Liability insurance – a reinsurer’s perspective

1. Liability insurance – a reinsurer’s perspective LUG Conference – Cambridge 4 Sep 2007 Tom Chivers Underwriter, International Casualty Treaty

2. Introduction • The problem with triggers – recent uncertainty. • What is the impact on insurers and reinsurers? • The development of trigger theories? • Consequences for insurers and reinsurers. • The future.

3. A definition • What is a trigger? • A trigger is a wording mechanism that causes the loss under an insurance or reinsurance policy to be fixed to a particular policy period. • A trigger determines which insurers and reinsurers will pay claims. • An insurance policy has its own trigger. A reinsurance policy also has its own trigger.

4. Trigger problems – Bolton v MMI (1) • Court of Appeal 2006 – Bolton Metropolitan Borough Council v Municipal Mutual Insurance Ltd & Commercial Union Assurance Company Ltd. • Background to case: • A case involving the allocation of liability between different public liability (PL) insurers. • Mr Green worked for an electrical contractor on a building being built by Bolton Metropolitan Council (who was NOT his employer). He inhaled asbestos dust while working at this site. He later worked for another company (CME) and inhaled asbestos dust working for them. He contracted mesothelioma and died. His widow sued both CME and Bolton and each paid £80,000 in compensation. Bolton then sought to recover this amount from its public liability insurers. • Bolton wanted to recover from MMI, which it said was the insurer when Mr Green’s mesothelioma occurred. MMI denied liability and said it was the insurer at the time when asbestos was inhaled that should pay. So Bolton joined as second defendants CU, which was the insurer at the time Mr Green was exposed to the asbestos fibres.

5. Trigger problems – Bolton v MMI (2) • Appeal judges found: • MMI was liable as mesothelioma had occurred during MMI cover. • CU not liable to indemnify Bolton for two reasons: • mesothelioma had not occurred during CU cover. • no immediate notification to CU of the accident or claim. • In a public liability policy when a loss “occurs” is not taken to mean when the injured party is exposed to asbestos. • MMI argued that “accidental injury” occurred when the body was first exposed to asbestos fibres. Longmore LJ said in his judgment “[that] (I)t cannot be right that, at the stage of initial exposure or initial bodily reaction to such exposure, there could be a liability on the part of Bolton in respect of which they could be require to be indemnified under any public liability insurance policy. Mr Green could not have sued for personal injury at that stage because he had suffered no injury at that stage.” • “These cases have established a pattern at first instance to the effect that actionable injury does not occur on exposure or on initial bodily changes happening at that time but only at a much later date; whether that is when a malignant tumour is first created or when identifiable symptoms first occur does not matter for the purposes of this case.”

6. What is all the fuss about public liability policies? • Generally, latent disease has been encountered in the workplace and has therefore been dealt with by employment law and employers’ liability (EL) insurance. Asbestos is covered under EL policies, but usually excluded under PL policies. • Latent disease is now an issue for public liability insurers: • Third parties have been exposed to asbestos. • Exposing third parties to the causes of latent disease (especially asbestos) is now seen as a genuinely insurable exposure. • Duty of care owed by employers to third parties (e.g. Maguire v Harland & Wolff plc (2004). • High cost of asbestos exposure.

7. The potential cost of public liability exposure. • If PL policies are ever called upon to pay non-bodily injury third party exposure, it could be more expensive than bodily injury exposure. • With changes in Health and Safety legislation, the cost of removing, decontaminating and cleaning up asbestos is increasing all the time. For example: • Silverhill Primary School in Mickleover, Derbyshire, was closed for eight weeks in 2004 during a £750,000 clean-up operation after asbestos fibres were discovered. The asbestos contamination happened during work to replace windows. The glazing company, head teacher and Derby City Council were all prosecuted. • Great Yarmouth egg carton manufacturer Omni-pac was fined £50,000 in February 2006 for breaches of the HSWA 1974 committed in 2003 as a result of damaged and poorly maintained asbestos insulation on top of dryers used to produce the papier-mâché egg cartons. The company was forced to cease production and make all staff redundant. • Therefore, any negligent third party property contamination could end up being more expensive than bodily injury claims. This is more likely then to involve reinsurers.

8. The consequences for public liability (re)insurers • Latent exposure and long tails have now become more important in public liability insurance. • The cost of non-bodily injury exposure could end up being greater than bodily injury exposure. Therefore, reinsurers are more likely to become involved. • Any-one claimant clauses will not protect reinsurers against non-bodily injury exposure. • Costs are only ever increasing. • Old policies could still be exposed. When a loss “occurs” was not conclusively defined, so there is still some uncertainty about which old policies will certainly be exposed.

