The time bomb

To paraphrase former US defence secretary Donald Rumsfeld, there are known unknowns and unknown unknowns – and one of the greatest of all the unknowns to affect the insurance industry is asbestos.

Diseases caused by asbestos, such as mesothelioma and asbestosis, can take 40 years or even more to develop, which means the true cost to the industry will not be known for decades. In 2004, the actuaries’ research group Giro conducted a survey of major insurers and predicted between 80,000 and 200,000 claims over the next 30 years. The future costs of asbestos-related diseases were estimated to be anything from £4bn to £10bn. Insurers must set aside reserves to cover the claims they expect to face, but these are a closely guarded secret and there is scope for wild variation from firm to firm.

“You get a ridiculously huge range from actuaries,” says David Williams, managing director of claims at AXA. “The real cost of asbestos claims is a highly sensitive issue and there’s a huge debate about the different approaches to reserving for them. If I were to tell you the figure for asbestos in our reserves I’d get sacked. We’re all obsessed with it.”

What actuaries do agree on is that deaths from mesothelioma, the most common illness, will peak between 2011 and 2015. According to the Health and Safety Executive (HSE), in 2005, there were 2,037 deaths and this could reach 2,450 deaths a year before tapering off by 2040. But asbestos was so widely used – and still exists in so many of our buildings – that a second wave of cases could keep rolling for many decades to come.

Actuaries specialising in this area have the morbid task of updating their predictions based on the developing medical evidence and on the results of court battles where a judgment can make an overnight difference

of millions of pounds to insurers. There are several decisions imminent right now, which means that by the start of November, the landscape could look very different.

Asbestos is a miracle product that exacts a terrible price. It was heralded as far back as ancient Greece for its ability to withstand fire, but even then Pliny the Elder noticed that slaves who worked with it often died a terrible premature death. Fast forward to the 19th and 20th centuries and asbestos was used around the world in everything from insulation and office wall partitions to brake pads in cars.

Its use dropped in the 1970s and 1980s before it was finally banned 30 years ago but, by then, the damage was done. A single fibre in the lungs can lead to fatal conditions, but the gestation periods can be 40 years or more.

The first asbestos-related claims surfaced in the late 1960s and the number has grown steadily since then. Giro’s asbestos working party estimates claims had cost the industry £1.3bn by 2003, a fraction of the eventual cost. There are four separate classes of asbestos-related disease, ranging from the savage lung cancer mesothelioma to the pleural plaques that have no symptoms and are, for now at least, non-compensable in the UK.

Cases of mesothelioma and the related lung disease, asbestosis, are the most straightforward to predict as they have traditionally been found in manual labourers who were in daily contact with asbestos. Even then, there is a massive range of factors to take into account, from the latest evidence on gestation periods to the peak manufacturing periods for asbestos products. But asbestos claims are becoming less predictable by the day.

“The whole demographic has changed,” says Steve Thomas, UK technical claims manager at Zurich. “When I started handling claims you went along the shelf and it was lagger, lagger, lagger, lagger, all in their sixties, maybe seventies. Now it’s totally different. We see claims from carpenters, plumbers and teachers.”

The geography of claims has also broadened. Mesothelioma and asbestosis used to be concentrated in industrial areas, but now cases come from all over the country as workers retire and move away.

“If I were to tell you the figure for asbestos in our reserves I would get sacked. We are all obsessed with it.

David Williams, AXA

The first wave of claims fell mainly under employers’ liability policies, and these should tail off some time in the next decade. But insurers are now receiving public liability claims from the wives who washed their husbands’ overalls and the children who rushed to play with their fathers when they came in from work. In December 2006, the widow of a 32-year-old man was awarded compensation after he inhaled fibres from the work clothes of his stepfather, a scaffolder at Kingsnorth Power Station in the 1970s.

There are also secondary cases from the tradespeople who worked with asbestos products, clerical staff working in asbestos-riddled buildings and former council housing tenants. The HSE is running a campaign to make younger tradespeople aware of the hidden killer in any building refurbished before 1990 – in 2006, it estimated there were still 550,000 tonnes of the lethal brown and blue varieties of asbestos in UK buildings and 2.7 million tonnes of white asbestos, whose full effects are still not known.

“In our old office, there was a lot of asbestos,” says Williams. “That’s how widely used it was, there could be millions of places where it was used. How do you pin down who’s going to be liable?”

Thomas agrees: “Causation in these cases is very difficult. You could be employed in an office, in a shop or factory and there might be asbestos in the construction of that building where it has been for years without harming anybody. Then there’s some damage to the fabric of the building and the fibres can be released and breathed in.”

There is greater variation in compensation payments in secondary cases too, as they are based on loss of earnings and the age of the claimant.

Ian Pelham is managing consultant at Insolutions, the insurance archaeology division of broker Marsh, which specialises in piecing together the details of old policies.

