DISPUTE RESOLUTION review. Insurance and reinsurance disputes LEGAL GUIDE

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1 DISPUTE RESOLUTION 2012 review Insurance and reinsurance disputes LEGAL GUIDE January 2013

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3 HERBERT SMITH FREEHILLS Insurance and Reinsurance 01 Contents page Insurance and reinsurance 01 International Energy Group Ltd v Zurich Insurance plc UK Apportionment of liability for mesothelioma claims under employers' liability policies Standard Life Assurance Limited v Ace European Group (and Ors) Mitigation costs under professional indemnity policies British Waterways v Royal & Sun Alliance plc Commercial Court considers causation issues arising out of common wording Ministry of Defence v AB and other Judgment of the Supreme Court on limitation issues Clothing Management Technology v Beazley Actual Total Loss and Constructive Total Loss considered in non-marine context BAI (Run Off) Limited v Durham Supreme Court delivers judgment in the Employers' Liability Trigger Litigation European Group Ltd and Others v Chartis Insurance UK Ltd Proximate cause and inherent vice Update on the Law Commissions' Review of Insurance Contract Law Fairclough Homes Ltd v Summers Power to strike out exaggerated claim will rarely be exercised Faraday Reinsurance Co Limited v Howden North America Inc & Anor Court of Appeal rules on service out of the jurisdiction in support of negative declaratory proceedings Brit Inns Limited & Ors v BDW Trading Limited The difficulties insurers can face when exercising subrogation rights against third parties Amlin Corporate Member Limited v Oriental Assurance Corp Court of Appeal confirms that English reinsurance proceedings should not be stayed pending the outcome of foreign proceedings in respect of the underlying insurance claims Genesis Housing Association Limited v Liberty Syndicate Management Limited Legality of basis clauses Howden North America Inc & Anor v ACE European Group Ltd & Ors Court of Appeal rules again on service out of the jurisdiction in support of negative declaratory proceedings but this time sets aside the order allowing service...34

4 02 Insurance and Reinsurance HERBERT SMITH FREEHILLS contents page Insurance and reinsurance (continued) 15 Standard Life Assurance Limited v Ace European Group (and Ors) Mitigation costs under professional indemnity policies...35 Professional negligence 16 Shepherd Construction Limited v Pinsent Masons LLP High court clarifies the scope of a solicitor's retainer Rubenstein v HSBC Bank PLC Court of Appeal overturns finding that customer's investment loss was too remote Pegasus v Ernst & Young Assignments and the problems of "legal black holes" General interest 19 West Tankers Inc v Allianz SPA & Generali Assicurazione Generali SPA Court of Appeal affirms West Tankers pro-arbitration decision endorsing an arbitral award in the face of a possible inconsistent Italian judgment Sulamerica v Enesa Engenharia The law of the arbitration agreement which law applies and why does it matter? Odedra v Ball Court can require disclosure of privileged report even where no change of expert Simmons v Castle Court of Appeal confirms 10% increase in general damages from April Stannard v Gore No strict liability for accidental fire damage Mir Steel UK Ltd v Morris Court of Appeal confirms modern approach to contractual construction Lomas v JFB Firth Rixson Inc. The ISDA Master Agreement Turville Heath Inc v Chartis Insurance UK Ltd Arbitration or ADR?...57

5 HERBERT SMITH FREEHILLS Insurance and Reinsurance 03 page Regulatory 27 FSA consults on overhauled client money rules for insurance intermediaries PRA and FCA regimes for Approved Persons Council Regulation (EU) 267/2012 EU sanctions against Iran - extended for insurers, reinsurers and brokers PRIPs: Proposed Regulation on pre-sale disclosures for Packaged Retail Investment Products interaction with RDR and MiFID II European Commission proposes legislation on insurance sales Solvency II: FSA's proposals for with-profits business Personal injury/health and safety 33 Chandler v Cape Plc When does a parent assume a duty of care to employees of its subsidiary? HSE implements cost recovery scheme HSE launches consultation on changes to simplify RIDDOR...88 Alternative dispute resolution 36 Swain Mason v Mills & Reeve (a firm) Court of Appeal defends successful party's refusal to mediate Ghaith v Indesit Court of Appeal mediation pilot endorsed in Gaith v Indesit Case Study: settlement of mass claims arising out of World Trade Center litigation ADS Aerospace Limited v EMS Global Tracking Limited English High Court defends successful party's refusal to mediate and declines to impose costs sanctions Lidl UK GmbH v R G Carter Colchester Ltd Enforcement and severability of adjudicator's decision Vertase v Squibb High Court reviews temporary binding effect of adjudicator's decision...95

6 04 HERBERT SMITH FREEHILLS Preface This is the first Annual Review produced by the newly merged Herbert Smith Freehills firm and we hope you enjoy the new format. So far as content is concerned, it remains a collection of our e-bulletins, briefings and notes produced over the last twelve months on key decisions of relevance to our clients and contacts with an interest in insurance and reinsurance law and practice. Once again the courts have been grappling with claims arising from mesothelioma. The Supreme Court decision in the EL Trigger Litigation finally provides welcome clarity on the question of when cover under an EL policy is triggered and there is now in place a legal framework for the bringing of claims by mesothelioma victims against their employers and for the transmission of that liability to the employers EL insurers. It remains to be seen whether the position under PL policies and, in particular, the Bolton decision becomes the next focus of attention. Looking forward to 2013, of key interest for the insurance industry and businesses, will be the work of the Law Commissions who, in their review of insurance contract law, look to produce a final report and draft bill on business insurance at the end of the year. Whilst the indication from the Law Commissions is that there will not be quite as extensive reform as first proposed by them, the reforms will still be significant particularly in relation to the duty of good faith and warranties. Indications at the time of going to press are that there is significant industry backing for the proposals. This makes use of the uncontroversial bills procedure possible, with a good prospect of reforms being enacted in 2015 or We hope that you find the Annual Review of interest. Should you need any further hard copies (soft copies are available on the Herbert Smith Freehills website) then please contact any member of the insurance and reinsurance disputes team. David Reston david.reston@hsf.com Reinsurance law is, again, bereft of key decisions with the market preference remaining for disputes to be decided by arbitration. However, the Faraday litigation (which essentially arose because of the difference in approach between English and American courts on the question of liability of insurers to respond to asbestos claims) emphasises the continuing willingness of the English courts to retain jurisdiction over disputes in relation to the construction of policies written in the London market and governed by English law. Considerable progress has been made during 2012 towards establishing a new framework for financial services regulation in the UK. This makes the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) responsible for authorising and supervising firms, in place of the FSA. The new structure will take effect from 1 April 2013 leaving much to be done over the next few months. By way of contrast, delays in finalising key changes to the Solvency II Directive mean that the regime is now not expected to come into force until 2015, at the earliest; a 2016 start date is also widely predicted. Despite this, Solvency II developments remained of critical importance to insurers and reinsurers during 2012, including the FSA s second consultation on implementation of the new regime. Other European initiatives launched in 2012 that are relevant to the distribution of insurance products are the proposed revision of the Insurance Mediation Directive (known as IMD2 ) and proposals in relation to Packaged Retail Investment Products (PRIPs).

