Director not civilly liable for corporate employer’s failure to insure, Inner House rules

By a 2-1 majority, the Inner House of the Court of Session allowed an appeal against a decision of the Lord Ordinary, who held that the director should be held liable for his failure to obtain insurance against the risk of workers sustaining injury in the course of their employment.

Lord Brodie (pictured), Lord Drummond Young and Lord Malcolm heard that the pursuer William Campbell raised an action for damages against the first defender Peter Gordon Joiners Limited as reparation for personal injury caused by negligence and breach of statutory duty, after injuring his left hand when using an unguarded electrical circular saw in June 2006.

His claim against the second defender Peter Gordon, the sole director of his former employer, arose from the facts that the company was now in insolvent liquidation and, contrary to the provisions of section 1 of the Employers’ Liability (Compulsory Insurance) Act 1969, was not insured against the risk of becoming liable to the pursuer by reason of the circumstances of the pursuer’s accident.

The Lord Ordinary dismissed the common law case against second defender, but held that the pursuer had pled a relevant case based upon the argument that the 1969 Act allowed a director to be held civilly liable for breach of his qualified statutory duty not to permit the employer company to carry on its business without having in place an approved insurance policy insuring the employer against liability for bodily injury or disease sustained by employees in the course of their employment.

However, the second defender reclaimed against that decision, arguing that he was not made liable to the pursuer by reason of the terms of the 1969 Act.

It was submitted that no civil liability attached to him for any breach of its provisions, and that the obligation created by the 1969 Act was imposed on the employer and not, where the employer was a corporation, on the directors.

It could not be said that it was Parliament’s intention to impose civil liability on a director in the event of a corporate employer’s failure to insure – to do so would be to “pierce the corporate veil” to an “intolerable extent”, it was argued.

For the pursuer, it was submitted that the fact that parliament had not expressed its intention in explicit terms did not relieve the court from its “obligation” to construe the statute in question.

it was argued that the “primary purpose” of the 1969 Act was to “protect employees”, and the “right to recover went hand in hand with the obligation to insure”.

Lord Brodie – with whom Lord Malcolm agreed – held that the appeal should be allowed and the action against the director dismissed.

Delivering his opinion, Lord Brodie said: “The particular risk of an employee being avoidably injured in the course of his employment is part of the risks undertaken and created by the employer’s enterprise. It is rational and indeed just that the employer should bear that particular risk and all its financial consequences irrespective how substantial they may be. That is hardly the case with, say, a manager or company secretary or, indeed director of a limited company.

“By entering into a contract of employment or accepting appointment he is not undertaking to shoulder all the risks associated with the company’s enterprise or to act as an insurer for the company’s employees. The company can limit its liability. It can obtain insurance. The company’s officers cannot limit their liability.”

Lord Malcolm agreed that the provisions of the 1969 Act did not reveal a “legislative intention” to impose civil liability upon directors.

He explained: “The 1969 Act imposes a duty to insure upon employers, not upon others – see section 1. Section 5 backs this up with criminal sanctions…enforceable against both employers and any recalcitrant directors or officers. There is no mention of any intention or non-intention to make employers and/or officers liable in damages to anyone harmed by an absence of insurance.”

Dissenting, however, Lord Drummond Young held sections 1 and 5 of the 1969 Act did impose civil liability upon any director who has consented to a corporation’s failure to insure, or who has connived in or facilitated any such failure to insure.

He said: “The statutory duty is clearly an important part of the statutory regime governing health and safety of employees, and I can see nothing unfair in placing the burden of securing insurance on the directors who are responsible for the overall management of the company.”