He recently saw a case of a man who worked stripping asbestos in his university holidays and went on to set up his own company. He died of mesothelioma while in his prime. “The cost was far higher than if he’d been in his late seventies with only four or five years to live.”

But one of the greatest uncertainties in these claims is a legal and political issue, not a medical one. The “trigger litigation” issue hinges on the assumed gestation period for mesothelioma cases. The first fatal cell mutation can take place many years after exposure to asbestos and may not be discovered for another 10 years. Insurers had always paid out based on liability through exposure, but the case of a Bolton electrician changed all that in 2005.

Gordon Green died from mesothelioma in 1991. He had been exposed to asbestos while working for the council in the 1960s, but medical evidence assumes he would have contracted the disease in 1981. The council’s public liability insurer cited the wording of the policy, which made it liable for injury, not causation. The “injury”, it said, would have taken place in 1981, so a later public liability policy should pay out.

The judge agreed and ever since insurers have been scrutinising the wording of policies they wrote many years ago. A lengthy series of test cases was heard this summer with a judgment due by early November. Whichever side wins, there is likely to be an appeal.

The amounts at stake are huge for the companies concerned, but it’s not just a case of who picks up the tab. If the “Boltonites”, as they are called, win the argument, it will mean that employers’ liability policies will face a slew of claims that they were never set up to cover. “We’ll find people with large gaps in cover,” says Pelham. “Policies written later might have exclusionary language that leaves them without cover. It’s a fairly major issue.”

After diagnosis, mesothelioma sufferers rarely live beyond a year, so compensation often ends up being paid to their families years afterwards. Williams believes insurers and government should agree a way for compensation claims to be paid quickly, leaving the wrangling over who’s liable until later. “The government needs to be involved, but it wants insurers to pick up the tab. It was keen on doing a trade-off on mesothelioma if we were more obliging on pleural plaques, but there’s no way that’s going to happen.”

“The way insurers keep records is crucial. Insurance can be a grey area but if you have the records you can say, yes it is us, or no it is not.

Martin Saunders, Allianz

AXA is one of several insurers preparing to mount a legal challenge against the Scottish government on exactly this issue. This is another looming battle that could rewrite the claims rulebook. Pleural plaques are areas of scar tissue on the lungs that produce no symptoms and have no causal link to more serious conditions. All they show is that a person was probably exposed to asbestos at some point in the past, which makes causality very difficult to prove. They used to account for around a third of asbestos-related claims, as insurers used to make small pay-outs to sufferers to compensate them for their anxiety or distress over the possibility of developing mesothelioma. But a House of Lords ruling in 2007 decided they should no longer be compensable. The Holyrood government is threatening to force insurers to pay out in Scotland, however. Norwich Union’s Dominic Clayden told the parliament’s justice committee that Scottish employers’ current level of liability of £131m could rise to anything from £76m to £607m. Meanwhile, the Ministry of Justice in England has launched a consultation on pleural plaques, which ended at the start of this month and was expected to report back within weeks.

The US is about 20 years ahead of the UK in asbestos claims, with more than 730,000 claims since the early 1980s. Pleural plaques made up the vast majority. The ultimate cost of US claims to insurers has been estimated at $120bn (£67.5bn), split equally between US and foreign firms.

It’s hard to draw lessons from the American example, though. Even though deaths as a proportion of the population are predicted to be higher in the UK, the effect on the insurance industry is unlikely to be as severe.

Ian Harvey, senior claims manager in Norwich Union’s environmental claims unit, points out that most US cases were class actions brought against the manufacturers of asbestos products. “If someone’s got an asbestos-related disease, they can almost just print off a list of companies and sue 100 potential defendants, who all pay a small amount of damages.”

Another crucial factor is that US litigants are not liable for the other side’s costs, so they have nothing to lose by joining a class action. “It’s incredibly easy to look at the US and say, ‘Oh my God, asbestos claims will be huge’, but it’s not the same in this country.”

As for preparing for the future, it’s not only money that insurers need to have in reserve. Martin Saunders, motor and casualty claims manager at Allianz, says it will also be essential to have a proper archive of policy documentation. “The way insurers keep records is crucial. Insurance can be a grey area but if you have the records you can positively say, ‘yes it’s us’, or ‘no it isn’t’.

“If I receive a claim, I want to be able to look at my record and check who I insured, when and what covers were in place, and make sure I had the appropriate premiums.”

Allianz’s sister company AGF has records going back to the early 1900s, when each policy was handwritten. The oldest document Saunders has ever had to refer to was from 1925, in the case of a very old man who died

15 years previously and whose family were trying to recover compensation. Fortunately, Saunders had the paperwork so he could issue a repudiation.

There will undoubtedly be more trips to the archive for Saunders and, whatever the outcome of the trigger litigation and pleural plaques cases, insurers expect to be arguing about asbestos cases for decades to come.

As Steve Thomas at Zurich puts it: “Not until every last bit of asbestos has been removed will these claims ever stop.”