7 HERBERT SMITH FREEHILLS Insurance and Reinsurance 05 Apportionment of liability for mesothelioma claims under employers' liability policies Mr Justice Cooke's judgment in International Energy Group Limited v Zurich Insurance PLC UK, although governed by Guernsey law, has implications for the apportionment of liability for mesothelioma claims under employers' liability ("EL") policies as a matter of English law. Case reference and judgment date International Energy Group Limited v Zurich Insurance Plc UK [2012] EWHC 69 (Comm) 24 January 2012 Insurance and Reinsurance Background The Claimant was responsible for all of the liabilities of Guernsey Gas Light Company Ltd (referred to collectively below as the "insured"). It sought an indemnity under EL policies issued by Midland Assurance Ltd, whose liabilities had been succeeded to by Zurich (the "insurer") covering a 6 year period from 31 December 1982 to 31 December The insured employed Mr Carré for 27 years from 13 November 1961 to 31 December Throughout the entire 27 year period of employment (which included the 6 year policy period) Mr Carré was negligently exposed to asbestos by the insured. He subsequently contracted and died of mesothelioma. Mr Carré's claim was settled by the insured who then sought to recover the settlement sum and its own costs from the insurer. The insured's aggregate outlay totalled 278, The sole issue in dispute was whether the insured was entitled to an indemnity from the insurer amounting to the entirety of its outlay ( 278,451.60) or whether it was only entitled to a proportion of this sum, corresponding to the proportion which the insurer's 6 year policy period bore to the full 27 year period of Mr Carré's exposure to asbestos by the insured. The insured's liability to Mr Carré was governed by the law of Guernsey where the UK Compensation Act 2006 (the "Compensation Act") did not apply. The insurer argued that this was crucial, since the effect of the Compensation Act was to reverse the decision of the House of Lords in Barker v Corus UK Ltd, with the result that the position in Guernsey was governed by the decision in Barker. Decision In reaching his decision that the liability of the insurer was to be assessed on the basis of its responsibility for the insured's loss on a "time on risk" basis, Cooke J analysed the rulings in Fairchild v Glenhaven Funeral Services Ltd and Barker and considered the impact of the Compensation Act. In Fairchild the House of Lords held that an individual who had been negligently exposed to asbestos by an employer should be able to recover in full from that employer, irrespective of his inability to show that his mesothelioma was caused during the relevant period of employment. Liability was imposed on the basis that the employer in question had negligently exposed its employee to asbestos and to the risk of contracting mesothelioma and this was regarded as a sufficient degree of causal connection between the breach of duty and the damage to give rise to tortious liability. The majority of the House of Lords in Barker made clear that the ruling in Fairchild should be regarded as creating a new form of special tortious liability in relation to mesothelioma, namely the creation of a material risk of mesothelioma (as opposed to liability for causing the disease). On this basis, the House held that each tortious exposure which gave rise to a material increase in the risk of contracting mesothelioma generated a several liability for a proportion of the full compensation. The House was of the view that the most practicable apportionment would be based on the length of exposure for which each defendant was responsible, but that allowance would also be made for the intensity of exposure and type of asbestos. In the present case, it was accepted that there was uniformity of exposure throughout the whole period of Mr Carré's employment. The common law position as to the apportionment of damage, established in Barker, was reversed by section 3 of the Compensation Act. Section 3 provides that, where there are two or more employers who are liable in tort for a victim contracting mesothelioma as a result of negligently exposing them to asbestos, they will be jointly and severally liable to make full compensation to the victim. However, in view of the fact that the Compensation Act is inapplicable to Guernsey, it was the common law principles derived from the cases referred to above that had to be applied. On this basis, Cooke J found that the liability of the insured to Mr Carré incurred in any policy year was a proportionate share of the total damages suffered by reference to the relevant time of exposure during the policy year compared with the total exposure during the period of employment. Accordingly, Cooke J ruled that the insurer was only liable for the insured's loss on a "time on risk" basis. Comment In circumstances where the Compensation Act does not apply, the common law position expressed in Barker prevails with the result that an insurer's liability may be limited to its proportionate share of the insured employer's total liability, based on time on risk. Cooke J acknowledged that the result was unfortunate from a victim's perspective, not least in cases where the employer is insolvent, since the victim's recovery from any insurer under the Third Parties (Rights against Insurers) Act 1930 would be limited to the insurer's proportionate share. The question arises, however, as to how the case would have been decided had the liabilities been governed by English law (to which the Compensation Act applies) and, more specifically, whether the insured would have been entitled to recover its entire liability under any particular year or years of its EL cover. Cooke J's obiter comments

8 Insurance and Reinsurance 06 Insurance and Reinsurance Apportionment of liability for mesothelioma claims under employers' liability policies suggest that he considered that the insured would be so entitled. He stated in his conclusion that "under Fairchild principles and those which prevail following the Compensation Act in the jurisdictions affected by that statute, the insured's claim [that it was entitled to recover the entirety of its outlay from the insurer] would be unanswerable". In the course of his judgment, Cooke J cited with apparent approval the ruling of Eady J in Phillips v Syndicate 992 Gunner. In this case an attempt to limit an insurer's liability in respect of a mesothelioma claim to a proportion corresponding to the insurer's time on risk failed. Cooke J also dismissed the insurer's alternative argument that, if its primary submission failed, it would be entitled, as a matter of equity, to a contribution from the insured in respect of the periods during which Mr Carré had been exposed to asbestos that were not the subject of insurance with the insurer. Cooke J held that, on the ordinary principles of insurance law, there was no basis upon which an insurer could obtain a contribution from an insured in respect of a liability that the insurer was bound to pay under the terms of the policy. For completeness it is to be noted that the majority of the Supreme Court in the EL Trigger Litigation has since departed from the reasoning in Barker as to the basis of liability in tort for mesothelioma claims. Lord Mance held that it was "over simple" to regard the rule in Fairchild as imposing liability for the creation of the risk of mesothelioma. Instead the majority held that the rule imposed a weak or broad causal link to exposure which "may but cannot be shown on the ordinary balance of probabilities to have played a role in the actual occurrence of the disease". Finally, we understand that the decision is currently the subject of an appeal. HERBERT SMITH FREEHILLS Additional references Barker v Corus UK Ltd [2006] 2 AC 572 Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22 Phillips v Syndicate 992 Gunner [2003] EWHC 1084 (Comm) BAI (Run Off) Limited v Durham [2012] UKSC 14 Compensation Act 2006 Third Parties (Rights Against Insurers) Act 1930

