Company. Neglect permitted deliberate acts of abuse to occur, but the deliberate acts were caused by the abusers. The exception is concerned only with an act or omission which is deliberate and which is, as a matter of law, the act or omission of the Company. None of the cases concerned damage which resulted from the deliberate act or omission of the Company.
50. For example, in the case of DK, the Judge found that he was physically abused in the period 1979 to1982. Jeff Davies was one of many abusers. However there is no basis for saying that the cause of the loss was the deliberate act or omission of the Company. As Connell J expressed it (in §48 of the judgment):

I am satisfied that inexperienced staff, inadequately supervised, accepted a regime in which the use of violence by way of pushes, slaps, cuffs and punches was a regular occurrence. Accepting as I do that DK was a complex and difficult child who was himself capable of significant physical violence, nonetheless he was the victim of serious physical abuse over 3 years and at a time in his life when he needed to be able to trust adults and be treated sympathetically be them. He suffered in this way because of faults in the system which was operated in the Community, in which the safety and wellbeing of some of the residents were neglected on a regular basis.

51. Although the wording of the exclusion was changed from 1981 the change did not, in my judgment, significantly change the terms of the policy. The Insurer still has to show that the deliberate acts or omissions were committed by those acting within an operational role and exercising a management responsibility.
52. Again I am not satisfied that the Insurer can bring itself within the exception. At the root of the claim is the negligence which 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 is not the material issue; it is the role of the abuser which is significant. In each case they were not acting in a managerial role, they were acting for their own ends or, as Mr Owen QC put it, 'selfishly and gratuitously'.
53. It is convenient to take the case of GOM as an example. GOM was subjected to regular sexual abuse by John Allen, and physical abuse from the staff, between 1984 and 1986. As the Judge found (§136) much of the abuse occurred in John Allen's car. He also found (§130) that John Allen warned him that, if he told anyone, he would be sent to a secure unit. The Judge concluded (§136):

In summary (the Company was) negligent in not investigating a strange situation and in taking not steps to prevent the course of conduct which significantly damaged (GOM). Thus (the Company is) vicariously liable for the proven sexual abuse which (it), and (its) systems, failed to detect or prevent.

54. In my view the nature of the acts (in the car of the abuser) the "strangeness" of the situation, the warnings not to report what had occurred, all militate decisively against the Insurer's submission that this was loss resulting from the deliberate act or omission of the Company.
55. I also accept the submissions of Mr Owen QC that an analysis on the basis of the principles of vicarious liability does not throw significant light on the issue that I have to decide. The exception is confined to injury or damage which results from the deliberate act of omission of the assured. It is not concerned with deliberate acts or omissions of servants or agents who might have been acting in the course of their employment and in respect of whose acts or omissions (deliberate or otherwise) vicarious liability might attach.
56. I am also not persuaded that the US decisions to which I was referred assist greatly in this case. Each case is likely to turn on the terms of the particular Policy; and, in so far as the cases reflect public policy, it seems to me that it would be necessary to carry out a more complete review of both the relevant public policy issues and the relevant US decisions. As Professor Clarke expresses it, 'the impact of value judgments offers one explanation of the variety of interpretations courts have put on the exceptions', Clarke (op cit) §19-2E6.
57. For these reasons I have concluded that the Insurer's defence on the exception issues fail.
58. I should add that, if I had found that the Insurer had provided cover prior to August 1976, I would have found that it was on the terms of the Combined Insurances Policy 1969-70 (p.167B of bundle 1). This provided Third Party Liability cover

In the event of (a) accidental bodily injury to … any person … caused in the course of business.

The General Conditions provide:

… if any loss destruction or damage be occasioned by the wilful act or with the connivance of the Insured all benefit under the Policy shall be forfeited.

59. Although the structure of this policy differs from the 1976 and 1981 Policy, I would have found that the Claimants could have recovered against the Insurer had such a Policy been in existence in 1972. The word 'accidental' in the phrase 'accidental bodily injury' has to be looked at from the perspective of the assured and not the insurer. The claims based on abuse would fall within the Policy unless the injury was the result of the deliberate act of the assured. For the reasons already given I would have found that loss was not caused by the deliberate acts of the Company in this early period. However, for the reasons that I have already given, I find that there was no such cover provided by the Insurer.

Summary

60. I have concluded that:

i) The cover provided by the Insurer incepted on 22 August 1976, but not before.

ii) The Insurer's defence based on the exception in the Policies fails.

I will hear the parties on the form of any order.