ASBESTOS LIABILITY – WHICH INSURER PAYS?

Practical Law Company (PLC) Magazine
Tuesday 27th January 2009

The nine week trial of six test cases in the High Court in summer 2008 led to judgment on 21 November 2008 in favour of the claimants who were successful in obtaining a declaration clarifying how employers’ liability (EL) policies should respond to mesothelioma (the disease caused by exposure to asbestos) claims (Employers’ Liability Policy “Trigger” Litigation Neutral Citation Number [2008] EWHC (QB) 2692) (the EL trigger litigation).

Interpreting employers’ liability insurance policy wording

Although this case related to injuries arising only from asbestos exposure, in the run up to the hearing some of the defendant insurers had started to take a similar approach to other long tail exposure cases (in other words, where exposure to a substance said to have caused harm took place many years before the symptoms developed, such as bladder cancers which it was claimed arose from exposure to certain dyes and oils 30 or more years before the cancer developed). It seemed that a trend was developing that these insurers intended to decline cover for all such long tail exposure cases apart from noise and vibration exposure. The implication of such an approach to UK businesses would be measured in tens of millions of pounds of liabilities which the businesses rather than the insurers would have to meet.

Mr Justice Burton ruled that all EL policies, however they are worded, are triggered by exposure to asbestos and not when, many years later, the disease manifests itself (the date of the tumour). This means that in every case it is the insurers whose policies are in force at the time the employees inhaled the asbestos fibres who must indemnify the employers. The decision restated decades of market practice which had been brought into question by the controversial decision in the case of Bolton.

The Bolton decision

The decision in the case of Bolton Metropolitan Borough Council v Municipal Mutual Insurance Limited and Commercial Union Assurance Company Limited ([2006] EWCA (Civ) 50) concerned public liability (PL) policies.

Before Bolton, where claims were brought against employers based on exposure to asbestos at work the EL insurer on risk when the exposure took place paid the claim. Where the exposure spanned a number of insurers’ interests the damages were paid pro rata depending on the extent of the exposure during each period on risk.

PL policies usually provide cover if the insured became liable for injury or illness which occurred “during the currency of the policy” or “during the period of indemnity”. This is known as the occurrence basis.

The Court of Appeal in Bolton held that the original claimant became fatally ill in about 1980 which was ten years before he had symptoms attributable to mesothelioma. The injury was therefore suffered in 1980 and Municipal Mutual, Bolton’s PL insurers on risk in 1980, were liable to indemnify Bolton. It further held that since the damage did not occur on inhalation, Commercial Union, Bolton’s PL insurers on risk at the time of the exposure in the 1960s,
were not liable.

EL insurers’ response to Bolton

Following Bolton, certain EL insurers, mainly those in run-off, reviewed the wording of their policies carefully and made the decision to decline cover by relying on Bolton. This had the effect of moving insurer responsibility for mesothelioma claims away from the earlier point of exposure and forward to the later time when the tumour started to develop. Employers who had taken out valid EL cover at the time were being told that they were not covered and individual claimants (and their dependants) faced the possibility of no compensation.

The common issue

Unlike PL policies, EL policies generally either indemnify liability for injury or disease “caused” during the period of insurance or liability for injury or disease “sustained” during that period. This is known as the causation basis.

The common issue for Mr Justice Burton to determine was which EL policy should indemnify an employer against whom an employee claims damages for mesothelioma. To reach the decision the meaning of “injury or disease sustained” as against “injury or disease caused” or similar wordings had to be clarified.

It is generally accepted that the employer’s negligent act is the harmful exposure of the employee to asbestos and it is generally agreed that this exposure causes the mesothelioma but following medical knowledge at the time and the case of Bolton the insurers argued that the injury is not sustained until the malignant changes occur which is on average ten years before the symptoms appear and the disease can be diagnosed. It had previously been assumed for claims handling purposes that the mesothelioma develops from the moment of exposure, in other words, that it is sustained at the same time as it is caused.

If the court had found in the EL trigger litigation that there is a time delay between mesothelioma being caused and sustained employers may have found that they were not insured for a particular claim even though they had complied with the compulsory employer’s liability insurance provisions which did not specify a particular wording.

The EL trigger decision

Mr Justice Bolton decided that the interpretations of the “sustained” EL wordings from both sides were unclear and open to interpretation. Having reviewed the factual background and commercial purpose of EL cover, he concluded that insurers had in the past, and without apparent difficulty, interpreted “caused” and “sustained” interchangeably in EL policies. The cases had always been dealt with on a causation basis and accordingly the insurers’ policies should also respond on a causation basis.

The judgment is an affirmation of the position as understood by the insurance industry since industrial diseases with a latency period first began to be identified, and is welcomed both by companies and victims of mesothelioma. However, as a result of this decision, the potential cost for insurers will run into millions of pounds and the insurers are likely to appeal.

What should companies do?

Any company that believes it has a history of employees being exposed to asbestos, or any other harmful substance with the potential to cause injury many years later, or has faced such claims, must ensure that it has as full a record (including the policy numbers) of its employers’ liability insurers as possible. It cannot rely upon the previous action of insurers in dealing with claims being evidence that that insurer will continue to do so.

Unfortunately, as there was no requirement prior to 1998 to keep copies of employers’ liability certificates, and there is now no longer a requirement to keep a copy of the certificate, a business may have to undergo a considerable exercise of looking through old records. Many insurance brokerages have ceased trading or have been amalgamated with others and many insurance offices have closed down. The possibility therefore of another person having the information is very limited and they may not be in a position to assist a company. This is an exercise that should be undertaken sooner rather than later.

As and when business confidence returns and mergers and acquisitions begin to take off once more, the lack of insurance history cover could become a factor in determining whether a deal can be done or whether a significantly reduced price would be sought.

So whilst the EL Trigger result has been welcomed as one of common sense, it would seem that it is only going to be of benefit to businesses if they are able to produce appropriate evidence of their insurance history.

Darren Smith, Partner & Head of Risk and Liability and Louise Macdonald, Associate, Hill Hofstetter LLP.

View story online