9 HERBERT SMITH FREEHILLS Insurance and Reinsurance 07 Mitigation costs under professional indemnity policies In Standard Life Assurance Limited v Ace European Group (and Ors), Mr Justice Eder considered the recoverability of mitigation costs under a professional liability policy and, in particular, whether the insured's purpose in making remediation payments was relevant. He held that the insured's motive was "extraneous and irrelevant" provided the payments were made in taking action to avoid or reduce a third party claim which was of a type that would have been covered under the policy. Note: Please see our later article on the decision of the Court of Appeal. Case reference and judgment date Standard Life Assurance Limited v Ace European Group (and Ors) [2012] EWHC 104 (Comm) 1 February 2012 Insurance and Reinsurance Background The dispute concerned a claim for approximately 100 million by Standard Life Assurance Limited ("SLAL") against its professional indemnity insurers (the "Insurers"). SLAL operated a 2.2 billion pension fund (the "Fund"). The Fund had been marketed as a temporary home for short term funds, with some literature referring to it as being invested in cash. The Fund's assets included a large proportion of asset backed securities. During the credit crunch, asset backed securities became increasingly illiquid, making valuation more and more subjective. As a result, with effect from 14 January 2009, SLAL decided to switch to a different source of prices, resulting in a one-off fall in value in units in the Fund of around 4.8%. SLAL took the view that many of its customers were not fully aware of the nature of the fund and therefore may not have anticipated such a dramatic change in a single day. Following an influx of complaints, SLAL concluded that some 64% (by value) of its customers (worth approximately 124 million) would have actionable claims against it. Accordingly, on 11 February 2009 SLAL announced that it would reverse the effect of the fall by injecting cash into the Fund and compensating those customers that had left since the price reduction. It also made payments to customers who pursued claims for losses exceeding the 4.8% fall. Together, these payments amounted to 106,647, (the "Remediation Payments"). SLAL subsequently sought to recover the Remediation Payments from its Insurers under its professional indemnity insurance which consisted of a primary policy and 3 excess policies (the "Policy") on the basis that the Remediation Payments constituted Mitigation Costs. The Policy was subject to a 10 million deductible ("each and every claim/loss including costs and expenses"). Decision Insurers denied coverage principally on the grounds that the Remediation Payments did not fall within the meaning of "Mitigation Costs" under the Policy as the payments were made, in truth, for the purpose of avoiding or reducing potential "brand damage". Insurers also contended that the actual and potential claims against SLAL could not be aggregated. Mitigation Costs Mitigation Costs were defined under the Policy as: "any payment of loss, costs or expenses reasonably and necessarily incurred by the Assured in taking action to avoid a third party claim or to reduce a third party claim (or to avoid or reduce a third party claim which may arise from a fact, circumstance or event) of a type which would have been covered under this Policy " Eder J considered the scope and effect of the clause which he said had four main elements, namely: (a) a payment of loss, costs or expenses; (b) reasonably and necessarily incurred by SLAL; (c) in taking action to avoid or to reduce third party claim/claims; (d) of a type that would have been covered under the Policy. We deal with each in turn below. " a payment of loss, costs or expenses " Eder J held that the Remediation Payments were plainly a "cost" and/or "payment for loss" falling within the definition of Mitigation Costs under the Policy. " reasonably and necessarily incurred " Insurers submitted that payments must have been reasonably incurred for the purpose of avoiding or reducing actual or potential third party claims. What is reasonable must not be viewed from the sole perspective of the insured but rather from the mutual perspective of insured and insurer. Further, it must be shown that the insured had to make payment to avoid or reduce potential third party claims.

10 Insurance and Reinsurance 08 Insurance and Reinsurance Mitigation costs under professional indemnity policies Eder J held that the introduction of the concept of purpose here was confusing. It was also confusing to take into account the mutual perspective of insured and insurer. Whether an insured acted reasonably is an objective enquiry; there is no justification for any further requirement. Eder J accepted Insurers' submission that the term "necessary" set a high threshold, albeit one which must have appropriate regard to the realities. " in taking action to avoid or to reduce " Insurers submitted that this clause should be construed to mean action that is taken for the purpose, in the sense of motive, of avoiding or reducing claims. Accordingly, they argued the payments were not Mitigation Costs, as they were made with the dominant purpose of reducing brand damage. Eder J rejected this argument. He found that the correct approach was to look at the intended effect of the payment, not the company's motive. He held that "[p]rovided the settlement payment was made in taking action to avoid or to reduce the third party claim which was of a type that would have been covered under the Policy, the insured's motive in making the payment is extraneous and irrelevant." Insurers submitted, in the alternative, that the amount of any indemnity which SLAL was entitled should be reduced in accordance with the principles of apportionment found typically within policies of marine insurance or in the context of under-insurance. In such cases, there is an established principle that where a payment is made for competing purposes, one insured and one uninsured, then an apportionment should be made between the respective insured and uninsured interests. Eder J was "at the very least, very doubtful" whether there is any general principle of apportionment in a liability policy. In any event, whether mitigation costs can or should be apportioned, in circumstances where there are two objectives motivating the action of the insured, would depend on the wording of the policy. Eder J found that the wording of the Policy in this case pointed against any requirement of apportionment. There was no limiting language in the clause such as "solely" or "exclusively" to confine the application of mitigation costs to action taken only to reduce or avoid third party claims. He noted: "it does not seem to me either sound in principle or desirable that the assured should be penalised if it might be said that those costs were also incurred to obtain some further or additional benefit". " of a type that would have been covered under the Policy " Insurers submitted that, in making the blanket cash injection, SLAL provided a windfall to those customers who had received adequate marketing literature and, consequently, SLAL had made a payment where it had no legal liability. Eder J accepted that there was no legal necessity to undertake the course chosen by SLAL and there was a possible alternative option, namely responding to claims on a case-by-case basis. Further, Eder J agreed with Insurers that the cash injection was incurred, in part, to reduce "brand damage". However, Eder J accepted that SLAL had HERBERT SMITH FREEHILLS reasonably concluded that the number and value of third party claims would be substantially reduced if the 4.8% fall was reversed, and that this option would be less costly than dealing with cases individually. Eder J held in order to qualify as Mitigation Costs the relevant payment does not have to be made to discharge a particular liability to a particular third party claimant: "In my view, as stipulated in the definition, the requirement is simply that the payment is reasonably and necessarily incurred in taking action to avoid or to reduce one or more third party claims of the relevant type". Aggregation The Policy contained a very wide aggregation clause: "All claims or series of claims (whether by one or more than one claimant) arising from or in connection with or attributable to any one act, error, omission or originating cause or source, or the dishonesty of any one person or group of persons acting together, shall be considered to be a single third party claim for the purposes of the application of the Deductible." Insurers said that SLAL had not properly identified the originating cause or source to which all the claims were attributable. Further, that there was a wide variety of different complaints such as mismanagement, poor investment performance or mispricing. In addition, different misrepresentations were made to different customers and in different ways. Eder J said that it was difficult to envisage a more widely drawn form of aggregation clause. He considered that: "[t]he phrase in connection with is extremely broad and indicates that it is not even necessary to show a direct causal relationship between the claims and the state of affairs identified as their originating cause or source, and that some form of connection between the claims and the unifying factor is all that is required." Thus, Eder J held that all the actual and potential claims could be aggregated; in every case the originating cause of the complaint was that SLAL marketed the Fund as a safer investment than was in fact the case. Accordingly, Eder J held that SLAL were entitled to recover the Remediation Payments subject to a single deductible of 10 million. Insurers have been given leave to appeal. Comment This case should provide some comfort for insureds who take mitigation steps in a crisis to reduce the risk of third party claims but also to protect their brand image. Eder J was mindful of the fact that employees at SLAL were operating at "fever pitch" when the decision was made and "in that context, it is unsurprising that different individuals would have different perspectives and express different views" regarding the purpose of the decision. For that reason, Eder J concluded that motive was an unhelpful criterion for assessing whether the Policy should respond. It remains to be seen whether insurers will seek to revise Mitigation Costs wordings to achieve apportionment between payments made for competing purposes or include limiting language such as "solely" or "exclusively"

