Insurance

Liability insurance - Employers' liability

Durham v BAI (Run Off) Ltd (in scheme of arrangement) and other cases: Supreme Court (Lords Phillips P, Mance, Kerr, Clarke, and Dyson SCJJ): 28 March 2012

Section 1 of the Employers’ Liability (Compulsory Insurance) Act 1969, had since 1 January 1972 made it compulsory for every employer other than local authorities carrying on any business in Great Britain to, inter alia: 'insure, and maintain insurance, under one or more approved policies with an authorised insurer or insurers against liability for bodily injury or disease sustained by his employees, and arising out of and in the course of their employment in Great Britain in that business, but except in so far as regulations otherwise provide not including injury or disease suffered or contracted outside Great Britain... .'

Six consolidated actions were specimen proceedings brought by the claimants against the defendant insurers to resolve issues relating to cases where employees had suffered and died from mesothelioma resulting from inhalation of asbestos fibres during employment and they, their families or their estates, or the employers liable to them, sought to recover from the insurers who had provided the employers with employers' liability insurance. An unusual feature of mesothelioma was that it had an extremely long period of gestation, which could be in excess of forty years between exposure to asbestos and manifestation as cancer of the mesothelium, a protective lining covering the internal organs, most commonly as a cancer of the pleura. Its precise pathogenesis was unknown and indescribable.

Because of those unusual features, the law had developed a special rule which was the product of judicial innovation in Fairchild v Glenhaven Funeral Services Ltd [2002] 3 All ER 305 (Fairchild) and in Barker v Corus UK Ltd [2006] 3 All ER 785, (Barker) modified by statutory intervention in the form of section 3 of the Compensation Act 2006.

Leaving aside exposures occurring within the ten or so years prior to diagnosability, the rule could be stated as being that when a victim contracted mesothelioma each person who had, in breach of duty, been responsible for exposing the victim to a significant quantity of asbestos dust and thus created a 'material increase in risk' of the victim contracting the disease would be held to be jointly and severally liable in respect of the disease.

In due course, the insurers of a public liability insurance policy whose wording spoke of injury occurring during the currency of the policy declined to pay out on the policies in force at the date of inhalation. They maintained that the insurer liable to meet such a claim was not the insurer who had insured the employer at the time the employee had inhaled the asbestos fibres, but the insurer who insured the employer at the time the mesothelioma tumour developed. Those alternative bases of response (or 'triggers' of liability) could be described as an occurrence (or manifestation) basis and an exposure (or causation) basis.

The relevant specimen policies had different wordings, covering a period from the late 1940s to 1992, but they were all expressed to operate only where 'injury' was 'sustained' and/or 'disease' was 'contracted' during the policy year in question. In the High Court (see [2009] 2 All ER 26)) the judge held, inter alia, that the relevant insurances all responded on an exposure basis. The defendants appealed. The Court of Appeal, by a majority (Rix and Stanley Burnton LJJ), upheld the judge in relation to some of the insurances (particularly those covering injury 'contracted' during the relevant insurance period); but they concluded that others (particularly those covering disease 'sustained' during the insurance period) responded only on an occurrence or manifestation basis. The parties appealed.

The first issue was whether, on an interpretation of the policies, had mesothelioma had been 'sustained' or 'contracted' on an occurrence or exposure basis. The claimants submitted that all the policies were to be understood as operating on an exposure basis. The defendants submitted that all the relevant wordings namely 'sustain' required the injury to have occurred during the period of insurance or of any renewal. The force of the defendants' case rested on the use of the word 'sustain' particularly when used by itself rather than in conjunction with a more ambivalent alternative such as 'contracted'. The second issue was, if the insurances covered employers’ liability for injuries or diseases 'caused' during the relevant insurance periods, whether they covered employers’ liability for mesothelioma arising under the rule in Fairchild and Barker from having exposed employees to asbestos during such periods. Consideration was given to the Workmen's Compensation Acts (WCA). The appeals would be dismissed (Lord Phillips dissenting in part).

(1) In interpreting commercial contracts/insurance policies, it was necessary to avoid over-concentration on the meaning of single words or phrases viewed in isolation, and to look at the insurance contracts more broadly. All words had to be set in the landscape of the instrument as a whole and, any instinctive response to their meaning had to be verified by studying the other terms of the contract, placed in the context of the factual and commercial background of the transaction. Useful conclusions could be drawn from the commercial purpose of a policy (see [19] of the judgment).

In the instant case, as well as applying established principles, it was also necessary to give consideration to section 1 of the act and the development of employees' rights to compensation in respect of personal injury and disease at common law and under the scheme of the WCA. When the act was considered, it could be seen that it required insurance on a causation basis. Further, when the policies were examined it could be seen first that the wording required the course of employment to be contemporaneous with the sustaining of injury, leaving open what was meant either by 'sustaining' or by 'injury'. Secondly, the insurance wordings demonstrated a close link between the actual employment undertaken during each insurance period and the premium agreed to be payable for the risks undertaken by the defendants in respect of that period.

