Mesothelioma claims - an insurance “black hole” for local authorities?

The number of asbestos-related compensation claims being made in the UK is continuing to rise. Many local authorities are now receiving claims from teachers and pupils which relate to asbestos exposure at schools, as well as claims from maintenance workers who actually worked with asbestos. In this article, Adrian Neale looks at the implications for local authorities of a recent decision on insurance cover for mesothelioma claims.

01/11/2010

The number of asbestos-related compensation claims being made in the UK is continuing to rise. Many local authorities are now receiving claims from teachers and pupils which relate to asbestos exposure at schools, as well as claims from maintenance workers who actually worked with asbestos. In this article, Adrian Neale looks at the implications for local authorities of a recent decision on insurance cover for mesothelioma claims.


Asbestos-related compensation claims can present headaches in terms of insurance coverage, particularly in claims involving the asbestos-related cancer, mesothelioma. There is on average a 30 - 40 year latency period between asbestos exposure and the manifestation of diagnosable symptoms of mesothelioma. Which insurer should deal with a claim for the local authority – is it the insurer on risk at the time of the asbestos exposure, or the insurer at the time when the illness developed?

The issue is an important one from a financial perspective. Mesothelioma is an invariably fatal illness, and the resulting compensation claims frequently involve six-figure sums. It is therefore important for local authorities to be able to ensure that these claims are dealt with by an insurer.

Trigger Litigation case

The long-awaited Court of Appeal judgment on the point – known as the Employers' Liability Insurance Trigger Litigation [2010] EWCA Civ 1096 – has just been handed down. Far from producing clarity, however, the judgment creates great uncertainty for local authorities facing employers’ liability mesothelioma claims. It could also leave a large number of local authorities with significant (and expensive) gaps in their insurance coverage.

The problem is compounded by the fact that there is no standard wording for employers’ liability insurance policies. The majority of policies provide indemnity in claims where the employee’s injury or disease was “caused” during the policy period. The position here is straightforward: mesothelioma is “caused” at the point at which the asbestos fibres are inhaled. The insurer who was providing cover (or, to use the insurance terminology, was “on risk”) at the time of asbestos exposure will therefore provide indemnity, even if they are no longer the employer’s insurer at the time that the claim is made.

“Occurred”

However a minority of policies provided indemnity when injury or illness was “sustained” or “contracted” during the policy period. The Trigger Litigation was supposed to answer the question of when mesothelioma is “sustained” or “contracted”.

The Court of Appeal had in fact already addressed a similar issue, but in the context of public liability policies, in Bolton MBC v Municipal Mutual Insurance [2006] EWCA Civ 50. In that case the local authority’s policy provided cover at the time when an illness or injury “occurred”. The court concluded that mesothelioma “occurred” ten years prior to initial diagnosis of symptoms, based on expert medical evidence, not at the time when the original asbestos exposure took place

Most insurers nevertheless carried on settling employers’ liability asbestos claims if they were the insurer at the time of exposure, regardless of the precise policy wording.

However, four insurers (including Municipal Mutual, historically one of the largest insurers of local authorities) argued that the Bolton decision should also apply to employers’ liability policies which had “sustained” or “contracted” wordings, culminating in the Trigger Litigation.

The three Court of Appeal judges in the Trigger Litigation agreed that “contracted” in an insurance policy means the same as “caused”. In other words, if an insurer with this particular policy wording is on risk at the time when the asbestos exposure occurs, they will have to indemnify the employer. This is in line with previous market practice.

“Sustained”

However there is much less clarity on the solution in relation to the “sustained” wording.

There was a lot of disagreement between the three Appeal Judges. By a 2-1 majority, they decided that mesothelioma is “sustained” at the time when the illness occurs, and not at the time when the asbestos exposure happened. Even these two majority judges disagreed as to what that meant in practice.

One of the judges felt that this policy wording fell foul of the requirement for compulsory employers’ liability insurance imposed by the Employers’ Liability Compulsory Insurance Act 1969 (“ELCI”) on most employers. At the time when the 1969 Act was in force (after 1 January 1972), a “sustained” worded policy should be construed as responding at the time when the exposure occurred, but the insurer would have a right of indemnity from the employer, if the insurer were only being made to pay out because of the operation of ELCI.

The judge went on to say that if, by the time they develop mesothelioma, the claimant is no longer employed by the employer, the later insurer would not have to pay the claim. The other two judges did not agree with this.

Continuing uncertainty

The Court of Appeal decision conveys no finality. For the time being, at least, mesothelioma can be interpreted as being “contracted” at the time of asbestos exposure, and insurers with that type of policy wording should continue to pay claims in the normal way.

Take the example of an authority that had a “sustained” policy at the time an employee was exposed to asbestos in the post-ELCI era, from 1972 onwards:

  • it is one of the judges’ view that the insurer will not have to deal with the claim, as the employee did not become ill during the policy period
  • another judge found that the insurer will pay the employee but obtain a refund from the employer
  • the third judge found the insurer at the time of the exposure should pay.

The lack of common ground between the judges makes it very difficult to make the decision workable in practice.

Switches between insurers

Many local authorities will have been insured with a number of different insurers over the years, with a variety of different policy wordings. If there have been one or more switches between policies with “caused” or “contracted” wordings on the one hand, and “sustained” wordings on the other, there could be expensive gaps in a local authority’s insurance cover.

 If, by the time the employee first became ill, the authority had switched to an insurer with a “caused” policy wording, that insurer will not have to deal with the claim as the asbestos exposure did not occur during their period of cover.

This is far from a theoretical scenario for many local authorities.  As stated earlier, Municipal Mutual insured the majority of local authorities until they stopped writing new business in the early 1990s. Their standard policy wording was frequently on an injury “sustained” basis. 

Conclusions

On the basis of the Court of Appeal judgment, Municipal Mutual were found on two out of three of its policy wordings not to have to pay asbestos claims where the exposure occurred during their period of cover. In the third claim they did have to pay, because the policy had a “contracted” wording.

It is very likely that the Trigger Litigation will be appealed to the Supreme Court, but the outcome of that appeal is not likely to be known for another year. In the meantime, local authorities will have to decide whether they put aside reserves to pay mesothelioma claims themselves, a very tricky decision in the context of the current public sector spending cuts.

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