11 HERBERT SMITH FREEHILLS Insurance and Reinsurance 09 Commercial Court considers causation issues arising out of common wording In British Waterways v Royal & Sun Alliance plc, Burton J considered the causal requirement of the words arising out of in the context of an exclusion clause in an insurance policy. Considering apparently conflicting lines of authority, he held that for an exclusion in respect of liability arising out of specified matters to be effective, such matters must have been the proximate cause of the loss. The judgment provides useful guidance in establishing the likely approach of the courts to the construction of this commonly used expression in policy wordings. Background The Claimant, a public corporation established by statute, was responsible for maintenance of canal towpaths. It engaged two men in business as Mark Wells Fencing, independent contractors, to carry out hedge cutting along the Kennet and Avon Canal. In carrying out the works, the men used a tractor belonging to the Claimant. In the course of returning to the road, having trimmed the hedges, the tractor was driven too close to the edge of the bank, which collapsed. The tractor fell into the canal and the two men were tragically killed. The Health and Safety Executive formed the view that the Claimant had committed an offence contrary to s. 33(1)(a) of the Health and Safety at Work Act 1974, which required that the Claimant conduct its undertaking so far as reasonably practicable in such a way as to avoid risks to the health and safety of its workers. The Claimant pleaded guilty to the offence before the Swindon Crown Court and was fined. Subsequently, the estates and dependents of the two men (the Wells Parties ) brought claims against the Claimant. on the Tool Exclusion to avoid liability? If the Tool Exclusion was engaged, was the exception in respect of the requirements of "any road traffic legislation" operative? Decision Legal liability Case reference and judgment date British Waterways v Royal & Sun Alliance plc [2012] EWHC 460 (Comm) 7 March 2012 The Claimant alleged that it was liable to the Wells Parties for a breach of the Provision and Use of Work Equipment Regulations 1998 or in common law negligence, in respect of its provision of the tractor to Wells without adequate supervision, instruction or warning as to the risks of the bank collapsing. The Court accepted that the starting point for analysis of the Claimant's liability was the guilty verdict in the previous criminal prosecution. Pursuant to section 11 of the Civil Evidence Act 1968 that verdict (even on the Claimant's guilty plea) established a presumption that they had committed the offence in question. On the evidence before the Court, the judge held that the Defendant insurers had not rebutted that presumption, indeed, the evidence pointed toward liability. Accordingly, the Claimant established that it was legally liable to the Wells Parties. Insurance and Reinsurance The Claimant settled the Wells Parties claims and sought to recover the settlement payments from the Defendant, its motor fleet insurer. The Defendant insurers denied liability under the policy. The policy covered legal liability incurred by the Claimant in respect of accidental death or bodily injury to any person in connection with the use of insured vehicles but contained an exclusion in the following terms: The Insurers shall not be liable for liability arising out of the operation as a tool of the Insured Vehicle or attached plant except as required by any road traffic legislation (the Tool Exclusion ) There were essentially four issues before the Court: Was the Claimant legally liable to the Wells Parties? If so, did the policy cover the liability? If there was cover under the policy, could the Defendant insurers rely Cover under the policy Whether there was cover under the policy was primarily a matter of the construction of the policy insuring clause in accordance with the usual principles. The judge found that the liability (and the deaths of the contractors) had arisen in connection with the use of the vehicle, and thus fell within the scope of cover provided by the policy. In so holding, the judge rejected the Defendant insurers' submission that the policy insuring clause should be construed in accordance with the authorities on the Road Traffic Act 1988 so as to exclude liability to the driver or a user of the vehicle. The Tool Exclusion The Court found that, as a matter of fact, the accident had occurred whilst the tractor was being reversed along the towpath (which was too narrow for the tractor to turn around) so as to return to the road after the

12 insurance and reinsurance 10 Insurance and Reinsurance Commercial Court considers causation issues arising out of common wording conclusion of the hedge trimming. The Defendant insurers contended that, notwithstanding this finding, the Tool Exclusion was applicable on the basis that either (1) even if the deaths of the contractors did not arise out of the use of the tractor as a tool, the liability of the Claimant did arise out of such use: i.e. the Claimant failed properly to supervise the operation of the tractor as a tool; or (2) the words arising out of were sufficiently wide to cover the accident, notwithstanding that the hedge cutting had been completed. The Court was not persuaded by the Defendant s first submission, holding that the Claimant s liability to the Wells Parties, founded as it was in tort, arose only on injury or loss, and not on any antecedent breach by the Claimant of its statutory or common law duty. The actual operation of the tractor which caused the deaths of the contractors was therefore the relevant criterion. On the Defendant s second submission, the Court considered in detail the authorities as to the meaning of the words arising out of in the context of a policy of insurance. Burton J referred to the cases of Coxe v Employers Liability Insurance Corpn and The Evaggelos TH, in which the Court had held that the words should be construed as relating to the proximate cause of the loss in question. This approach was also endorsed by two Scottish decisions, Bell v Lothiansure and John Drew Russell (Transport) v (First) Heath Collins Halden (Scotland). However, a different approach was taken by the Court of Appeal in Dunthorne v Bentley, which concerned the interpretation of the requirements of section 145(3)(a) of the Road Traffic Act 1988 (which required motor vehicle users to have in place insurance covering death or injury caused by, or arising out of, the use of a vehicle on a road ). Referring to Australian authority, the Court of Appeal had accepted that the words arising out of contemplated a more remote consequence than the words caused by. The wider concept implied by the words arising out of accordingly embraced the less immediate results of the underlying cause, although a causal connection of some degree was still required. A similar approach was followed by Christopher Clarke J in Beazley Underwriting v Travelers. Having reviewed the relevant authorities, he held that in the context of exclusion provisions in an indemnity deed the words arising out of did not relate exclusively to the proximate cause of loss and a lesser causal connection would be allowed. He held, however, that a relatively strong degree of causal connection would nevertheless be required to establish liability. Burton J s view was that the review of the authorities did not present him with a clear answer to the degree of causal connection required between the use of the tractor as a tool and the deaths of the contractors. He considered that whilst on one view he might strictly be bound by the decision in Dunthorne, the Court of Appeal had not been referred to either the Coxe or Evaggelos cases. It appears that Burton J was not persuaded by the halfway house position adopted in Beazley. Accordingly, he held that (giving particular consideration to the Scottish authorities), at least where a policy exclusion was under consideration, the more stringent approach to causation was appropriate and the exclusion would only be established where the excluded matters were the proximate cause of the loss. Burton J found that the proximate cause HERBERT SMITH FREEHILLS of the tractor falling into the canal was it being reversed too close to a vulnerable part of the bank. Accordingly his view was that the deaths, and the liability for the deaths: arose out of the collapse of the bank when, after completing that phase of the operation, the Tractor was being reversed. The Defendant accordingly does not establish the Tool Exclusion. The road traffic legislation exception Given that the Tool Exclusion was engaged, Burton J briefly considered the scope of the exception in respect of "any road traffic legislation" which he took as referring to the requirement under section 145(3)(a) of the Road Traffic Act 1988 that a motor insurance policy cover liability incurred in respect of death, bodily injury or personal damage to property caused by the use of the vehicle on the road or other public place. It was common ground between the parties that this requirement did not extend to covering the driver or any user (or joint user) of the vehicle. On the facts, the judge held that the two men were acting as the driver and a joint user of the vehicle at the time of the accident, and accordingly the exception did not apply. Comment This decision is of particular interest in its attempt to resolve the differing lines of authority on the meaning of the phrase arising out of in an insurance context. Where the wording appears without further gloss, particularly when considering policy exclusions, it is likely that a restrictive interpretation will be adopted, requiring a stronger causal connection between the excepted matter and the loss. However, anticipating the possible wider consequences of his finding, Burton J emphasised the importance of the context in which the wording appears, stating: I have the inevitable feeling that a court may in fact have a different approach to concluding whether there is cover for an event from where the court is being asked to conclude that an insurer can exclude cover, even though the words the court is considering may be identical. It may therefore be that the Court will indeed adopt a different approach when considering the causal connection required by the words "arising from" in the context of clauses other than exclusion clauses. Additional references Coxe v Employers Liability Insurance Corpn [1916] 2 KB 629 The Evaggelos TH [1971] 2 Lloyd s Rep 200 Bell v Lothiansure [1993] SLT 431 John Drew Russell (Transport) v (First) Heath Collins Halden (Scotland) [1996] CLC 423 Dunthorne v Bentley [1996] RTR 428 Beazley Underwriting v Travelers [2011] EWHC 1520 (Comm) Health and Safety at Work Act 1974 Provision and Use of Work Equipment Regulations 1998 Civil Evidence Act 1968 Road Traffic Act 1988