Thirdly, if insurances only addressed risks arising from employment during the insurance period, then, on the defendants' case, there was a potential gap in cover as regards employers’ breaches of duty towards employees in one period which only led to injury or disease in another later period. Fourthly, on the defendants' case, employers would be vulnerable to any decision by insurers not to renew; and such a decision might arise from the simple performance by employers of their common law duty to disclose past negligence to insurers upon any renewal.

Fifthly, the way in which some of the policies dealt with the issue of extra-territorial scope pointed to an underlying focus on causation. Other policies threw doubt on any proposition that their wordings were so carefully or well-chosen that a court should be careful to stick literally to whatever might be perceived as their natural meaning. In any event the word 'contracted' used in conjunction with disease looked to the initiating or causative factor of the disease.

Further, although the word 'sustained' might initially appear to refer to the development or manifestation of such an injury or disease as it impacted employees, the only approach, consistent with the nature and underlying purpose of the insurances was one which looked to the initiation or causation of the accident or disease which injured the employee. The disease might properly be said to have been 'sustained' by an employee in the period when it had been caused or initiated, even though it only developed or manifested itself subsequently (see [19], [21], [24], [25], [27], [28], [47], [49], [50] of the judgment).

The appeals by the defendants, so far as they concerned the policies with 'contracted' wordings, would be dismissed. The appeals against the defendants would be allowed. Further, the appeal, so far as it concerned policies with 'sustained' wordings would be dismissed (see [75] of the judgment). Charter Reinsurance Co Ltd v Fagan [1996] 3 All ER 46 considered.

(2) (Lord Phillips Dissenting) The liability under the rule in Fairchild and Barker arose only because of the incurring of the disease and was for the disease. A condition of such liability was that the employer (negligently) exposed the victim to asbestos. For that purpose, the law accepted a weak or broad causal link. The link was to exposure which might, but could not be shown, on the ordinary balance of probabilities to have played a role in the actual occurrence of the disease.

But for the purposes of the policies the negligent exposure of an employee to asbestos could properly be described as having a sufficient causal link or being sufficiently causally connected with subsequently arising mesothelioma for the policies to respond. The concept of a disease being 'caused' during the policy period had to be interpreted sufficiently flexibly to embrace the role assigned to exposure by the rule in Fairchild and Barker (see [72]-[74] of the judgment).

In the instant case, the insurance policies, read as operating on a causation basis, had been aimed at covering liability generated by employers’ activities during their insurance periods: unless liability for mesothelioma flowing from negligent exposure during an insurance period was covered by the policies, that aspect of employers’ activities would not in practice be covered at all. Therefore, for the purposes of the insurances, liability for mesothelioma following upon exposure to asbestos created during an insurance period involving a sufficient 'weak' or 'broad' causal link for the disease to be regarded as 'caused' within the insurance period. It was not in any event accurate to treat the liability as being either solely or strictly for the risk.

The risk was no more than an element or condition necessary to establish liability for the mesothelioma. If the fundamental focus of the policies was on the employment relationship and activities during the insurance period and on liability arising out of and in course of them, then the liability for mesothelioma imposed by the rule fulfilled precisely the conditions under which those policies should have and had responded (see (see [72]-[74] of the judgment). Decision of Court of Appeal [2011] 1 All ER 605 affirmed in part.

Colin Wynter QC with Alison McCormick (instructed by Irwin Mitchell LLP, Sheffield) for Mrs Durham; Roger Stewart QC and Stephen Robins (instructed by DLA Piper UK LLP) for BAI (Run Off) Ltd and Independent Insurance Co Ltd; Edward Bartley Jones QC and Dr Digby Jess (instructed by Burd Ward Solicitors Ltd) for Thomas Bates & Son Ltd; Colin Edelman QC, David Platt and Peter Houghton (instructed by Plexus Law) for Excess Insurance Co Ltd; Richard Harrison (instructed by Berrymans Lace Mawer LLP) for Akzo Nobel Ltd and Amec plc; Howard Palmer QC, Andrew Miller and Sonia Nolten (instructed by Watmores) for Municipal Mutual Insurance Ltd; Timothy Smith (instructed by John Pickering & Partners LLP, Manchester) for Mrs Fleming and Mrs Eddlestone; Andrew Burns (instructed by Thompsons, Liverpool) for Mrs Edwards; Jeremy Stuart-Smith QC, Leigh-Ann Mulcahy QC and Clare Dixon (instructed by Buller Jeffries) for Zurich Insurance Co; Lawrence West QC and John Williams (instructed by Plexus Law) for the second defendant (instructed by Kennedys) for the third and fifth defendants (instructed by Barlow Lyde Gilbert) for the fourth defendant (instructed by Philip McCourt, Milton Keynes) for the sixth defendant (instructed by Sparling, Benham & Brough, Essex) for the seventh defendant (instructed by Berrymans Lace Mawer LLP, Birmingham) for the eighth and eleventh defendants (instructed by Morgan Cole LLP, Cardiff) for the ninth defendant and instructed by DWF LLP for the tenth defendant.