9. Trigger theories (1) • What are trigger theories? • Mainly US – Products Liability policies used for redress. • Initial Exposure Theory • Manifestation Theory • Injury-In-Fact Theory • Double Trigger Theory • Continuous Exposure Theory • aka Triple Trigger Theory or Multiple Trigger Theory or Keene Doctrine. • Initial exposure AND manifestation AND all periods in between. • Leading case is Keene Corporation v Insurance Company of North America (1981).

10. Trigger theories (2) • MMI’s counsel in the Bolton case argued that English law should follow decisions in other jurisdictions • Longmore LJ in Bolton Metropolitan Borough Council v Municipal Mutual Insurance (2006) said: • I am far from saying that what has been called this multiple trigger or, sometimes, triple trigger theory (exposure, development of disease, and diagnosis) might not be held, on some future occasion, to be appropriate for employers’ liability policies in general, depending on the precise words used. But as far as public liability policies are concerned with the specific wording used in the present cases, I see no need for the English courts to adopt the multiple trigger theory. It has been adopted in the United States avowedly for policy reasons in relation to the vastly greater numbers of asbestos-disease sufferers in that country. I see no reason to adopt it in this particular case where the same policy considerations are not present.

11. What are implications of trigger theories for insurers and reinsurers? • Interpretations of how an old policy is triggered may change. • Judges seem to be more keen to allow injured parties to gain redress (e.g. the Law Lords in Fairchild v Glenhaven Funeral Homes Ltd (2002). cf Barker v Corus (2006)). • Politicians are very keen to allow injured parties to gain redress (e.g. Compensation Act 2006, q.v.). • Changing the way in which an insurance policy is triggered may appear to be the easiest way of allowing victims of latent disease to gain full compensation. This would have implications for both insurers and reinsurers.

12. Triggers in insurance policies • Employers’ liability policies usually cover injuries “caused” during the period of insurance. The EL insurer at the time of inhalation has been held to be liable. • Public liability policies usually cover injuries “occurring” during the period of insurance. • Definition of when a loss “occurs” is not very clear. If when a loss “occurs” is not taken to mean the time at which the victim is exposed to asbestos dust, then what is it taken to mean? • Is “occurrence” the time exactly at which the first malignant cell develops (which is medically difficult to prove) or when the patient first presents with symptoms, or when a diagnosis is made? In the Bolton case, this question was not important because there was only one insurer for all of these periods.

13. Triggers in reinsurance treaties • Treaty = losses occurring, losses discovered, claims made, losses arising on etc. • EL coverage appears more certain. • When does a loss occur under an original PL policy? When asbestos is inhaled, when malignancy occurs, when the victim becomes symptomatic, when mesothelioma is diagnosed, a combination of these, or at some other time? Therefore, which reinsurance treaty will be called upon to respond? • For PL policies, “occurrence” is NOT when asbestos is inhaled, but some other time (which the Bolton case did not clarify). • Reinsurance triggers must match original policy triggers otherwise reinsured could be left without coverage.

14. How reinsurers limit their exposure (1) • Employers Liability • Reinsurance treaties almost always have one of the various ACOD clauses attached. • ACOD for EL = exposure to industrial disease is fairly low. Nearly all EL treaties attach above award to any one person anyway. But awards may increase in future. • Different ACOD clauses: • ACOD/A • simply, any one claim by any one employee = one event • ACOD/B • any one claim by any one employee = one event • if original liability established on an exposure basis then claim paid by any one period of reinsurance is reduced in proportion to total length of exposure • if legal liability NOT exposure basis then date of loss occurrence = date legal liability is established • ACOD/C • loss occurrence is date original insured advised of claim after diagnosis by a doctor.

15. How reinsurers limit their exposure (2) • Public Liability • Asbestos exposures usually excluded completely. This is common both in UK and overseas treaties. However, this situation is changing. • ACOD–type clauses have recently been developed by reinsurers for public liability exposures. • These operate in the same way as EL ACOD clauses. • Any one claim in respect of any one person is to be treated as one event / occurrence for purposes of recovery from treaty.