13 HERBERT SMITH FREEHILLS Insurance and Reinsurance 11 Judgment of the Supreme Court on limitation issues The Supreme Court in the case of Ministry of Defence v AB and others considered a number of questions concerning the law of limitation; the central question being the interpretation of knowledge for the purpose of sections 11 and 14 of the Limitation Act 1980 (the Act ). Though the facts of the case were somewhat unusual the judgment is significant not only for the law of personal injury, but for any tortious claim in which the state of a claimant s knowledge under the Act is a live issue. Background The case concerned group litigation brought by a number of former servicemen (the veterans ) who suffered from a range of conditions including cancer and infertility. The veterans claimed that their conditions were the result of their alleged exposure to radiation during nuclear weapon testing carried out by the Ministry of Defence (the MOD ) in the Pacific between 1952 and 1958 (the Pacific Tests ). Proceedings were commenced in 2006 and ten cases were selected to be tried as lead cases. Mr Justice Foskett, sitting in the Queen s Bench Division, heard limitation as a preliminary issue in a hearing lasting ten days and in which a considerable volume of factual evidence was put forward by both sides. In this litigation, the particular issue for the courts to consider was whether insurers under a number of policies of EL insurance ( the Insurers ) were liable to indemnify the employers and estates of various employees with mesothelioma. The relevant policies provided cover by reference to a specific period, usually of a year, during which the employees had been exposed to asbestos. In each case, however, the specific period had long expired at the time the disease manifested itself. As to the cover itself, the policies provided an indemnity to employers in respect of injury or disease which was sustained or contracted by their employees during the period of the policy. First instance decision At first instance, Burton J found in favour of the claimants, concluding that the insurances all responded on an exposure basis. Accordingly, the date on which the injury was sustained or contracted was to be interpreted as meaning the period of exposure. The judge considered this finding to be consistent with the commercial purpose of EL insurance which was to compensate employees for losses they had suffered as a result of their employer s negligence. As to the effect of Bolton, Burton J felt able to construe the word sustained in a different manner to occurred primarily because, in his view, a manifestation-based analysis gave rise to difficulties in respect of ex-employees, who would be unable to recover from their employer after their employment had ended. High Court decision Case reference and judgment date Ministry of Defence v AB and others [2012] UKSC 9 14 March 2012 The MOD argued that each of the ten claims was statute-barred on the basis that the veterans possessed, more than three years prior to issuing proceedings, the knowledge of the necessary facts about their claim required under the Act. In respect of personal injuries, section 11(4) of the Act provides that a claim must be brought within a period of three years from: (a) the date on which the cause of action accrued; or (b) the date of knowledge (if later) of the person injured. Section 14 of the Act stipulates the knowledge which a claimant must possess for time to run against them under section 11(4)(b). The relevant subsection for the purposes of the proceedings was section 14(1)(b) which provides that a claimant must know that his injury was attributable in whole or in part to the act or omission of the defendant. The MOD argued that the veterans knew that their injuries were attributable to their exposure to the Pacific Tests, whilst at the same time denying that the veterans injuries were in fact caused by the Pacific Tests. It was the veterans case that only after they had sight in 2007 of a scientific report (the Rowland Report ), linking chromosomal changes with exposure to nuclear radiation produced by weapons testing, that they had the requisite knowledge for the purposes of the Act. The veterans were thus in the unusual position of contending that they did not possess the required knowledge concerning their claim until a considerable period after they had issued proceedings. Foskett J stated his preferred view was that the veterans could not be said to possess the knowledge required to start time running until they had some factual basis for concluding that their injuries were capable of being caused by their exposure to the Pacific Tests. The judge stated that this could not have taken place until the veterans had been made aware of the Rowland Report. However, he accepted that the authorities in this area did not allow him to apply his preferred view and thus found that five of the claims were statute-barred and the remaining five were not. In respect of the five cases in which the limitation period had expired he ruled that those claims should be allowed to proceed by the exercise of the court s discretion under section 33 of the Act. Section 33 provides that in cases of personal injury the court may disapply the limitation period where in all the circumstances it appears equitable to do so, taking into account a series of specified factors, including the length of, and the reasons for, the delay on insurance and reinsurance

14 insurance and reinsurance 12 Insurance and Reinsurance Judgment of the Supreme Court on limitation issues the part of the claimant, the cogency of the evidence available, the conduct of the defendant, the extent to which the claimant acted promptly and reasonably once he knew of the attribution of his injuries and the steps taken by the claimant to obtain expert advice about his claim. Court of Appeal decision On appeal by the MOD the first instance decision was reversed. The Court of Appeal held that all but one of the 10 lead cases were statute-barred. The Court of Appeal also reversed Foskett J s decision on the application of section 33 of the Act. It was accepted by Counsel for the veterans that there was insufficient evidence in the Rowland Report to enable the veterans to prove causation on the balance of probabilities. Therefore, when considering the application of section 33, the Court of Appeal found that Foskett J had not given due weight to a broad merits test and the prospect that the claims were unlikely to succeed in the event that the time bar was to be disapplied. Having regard to the available evidence going to causation and the difficulties this created for the veterans claims the Court of Appeal held that it would be inequitable to exercise its discretion under section 33 in order to allow the claims to proceed. Supreme Court decision The Supreme Court considered on appeal the following issues: 1. What is meant by knowledge for the purposes of sections 11 and 14 of the Act (the Knowledge Issue )? 2. In the event that the veterans claims were statute-barred, should the court exercise its discretion under section 33 to allow the claims to proceed (the Discretion Issue )? 3. In the event that the claims were to proceed, should the court extend the principles in Bonnington Castings Ltd v Wardlaw and/or Fairchild v Glenhaven Funeral Services Ltd, such that for the purposes of succeeding on causation it should be sufficient for the veterans to show that their exposure to the Pacific Tests had led to a material increase in the risk of them suffering from the injuries of which they complained (the Causation Issue )? The appeal was dismissed by a 4:3 majority consisting of Lord Walker, Lord Wilson, Lord Brown and Lord Mance in the majority. Lord Phillips, Lady Hale and Lord Kerr delivered robust dissenting judgments, fundamentally disagreeing with the approach of the majority on the Knowledge Issue. The main judgments for the majority and minority were given by Lord Wilson and Lord Phillips respectively. 1. The Knowledge Issue A fundamental division of principle separated the majority and the minority of the Supreme Court. In essence the issue in dispute was whether or not a claimant must be in possession of factual evidence in order to have knowledge within the meaning of the Act. The majority held that a claimant need only have a reasonable belief concerning the attribution of his injuries such that it is reasonable for him to take steps to investigate whether or not he has a claim against the defendant. The majority reasoned that factual evidence is not a necessary part of a HERBERT SMITH FREEHILLS reasonable belief. The minority adopted an entirely contrary approach, arguing that it is a claimant s knowledge and not their belief which is relevant, and that by definition knowledge must be based on fact. The Reasoning of the Majority A line of prior authorities provided that the issue of a claimant s knowledge concerning the attribution of his injuries for the purposes of section 14(1)(b) is a low evidential bar to satisfy: a claimant need only know that there is a real possibility that their injury resulted from the defendant s conduct, as opposed to such a possibility being merely fanciful. In this respect a claimant can have knowledge of the attribution of their injury without being able to discharge the burden of proof required to demonstrate that the defendant did in fact cause their injury. The issue which most starkly divided the approach of the majority of the Supreme Court from the minority was whether, for the purposes of satisfying the requirements of the Act, a belief by the claimant that their injury was attributable to the defendant s conduct could be equated with knowledge that this was the case and that therefore time would start to run. The majority held that a claimant will be deemed to have knowledge under the Act where that claimant holds a belief with a degree of confidence and substance (as opposed to mere suspicion) such that they hold a reasoned belief or a reasonable belief. Such a belief would be reasonable where it was held with sufficient confidence to justify embarking on the preliminaries to the issue of a writ, such as submitting a claim to the proposed defendant, taking legal and other advice and collecting evidence. A claimant does not need to be in possession of factual evidence to substantiate their belief on the balance of probabilities. As Lord Brown succinctly put it, the focus of the prior authorities on the concept of a reasonable belief was not so much on whether or how far the belief is evidence-based, but more on whether it is held with a sufficient degree of confidence to justify embarking on the preliminaries to making a claim. The search for a claimant s knowledge therefore involves an enquiry into that claimant s state of mind. While the majority were clear that a claimant will not automatically be deemed to have knowledge of their claim if they consult a solicitor, that inference may be justified on the facts. Once the required belief has arisen it is irrelevant if, upon consulting an expert, the claimant is told that it is not possible to prove causation. As Lord Wilson put it, a lack of evidence concerning causation could not result in claims being put on ice...for an indefinite period, in the hope that one day the right evidence might turn up. On a review of the evidence provided by the nine veterans, he concluded based on their private and public statements about their injuries that their claims were time barred. The Reasoning of the Minority The minority for the most part adopted the reasoning underlying the preferred view of Foskett J, that knowledge and belief are fundamentally different concepts which should not be conflated. A belief, however strongly it may be held, which is not grounded on evidence or based upon objective

