War of the words

Exactly a fortnight ago, the Court of Appeal handed down a decision that sent shockwaves through the insurance sector, sparking uncertainty over asbestos claims and concerns about the effect on the industry.

In a series of cases, collectively known as the employers’ liability policy trigger litigation, insurers have been seeking clarification over who will be held liable for compensating mesothelioma victims exposed to asbestos.

In a groundbreaking ruling, the court decided that responsibility for cover depends on the wording of the policy that was in force when the worker came into contact with asbestos.

Commentators predict that, if the so-called ‘trigger’ ruling is upheld, it could generate costs of more than £1bn for the insurance industry. The decision also means that some victims may never be compensated.

The battle begain in 2006 when four run-off insurers – Municipal Mutual Insurance (MMI), Builders’ Accident Insurance, Independent and Excess – won their argument in a case known as MMI vs Bolton MBC. This held that, in certain cases, the claimant should only be compensated from a policy in force at the date at which the tumour developed, rather than when they were exposed to the cancer-causing material.

In 2008, however, the High Court ruled that claims should automatically trigger a liability policy in place at the time of exposure to the cancer-causing material.

The four run-off insurers challenged that decision, which led to this month’s Court of Appeal judgment. This, to a large extent, removes the clarity of the 2008 ruling.

Berrymans Lace Mawer partner Henry Bermingham, who represented the defendants in the Court of Appeal, explains: “Until 2006, insurers had always taken the view that employers’ liability (EL) policies responded on a causation basis – if exposure took place during the life of the policy. The Bolton case had the effect of shifting insurer responsibility from exposure to the time when the tumour started to develop.”

Who pays?

In some cases, mesothelioma victims do not develop tumours until 30 to 40 years after the event, meaning many insurers that took on policies from the older run-off insurers have now come under fire from claimant solicitors. Ultimately the case has come to resemble a showdown between the ‘Boltonite’ run-off insurers and insurers still active in the market.

Unsurprisingly, major insurers have reacted angrily. “We take a principled position that the policies should be interpreted in the way that they have always been interpreted, and provide coverage for liability arising out of the original exposure,” Zurich’s disease claims manager Mike Klaiber argues. “We think it is manifestly wrong that these insurers are, in hindsight, putting a different interpretation on their wordings to avoid the intention of the policies when they were first written.”

The crux of the argument put forward by the older run-off insurers is that, in some cases, the wording of their policies means they are not triggered at the time of a claimant’s exposure to asbestos. While the judges in the Court of Appeal took different approaches in the ruling, certain principles emerged:

• When the wording contains the word “sustained”, the responding policy is the one in force when the tumour starts to develop.

• When the policy contains the word “contracted”, then the responding policy is the one in place at the time of exposure to the cancer-causing material.

Loss adjuster Cunningham Lindsey’s complex loss specialist Joseph Noel explains that many insurers have to confront the possibility that there are a great number of policies with “sustained” wordings in the marketplace. This means that many insurers, particularly those that have written employer liability policies for old industrial companies, could face a flood of claims which they could not have foreseen.

Noel says: “According to the Court of Appeal judgment, if insurers have written a sustained wording, there are now exposures that they simply couldn’t have calculated for at the outset. I fear that there are a lot of policies with sustained wordings in the marketplace.”

Consequently, law firm Keoghs partner David Pugh believes that, if the judgment is allowed to stand, insurers could face a massive increase in their exposure to asbestos-related claims. “I would think we are looking at potential liabilities in excess of £1bn for the insurance industry,” he predicts.

Furthermore, many asbestos victims now face the prospect that there is no cover in place for claims if they were first exposed to the harmful material in the 1960s and the early 1970s, while working at companies that have since become insolvent. If the wording of the company’s policy at the time of exposure fails to respond to claims, many mesothelioma sufferers may be left uncompensated.

PR nightmare

In addition, the judgment has the potential to create a public relations nightmare for mainstream insurers as the public perceives disputes over the ruling as an evasion of responsibility. “The danger is that if this current ruling stands, there will be lot of victims and their families who will go uncompensated,” Klaiber says. “That is very worrying and something the live insurance market is very much against.

What is doubly disappointing is that this decision is counterproductive to the efforts of the mainstream insurance market to try to improve the situation [for claimants]. It further damages the reputation of insurers, we are all tarred with the same brush.”

Consequently, it is expected that some insurers will pay claims – even if the wording of their policies means they are not legally obliged to do so – in order to avoid substantial reputational damage. LIoyd’s insurer Equitas has already announced it plans to pay claims on an ex gratia basis. However, Pugh believes some insurers may face issues with their reinsurance if they decide to pay such claims, leaving many in a catch-22 situation. “Reinsurers are becoming ever more acute about their asbestos exposures and it may well be that they would decline to pay out [to insurers] if an insurer did not have a legal obligation to pay those claims,” he says.

Complexity costs

As well as the confusion surrounding when and which insurers should respond to an asbestos-related claim, it is likely that the judgment, if upheld, could create a nightmare for claims departments and generate significant extra costs.

Berrymans Lace Mawer’s Bermingham says: “A claims handler who is advising a company for disease claims will have to sit down, look at the wording of each policy, identify who the insurers were and work out if this is a wording that works or doesn’t work. It creates a huge level of complication.” He adds: “The more complex something is, the more it costs to unravel.”

Cunningham Lindsey’s Noel adds that the insurance sector could face significant costs to train staff to handle the complications generated by the ruling – as well as an increased workload. “We will have to review all of our claims that are asbestos-related, as will insurers,” he says.

There is also a possibility that the principles in this case could apply to other disease-related claims. Zurich’s Klaiber says: “There is a concern that other insurers will try to apply this ruling to diseases such as cancer and asbestosis, which would encourage further high-level litigation.” Keoghs’ Pugh adds that the principle could also be applied to industrial deafness claims, generating more historical liabilities for current mainstream insurers.

There are some crumbs of comfort for mainstream insurers and claimants, however. The lack of clarity surrounding the decision means that the judgment will almost certainly go to appeal at the Supreme Court.

Beachcroft partner and head of the disease group Paula Jefferson says: “The decision appears to create more uncertainty and confusion over EL policies at a time when there needs to be greater clarity.

“To some extent, the court felt uncomfortable that it was bound by previous Court of Appeal decisions, and the best thing that can happen is that the Supreme Court has the chance to create that clarity.”

However, loss adjuster Garwyn points out that if the Supreme Court arrives at a similarly fragmented judgment, the ultimate decision on asbestos rulings has to be made by the government. Garwyn’s regional and technical director of specialist lines Neil Hackett says: “The only certainty of the Court of Appeal judgment is that it will fall upon the Supreme Court to adjudicate.

“If it is not to the satisfaction of all stakeholders, the government is likely to legislate, especially if claimants are seen to suffer the consequences of this battle.”

For now, however, it seems that there is little insurers can do except wait and mark a date in their diaries for the Supreme Court decision. IT