Supreme Court delivers judgment in the Employers' Liability Trigger Litigation

Supreme Court delivers judgment in the Employers' Liability Trigger Litigation On 28th March 2012, the Supreme Court handed down judgment in BAI (Run Off) Limited v Durham [2012] UKSC 14, the test-cases known as Employers' ("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. April 2012 Contents Background 1 First instance decision 2 Court of Appeal decision 2 Supreme Court decision 2 Comment 4 Contacts 5 In an unanticipated turn of events, the Supreme Court was also required to consider the juridical basis for what it termed "the special rule" in Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22. By that rule, legal liability is imposed upon an employer based purely on the negligent exposure of the victim to asbestos. This issue was important because, if Fairchild was to be understood as creating liability for the creation of, or increase in, the risk of causing the disease, that was not a peril to which this type of insurance responds. Though far from straightforward, the majority concluded that "the special rule" in Fairchild should not be viewed as imposing liability for creation of the risk but as relaxing the required causal link between the exposure and the disease. Background Related links Herbert Smith website Herbert Smith Publications Herbert Smith Insurance and reinsurance publications 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 [2006] EWCA Civ 50, 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 1

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 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 [2006] UKHL 20). 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. 2

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 discloseable 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 [2007] UKHL 39 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 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 Karen Sienkiewicz (Administratrix of the Estate of Enid Costello Deceased) v Grief (UK) Limited; Knowsley MBC v Willmore [2011] UKSC 10 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 3

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 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 [2011] UKSC 46. 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. 4

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