15 HERBERT SMITH FREEHILLS Insurance and Reinsurance 13 fact is irrational, and should not be sufficient to start time running against a claimant. Lord Phillips and Lady Hale held that even the Rowland Report did not offer the veterans a sufficiently firm factual basis for their beliefs, and therefore that time still had not started to run against them. 2. The Discretion Issue The majority agreed with the Court of Appeal that it was not justifiable to allow the veterans claims to proceed by the exercise of the court s power under section 33. Lord Wilson reiterated that it is generally undesirable for a court, when addressing limitation issues, to consider the overall prospects of whether a claimant s case would succeed at trial. However, the circumstances of this case were unusual in that the volume of evidence which had been put before Foskett J meant that the Court of Appeal was in the rare position of having sufficient material before it to properly assess the prospects of the veterans succeeding at trial. In these exceptional circumstances, Lord Wilson found it would be wrong to allow the claims to proceed when the next step was likely to be an application to strike out the claims for lack of evidence. insurance and reinsurance 3. The Causation Issue The Supreme Court rejected the veterans argument that the principle in Bonnington Castings/Fairchild should be applied to their case such that they need only show that the MOD s actions had materially increased the risk of their injuries developing. This argument was rejected on the basis of the judgment of the Supreme Court in Sienkiewicz v Greif (UK) Ltd. Comment The facts of the case before the Supreme Court were unusual but the judgment does provide certainty as to how the state of a claimant s knowledge concerning the attribution of their damage is to be determined under the Act. Time will run where a claimant holds a sufficiently firm belief that there is a real possibility that his injuries are attributable to the fault of the defendant such that it is reasonable for the claimant to begin to investigate, regardless of whether there is insufficient factual evidence available (either directly or through taking expert advice) to enable the claimant to evidentially establish his case. As a consequence the limitation clock will run against a claimant despite the fact that, if proceedings were served, the claim would fail through lack of evidence. Additional references Bonnington Castings Ltd v Wardlaw [1956] AC 613 Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22 Sienkiewicz v Greif (UK) Ltd [2011] UKSC 10 Limitation Act 1980

16 insurance and reinsurance 14 Insurance and Reinsurance Actual Total Loss and Constructive Total Loss Considered in Non-Marine Context The concepts of Actual Total Loss ("ATL") and Constructive Total Loss ("CTL") have both, again, come under judicial scrutiny in Clothing Management Technology v Beazley. In the case, HHJ Mackie QC was required to determine whether clothing and fabric that the insured had been unable to recover had become an ATL or, alternatively, a CTL. The policy was subject to the Marine Insurance Act 1906, but the substance of the risk and the claim was non-marine. The consideration of ATL and CTL in this case is, therefore, of general interest. HERBERT SMITH FREEHILLS Case reference and judgment date Clothing Management Technology v Beazley [2012] EWHC March 2012 Background Clothing Management Technology ("CMT") is a clothing manufacturing and distribution business. On receiving orders for clothing, CMT provides the necessary materials to overseas factories (owned by others), who manufacture the garments in the quantity required. CMT was insured under a policy that provided coverage for clothing, fabric, finished and semi finished garments whilst in storage at these overseas locations. The policy specifically incorporated the Marine Insurance Act and Mackie HHJ referred to the policy as one of marine insurance. The claim related to Beltrame, a Moroccan supplier that CMT had used without issue for five years until the period of its alleged loss. In the summer of 2008, there began to be difficulties with the factory (in particular the owners of the factory disappeared without paying the workers) which CMT tried to address by visiting the factory and making payment to the workers directly. On 5 November 2008, all cooperation between CMT and the workers broke down. The workers demanded payment of 80,000 in order to return to work, which CMT refused to pay. CMT, who had informed insurers of the on-going difficulties, submitted a claim for an ATL or, alternatively, a CTL in respect of clothing in the facility to which they could not get access or delivery. The Insurers denied that there was an ATL or a CTL; and raised several other defences based on policy exclusions. Decision Section 57 of the Marine Insurance Act 1906 provides that there will be an ATL where the subject matter of the insurance is destroyed, or the assured is irretrievably deprived of the subject matter of the insurance. Mackie HHJ noted that the test for an ATL was to be applied with the "utmost rigour" and that an assured is not irretrievably deprived of property unless it is physically and legally impossible to recover that property. Mackie HHJ concluded that, here, there was no ATL. The goods had not been destroyed (it had simply proved difficult to get them out of the factory) and they may still exist. CMT was, however, successful in demonstrating that there had been a CTL. Section 60(1) provides that there is a CTL where "the subject-matter insured is reasonably abandoned on account of its Actual Total Loss appearing to be unavoidable, or because it could not be preserved from Actual Total Loss without an expenditure which would exceed its value when the expenditure had been incurred". Section 60(2) provides that "In particular, there is a constructive total loss (i) where the assured is deprived of the possession of his ship or goods by a peril insured against and (a) it is unlikely that he can recover the ship or goods, as the case may be ". Mackie HHJ held that there was a CTL "from about 5 November 2008 onwards. After that point it was unlikely that CMT could recover possession of the goods within a reasonable time. A reasonable time would have been a relatively short period given CMT s commitments to customers and the fact that fashion garments have a short commercial life". By 5 November, the Judge considered, CMT were convinced that this was the end of the road: in particular there was no prospect of resumed commercial activity to justify the payment of the 80,000 requested by the workers; and legal advice was that legal steps to recover property were ineffective and would remain so. Mackie HHJ also rejected the Insurer s argument that there was no CTL by 5 November 2008 as there had been no abandonment of any hope of recovery on the grounds that, after that date, a CMT representative stayed in Morocco to monitor the situation and lawyers were instructed. Mackie HHJ held that Section 60(2) (which does not contain reference to abandonment) supplemented and did not merely illustrate Section 60(1) (which does contain reference to abandonment). There was, therefore, no need for CMT to demonstrate abandonment of any hope of recovery in order to demonstrate a CTL. The fact that no notice of abandonment was served (as required by Section 62(2) before a CTL can arise) was also rejected by the Judge as a reason for denying CMT s claim. Section 62(7) provides that notice of abandonment is unnecessary where there would be no benefit to the

