How do employers currently stand in relation to their insurers, and what should they do next?
I. Executive Summary
A recent Supreme Court decision means that employers may be entitled to a full indemnity from employers liability insurance (“EL”) underwriters in respect of employers’ past or prospective payments to employees with mesothelioma, regardless of –
- the length of time the EL underwriter insured the employer, or
- whether an EL underwriter has already contributed in part to a settlement made with an employee (“Past Payment”).
Employers should as a matter of urgency –
- check their EL policies to see if there are any policy terms which address rights and obligations based on the length of time the underwriter insured the employer;
- if employers do not have polices to hand, they should contact their brokers, failing which their underwriters, to obtain copies;
- if the underwriters are unknown, the insurers’ regulator, the Financial Services Authority, and trade bodies – in particular the Association of British Insurers – have put processes in place to enable employers and employees to identify EL underwriters; and
consider the –
- prospects for seeking a further or full indemnity, including by checking the terms on which an underwriter may have contributed to a Past Settlement, and when the Past Settlement was agreed, and
- economics of joining with other employers to seek indemnities, as explained in section IV below.
II. How do employers currently stand?
Employers across a range of industries – in particular, those with assets which have required work on fire retardant materials in the last 50 years, such as in the construction, engineering and manufacturing sectors – have faced and continue to face substantial liabilities in from mesothelioma-related claims from current or former employees.
The latency period for mesothelioma, from exposure to asbestos to the onset of the disease, can be some 40 years or so. Mesothelioma deaths continue to increase in Great Britain: from 153 in 1968 to 2,321 in 2009. Some predictions are that annual deaths will increase to a peak of over 2,000 in about 2016 before declining. The disease involves painful, debilitating and distressing symptoms, and usually proves fatal. Damages awards in respect of mesothelioma (“Mesothelioma Damages”) can be substantial – often in six-figures.
In relation to employer’s liabilities, putting EL cover to one side for a moment, the current state of the law can be summarised as follows:
if an employee only had one employer, and that employer alone negligently exposed the employee to asbestos fibres with the outcome that there was a material increase in the risk that the employee would develop mesothelioma (“Mesothelioma Risk Increase” – “MRI”), then that employer will be wholly liable in respect of the resulting mesothelioma;
- if an employee had more than one employer, but only one of those employers negligently caused MRI (the “Relevant Employer”), then that Relevant Employer will be wholly liable in respect of the resulting mesothelioma;
however, if an employee had more than one employer, and more than one Relevant Employer, then any and all of Relevant Employers will be jointly and severally liable in respect of the resulting mesothelioma;
- the period or periods during which an employee was exposed to asbestos by all Relevant Employers is referred to below as the “Total Exposure Period”,
- the period during which any one Relevant Employer caused MRI is referred to below as the “Liability Period”, which could be a small or large proportion of the Exposure Period.
In other words, the liability of one Relevant Employer in respect of any Liability Period can expand to 100% liability for 100% of the Mesothelioma Damages relating to 100% the Exposure Period.
The rule as to the joint and several liability for Mesothelioma Damages was developed in the cases of Fairchild¹ and Barker² and codified by the Compensation Act 2006, section 3 (the “Fairchild/Barker Rule”).
The position in relation to EL cover in respect of mesothelioma was considered in the recent case of BAI (Run Off) Limited (In Scheme of Arrangement) v Durham³. The Supreme Court ruled on two questions as to allocating liability to EL insurers on cover at the time of either –
- negligent cause of MRI or
- the onset of the employee’s mesothelioma.
In respect of certain EL policies which were worded to provide an indemnity against liability in respect of injury or disease “sustained” or “contracted” during the period of cover,
one question was whether the “trigger” point for cover was, either –
- the exposure to asbestos or
- the onset of the disease? (the “Trigger Issue”); and
- the other question was whether the Fairchild/Barker Rule applies when construing the EL policy as to whether an employee “sustained” or “contracted” mesothelioma during a particular policy period (the “Exposure Issue”).