16. How reinsurers limit their exposure (3) • Other measures are available to reinsurers to limit their exposure, for example: • Higher treaty attachment point • Sub-limits • Reinstatements (paid and unpaid) • Total exclusions and coverage only by special acceptance • Price of reinsurance coverage

17. Trigger problems for international (re)insurers • English law is clear(er!). • Some foreign jurisdictions have less developed canons of statute law and case law. • Future development of law in foreign jurisdictions is highly uncertain. • Asbestos is still being mined in some countries (2.13m tons worldwide in 2002) • Long tails will continue: crocidolite mining ceased in RSA in only 1997. • Rights of workers will generally only become stronger. • The emergence of other industrial diseases is unpredictable. Other examples of long-term disease do exist: e.g. industrial deafness, asbestosis, WRULD. How will insurance deal with these? • Expanding operations overseas. • QBD Leading Claim initiative will deal with EL trigger issues. • Will trigger problems emerge in other cases where allocating loss may be a problem? e.g. pollution.

18. The future • Asbestos exposures will continue to haunt employers and insurers. Deaths from mesothelioma have not yet peaked. • The progress of latent disease claims is unpredictable in the UK. Overseas it is even more difficult to predict. • How old policies will be called upon to pay latent disease claims is not fully known, especially under PL policies. • How foreign jurisdictions will deal with trigger issues is not known. • Will judges in the UK be prepared to modify triggers to allow fuller redress for claimants?

19. Further reading (1) • British Asbestos Newsletter (Issue 65 2006) http://lkaz.demon.co.uk/ban65.htm. • Compensation Act 2006 • BBC News 6 Dec 2003 – Tube station shuts over asbestos. http.//news.bbc.co.uk/1/hi/england/london/3297381.stm. • BBC News 29 Nov 206 – Head cleared of asbestos charge. http://news.bbc.co.uk/go/pr/fr/-/2/hi/uk_news/england/derbyshire/6156905.stm. • Champion Dying & Finishing Co., Inc. v. Centennial Insurance Company, 355 N.J. Super. 262, 810 A.2d 68 (App. Div. 2002). • Claims Standards Council (23 Feb 2006) Legal case exposes liability gap. http://www.claimscouncil.org/news/2006/02/23/legal-case-exposes-liability-gap. • Damages Act 1996 • Department for Work and Pensions (3 June 2003) Review of Employers’ Liability Compulsory Insurance: First Stage report. DWP, London. • Department for Work and Pensions (4 Dec 2003) Review of Employers’ Liability Compulsory Insurance: Second Stage report. DWP, London. • Flanigan, G.B., McCullough, K.A. and McGuire, C.R (2004) Occurrence and claims made: the road behind and the road ahead. CPCU Journal Vol.57 No.4 • Foxwell, A. (2006) Union sparks asbestos fears Post magazine 12 Oct 2006 • Hackett, N. (2006) The law turns full circle Post Magazine 19 Oct 2006 • Harrogate Advertiser 17 Sep 2004 – Hospital work delay anger. • HM Treasury (2006) Mesothelioma Compensation: Amending the Financial Services Compensation Scheme. HMSO: London.

20. Further reading (2) • HSE (Dec 2003) Mesothelioma Mortality in Great Britain: Estimating the Future Burden. HSE, London. • HSE (2006) Employers’ Liability (Compulsory Insurance) Act 1969: A Guide For Employers. HSE: London • HSE Press Release (2 Feb 2006) Egg carton manufacturer fined £50,000 over asbestos. • Land, J (2007) Derby City Council fined £50,000 after school asbestos scare. News article appearing in 24dash.com News for the public sector and beyond. http://www.24dash.com/localgovernment/20624.htm. • Sunday Times 25 June 2006 – American stars queue to sue in libel-friendly Belfast • Maguire v Harland and Wolff plc (2004) TLR 29 Apr 2004 • Milton Keynes Citizen 22 Jan 2004 – Asbestos alert on city homes • McGuire, C.R., McCullough, K.A. and Flanigan, G.B. (March 2004) ‘Exposure Triggers and Allocation Methods: Learning Lessons from Prior Court Rulings’. Risk Management and Insurance Review, Vol. 7, No. 1, pp. 73-87. • Savage, R (2007) Practice direction issued for industrial diseases Post Magazine 16 Aug 2007 • The Actuarial Profession Working Group (2004) UK Asbestos – The Definitive Guide. Unpublished. • Tasarruf Mevduati Sigorta Fonu v Demirel & Another (2007) TLR 24 Aug 2007. • Wasa v Lexington (2007)

21. www.QBEeurope.com QBE European OperationsPlantation Place 30 Fenchurch Street London EC3M 3BD United Kingdom Tom Chivers Underwriter – International Casualty Treaty tel +44 (0) 207 105 4626 Email tom.chivers@limit.co.uk