17 HERBERT SMITH FREEHILLS Insurance and Reinsurance 15 insurer if notice were provided. Here, Mackie HHJ considered that appropriate disclosures had been made to Insurers, who were well aware of the situation and could take informed decisions. Various other defences of the Insurers (based on an alleged failure to notify and several exclusions) were also rejected. insurance and reinsurance Comment The consideration of ATL and CTL in a non-marine context means that the case is of general interest, albeit it may be that the situations will be limited where marine concepts of ATL and CTL are applied to non-marine risks. Following the Court of Appeal in Masefield v Amlin, Mackie HHJ made plain that the concept of an ATL will be applied strictly and rigorously. In terms of the CTL, Judge Mackie HHJ's reference to recovering goods within a reasonable time and the market price of recovered goods reflects the fact that the policyholder was able to rely on s60(2) of the Act which requires a lower standard to prove the CTL (namely that it is unlikely that the goods can be recovered). The cargo owner was unable to recover for a CTL in Masefield v Amlin in spite of losing their market, however, because the policy expressly excluded s60(2) of the Act and the cargo owner could not meet the higher standard in s60(1) that the insured subject matter is abandoned because an ATL is unavoidable. The Judge also took a notably pragmatic view on the requirement for a notice of abandonment reflecting the fact that Insurers had been kept fully informed; the prudent course would nevertheless have been to have served a notice of abandonment to avoid the point being taken. Additional references Masefield AG v Amlin Corporate Member Limited [2011] EWCA Civ 24 Marine Insurance Act 1906

18 insurance and reinsurance 16 Insurance and Reinsurance Supreme Court delivers judgment in the Employers Liability Trigger Litigation On 28 March 2012, the Supreme Court handed down judgment in BAI (Run Off) Limited v Durham, the test-cases known as the Employers Liability ( EL ) Trigger Litigation. In relation to the issue of when cover under an EL policy is triggered in respect of mesothelioma claims, the Supreme Court held unanimously that policies which indemnify the insured for injuries sustained or disease contracted by employees will be triggered by the initial exposure to asbestos, rather than the manifesting of the disease. After the Court of Appeal had been unable to provide clear guidance, the ruling brings welcome certainty on the meaning of this wording in the context of such policies. HERBERT SMITH FREEHILLS Case reference and judgment date BAI (Run Off) Limited v Durham [2012] UKSC March 2012 Background Mesothelioma is an incurable cancer of the pleura which is caused by the inhalation of asbestos fibres. The disease will often only develop some decades after the relevant exposure and, where the victim has been exposed to asbestos over a period of years, it is presently impossible to identify the particular fibre or exposure which has caused it. These unusual features of the disease have meant that issues relating to the liability of employers (and their insurers) for deaths caused by mesothelioma have come before the courts on a number of occasions in recent years. In this litigation, the particular issue for the courts to consider was whether insurers under a number of policies of EL insurance ( the Insurers ) were liable to indemnify the employers and estates of various employees with mesothelioma. The relevant policies provided cover by reference to a specific period, usually of a year, during which the employees had been exposed to asbestos. In each case, however, the specific period had long expired at the time the disease manifested itself. As to the cover itself, the policies provided an indemnity to employers in respect of injury or disease which was sustained or contracted by their employees during the period of the policy. Prior to the decision in Bolton Metropolitan Borough Council v Municipal Mutual Insurance Ltd, the practice of the EL insurance market had been to treat such policies as triggered by reference to the period of exposure, regardless of the particular wording used. In Bolton, however, the Court of Appeal had held in relation to a public liability ( PL ) policy providing cover in respect of an injury that occurs during the currency of the policy that the mesothelioma could not properly be said to have occurred at the time of exposure. Rather, the injury only occurred when the malignancy developed, a point in time which invariably fell many years after the inhalation of asbestos dust. Following that decision, some of the market took the position on EL policies that mesothelioma was not sustained or contracted at the time of the exposure. It was in these circumstances that the multiple test-cases constituting the EL Trigger Litigation were brought. In these cases, certain insurers maintained that mesothelioma was not, on the true construction of the policies, sustained or contracted upon inhalation but at the time of the manifestation of the disease. In contrast, the claimants under the policies contended that the sustained and contracted wording was causation-based. On this basis, all that was required for the policies to respond was that the victim had been exposed to asbestos during the policy period. This was the case, it was said, regardless of when the mesothelioma became apparent. First instance decision At first instance, Burton J found in favour of the claimants, concluding that the insurances all responded on an exposure basis. Accordingly, the date on which the injury was sustained or contracted was to be interpreted as meaning the period of exposure. The judge considered this finding to be consistent with the commercial purpose of EL insurance which was to compensate employees for losses they had suffered as a result of their employer s negligence. As to the effect of Bolton, Burton J felt able to construe the word sustained in a different manner to occurred primarily because, in his view, a manifestation-based analysis gave rise to difficulties in respect of ex-employees, who would be unable to recover from their employer after their employment had ended. Court of Appeal decision The Court of Appeal upheld Burton J in relation to those insurances contracted during the relevant insurance period but concluded (Smith LJ dissenting) that those policies covering injury sustained during the period of insurance responded on a manifestation basis. However, while Rix and Stanley Burnton LJJ were in agreement on the proper interpretation of the sustained wording, they arrived at this conclusion by different routes. Whereas both considered they were bound by Bolton, Rix LJ made clear he would have preferred to find that mesothelioma sufferers sustained