In short, the Court ruled as follows:
1. The Trigger Issue
- Mesothelioma is “sustained” or “contracted” at the moment the employee is negligently exposed to MRI.
- The insurers on cover at the time of exposure, rather than the insurers on cover at the onset of the disease or subsequently, are liable to indemnify the employer.
2. The Exposure Issue
- The purpose of the EL policies was to insure the employers against liability to their employees.
- Whether a disease can be said to be “sustained” or “contracted” during the EL policy period must be interpreted sufficiently flexibly to give effect to the Fairchild/Barker Rule.
III. The Broader consequences of judgment
As explained above, any one Liability Period can make a Relevant Employer liable in respect of 100% of the Mesothelioma Damages relating to 100% of the Exposure Period.
However, insurers of Relevant Employers during Liability Periods (“Relevant Insurers”) have taken the position that any one Relevant Insurer can only be liable pro rata for the period of time during which that Relevant Insurer insured the Relevant Employer during the Liability Period (the “Time on Risk” or “TOR Argument”). For example:
- Employer X employed Employee Y;
- the Liability Period as between X and Y was 10 years;
- Relevant Insurer A insured X for 5 years of the Liability Period (ie half the time); Relevant Insurer B insured X for the other 5 years;
- The Mesothelioma Damages are £100,000; X is liable for this amount to Y.
- Based on the Time on Risk Argument, A and B are liable for £50,000 each to X.
The Time on Risk Argument raises no issues for employers provided that all Relevant Insurers are able to pay. However, during the lengthy time periods involved in mesothelioma onset and claims development, a number of EL insurers from the 1960s through to the 1990s have become insolvent or may now be at risk of becoming insolvent. This has left, and may yet leave, Relevant Employers having to bear substantial and unforeseen levels of Mesothelioma Damages themselves in settling claims (“Net Settlement Contribution”). For example:
- If Relevant Insurer B in the above example were insolvent, Relevant Insurer A would continue to accept liability for only £50,000 of the Mesothelioma Damages;
- X would have to pay the other £50,000 itself.
We are aware that a number of Relevant Employers have made Net Settlement Contributions to Past Settlements by reason of EL insurers’ deployment of the TOR Argument. These Relevant Employers, and those who have yet to settle claims for Mesothelioma Damages, need to consider the merits of challenging the TOR Argument. The essence of the challenge is that, in respect of Mesothelioma Damages
- the principle or substance of the Fairchild/Barker Rule should apply to Relevant Insurers commensurately with the application of such rule to those Relevant Employers whom the Relevant Insurers insured; or, in other words,
- a Relevant Employer can and must be fully indemnified by any or all of its Relevant Insurers
(the “Fairchild Insurance Argument”).
IV. What should employers do next?
Deploying the Fairchild Insurance Arguments raises questions of insurance policy terms and construction. Section I above deals with what employers should do.
That the Fairchild Insurance Argument can be successfully deployed can be readily inferred from the leading judgment of Lord Mance in Durham. In respect of the policies in issue in Durham, Lord Mance stated (emphasis added):
“The intention under the present insurances must be taken to have been that they would respond to whatever liability the insured employers might be held to incur within the scope of the risks insured and within the period in respect of which they were insured …
Furthermore, if the common law during or even after the currency of an insurance develops in a manner which increases employers’ liability, compared with previous perceptions as to what the common law was, that is a risk which the insurers must accept, within the limits of the relevant insurance and insurance period.”
A number of Relevant Employers may take the view that while they may have the legal issues on their side, it is not cost-effective to pursue the Fairchild Insurance Argument. Given the number of Mesothelioma Damages claims and awards, and the number and range of businesses affected by them, Relevant Employers should consider the principles of economies of scale (or perhaps ‘safety in numbers’), and the deployment of the processes for pursuing multi-claimant litigation allowed in the Civil Procedure Rules.