19 HERBERT SMITH FREEHILLS Insurance and Reinsurance 17 sufficient injury on exposure to asbestos to trigger the insurances in force at the date of the exposure (an extension of the approach adopted in Fairchild and in Barker v Corus UK Ltd). Rix LJ also considered there was a tension between this result and the commercial purposes of this type of insurance as identified by Burton J, a view not shared by Stanley Burnton LJ who held that the only commercial purpose behind the insurance was to provide the cover defined in the policy. The two judges differed further as to the significance of the Employers Liability (Compulsory Insurance) Act 1969 ( the ELCIA ), which required employers to insure against their liability for personal injury to their employees. Whereas Rix LJ thought that the ELCIA required employers to insure on a causation basis, with the result that sustained wording could be interpreted differently after the statute came into force, Stanley Burnton LJ considered that it simply required insurance to be taken out and maintained in respect of ex-employees. The Court of Appeal was thus unable to reach any real consensus on the proper meaning of the sustained wording, leaving the position unresolved. Supreme Court decision The Supreme Court held unanimously that, on the proper interpretation of the policies, the words sustained and contracted both looked to the causation of the disease, as opposed to its development or manifestation. By a majority, the Supreme Court also rejected the further argument that the policies responded to liability for causing mesothelioma but not to liability for the risk created by the exposure (on which grounds, it was said, the insurance claims must fail). The construction issue On what Lord Phillips termed the construction issue, Lord Mance (who gave the judgment of the court) considered it was necessary to construe the insuring clauses in the context of the policies as a whole, an exercise which also shed light on their commercial purpose. In this respect, Lord Mance took issue with the view of Stanley Burnton LJ that there was little if any assistance to be gained by reference to the commercial purpose of EL insurance. On a review of the wider terms of the policies, Lord Mance considered it was relevant that: 1. On their face, the wordings required the particular employee to be employed at the time the injury was sustained. 2. Each policy indicated a close link between the actual employment undertaken in the period of insurance and the calculation of the premium, which to varying degrees was tied to the salaries and earnings paid at the particular time. The probability, therefore, was that the policies provided cover in respect of liabilities arising out of current, as opposed to historic, employment activities. 3. On the basis that the insurances only covered risks arising from employment during the insurance period, there was a potential gap in cover if, as the Insurers maintained, the policies responded to diseases which manifested themselves during the period of the policy. In this scenario, as Lord Mance explained, there would be no cover unless the liability arose from and in the course of and involved injury or disease during the currency of the same employment and the same insurance (including any renewal). 4. In respect of long-tail diseases, therefore, employers would be unable to obtain cover in respect of negligent acts which had been discovered but had not yet resulted in any manifest disease. Because such acts would be disclosable on placing, insurers generally would be able to refuse to provide cover (or renew), leading to a further potential gap in cover. While this difficulty only arose in connection with the 1% of cases involving such diseases (a point Rix LJ had regarded as influential in the Court of Appeal), this was nonetheless a significant proportion. 5. A further difficulty arose in that the policies only afforded cover in respect of disease sustained in the course of employment in certain jurisdictions. In one policy, this was achieved by limiting the scope of the cover to disease sustained while engaged in the service of the Employer in Great Britain, Northern Ireland, the Isle of Man or the Channel Islands. If the wording looked to its manifestation, the disease would therefore not be covered if experienced overseas on any view, a curious outcome. In relation to the wider context, Lord Mance agreed with Rix LJ that the purpose of the ELCIA was to require employers to obtain insurance on a causation basis. In some cases, this purpose was achieved expressly by the inclusion of an ELCIA extension provision which appeared in certain of the policies. As to those insurances entered into subsequently which omitted the extension, these were to be read, if possible, as providing the cover which the ELCIA envisaged. In relation to Bolton, however, Lord Mance agreed with Smith LJ that PL and EL insurances gave rise to different considerations, and therefore that the Court of Appeal was not bound by its earlier decision. He did not, however, go so far as to expressly overrule Bolton, which he was not obliged to do, finding only that public liability insurance generally and the present employers liability policies operate on different bases, because of their different backgrounds, terms and purposes. In this light, Lord Mance proceeded to consider the effect of the contracted and sustained formulations. In relation to the former wording, he had little difficulty concluding that the word contracted looked to the causative factor of the disease and thus the exposure, whether used in isolation or in conjunction with the word sustained. As regards the policies with pure sustained wordings, though less straightforward, he considered it was clear from their general nature and underlying purpose that they were to be interpreted in the same way. Turning, finally, to Rix LJ s suggestion that an employee who inhales asbestos dust may be said to sustain an injury at the point of inhalation, Lord Mance considered that approach was inconsistent both with the previous decision of the House of Lords in Rothwell v Chemical & Insulating Co Ltd that no cause of action arises from inhalation alone and also with his analysis in relation to the further causation issue that, in law, damage is only incurred once mesothelioma develops. The causation issue As is well known, in the face of the impossibility of proving liability for mesothelioma on traditional principles, the House of Lords in Fairchild had formulated a special rule by which an employer who, in breach of duty, has exposed an employee to asbestos may be held liable in insurance and reinsurance

20 insurance and reinsurance 18 Insurance and Reinsurance Supreme Court delivers judgment in the Employers Liability Trigger Litigation damages if the employee subsequently suffers the disease. That rule had been developed further by the Compensation Act 2006 (reversing the decision in Barker) which provides that, where there are two or more employers who have exposed the claimant to the risk of mesothelioma, they will be jointly and severally liable for the whole of the consequences. More recently, the Supreme Court had held in Sienkiewicz v Grief (UK) Ltd that any culpable exposure to asbestos which is not insignificant will be of sufficient causative effect to allow a claim. Following an intervention by Lord Phillips mid-way through the hearing, the argument was addressed, for the first time in any court that the insurances were fundamentally incapable of responding in respect of mesothelioma. This was said to be because the special rule in Fairchild, as developed subsequently, had created a new form of liability in respect of the risk of causing the disease. While that decision had made it possible for employees to recover in respect of their illness, it was argued, the risk of disease was not, however, something to which the policies responded. The issue for the Supreme Court was therefore to identify the basis for the special rule. Following a detailed review of the authorities and the relevant provisions of Compensation Act 2006, the majority held that the rule imposed legal responsibility on the employer for the disease, for which purpose the law accepted a weak or broad causal link to exposure which (in Lord Mance s words) may but cannot be shown on the ordinary balance of probabilities to have played a role in the actual occurrence of the disease. Thus, for the purposes of the policies, there was a sufficient causal link between the negligent exposure to asbestos and the subsequently arising mesothelioma. Lord Phillips disagreed. He held that while the special rule was sufficient to impose liability on the employer for the negligent exposure to asbestos, it did not raise any implication or fictional assumption as to when the mesothelioma is initiated. While this would mean that no policies of insurance were capable of responding to mesothelioma that, in his view, was a matter for Parliament, not the courts. Comment The decision of the Supreme Court adopts a sensible and commercial approach to construction. It provides welcome clarity on the question of when cover under an EL policy in relation to mesothelioma claims is triggered, establishing as it does that all such cover is triggered at the point of exposure, whether it responds to disease contracted or injuries sustained. As a result of this ruling, it will therefore be open to employers (and employees of insolvent companies) to claim under the EL insurances in place at the time of exposure in the knowledge that the cover provided under those policies is (at least in principle) responsive to their claims. As a result of this decision there is, accordingly, now in place a clear legal framework for the bringing of claims by mesothelioma victims against their employers and for the transmission of that liability to the employers EL insurers. In this regard, the net effect of Fairchild, the Compensation Act 2006 (varying Barker) and Sienkiewicz has been to impose liability on employers for exposing their employees to asbestos, provided the exposure is not insignificant, such liability being joint and several where a HERBERT SMITH FREEHILLS number of exposures have taken place over a series of employments. While the decision of the House of Lords in Rothwell gave some solace to employers (and their insurers) when it was held that asymptomatic pleural plaques did not constitute actionable harm, that decision was reversed, in relation to Scotland, by the Damages (Asbestos-related Conditions) (Scotland) Act 2009 a statute that was recently confirmed as lawful in AXA General Insurance Ltd and Others v Lord Advocate and Others. Now, following this decision and Bolton, there is not only clear guidance in place in relation to the meaning of the various trigger wordings but it has also been made clear that the basis for liability imposed by application of the special rule in Fairchild is not the creation of the risk of disease but the disease itself. Importantly, that conclusion confirms, beyond doubt, that EL policies are capable of responding in cases of mesothelioma. Notably, however, the Supreme Court declined to overrule Bolton, distinguishing that decision on the basis it applied to PL insurance which operates on different bases. The Supreme Court did not, however, go so far as to express a view on the correctness of that decision. Additional references Bolton Metropolitan Borough Council v Municipal Mutual Insurance Ltd [2006] EWCA Civ 50 Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22 Barker v Corus UK Ltd [2006] UKHL 20 Rothwell v Chemical & Insulating Co Ltd [2007] UKHL 39 Sienkiewicz v Grief (UK) Ltd [2011] UKSC 10 AXA General Insurance Ltd and Others v Lord Advocate and Others [2011] UKSC 46 Employers Liability (Compulsory Insurance) Act 1969 Compensation Act 2006 Damages (Asbestos-related Conditions) (Scotland) Act 2009