UK: Asbestos Risks and Employer´s Liability Insurance

The recent decision of Mr Justice Lawrence Collins in T&N Ltd (in administration) and ors v Royal & Sun Alliance plc and ors [2003] EWHC 1016 (Ch) has widespread implications for asbestos-related insurance, and also for employer's liability insurance generally. The case involved a number of issues including the ambit of exclusion clauses, and the validity of arguments for rectification, estoppel and set off. Ultimately, the judge decided against the contentions of the defendant insurers on all these areas.

The claimants, T&N Ltd and its associated companies ("T&N"), were for many years involved in the asbestos industry. T&N were in administration in the UK, and had also filed for Chapter 11 protection under the US Bankruptcy Code.

The predominant reason for the administration and Chapter 11 proceedings was to enable T&N to develop a plan to deal with the substantial number of asbestos-related claims pending against them. The administrators argued that leave to commence or continue proceedings against T&N should be refused unless it was clear that insurance was available to cover the claims. Under the Third Party (Rights Against Insurers) Act 1930 (the "1930 Act"), any claimant who was able to establish a claim against T&N would be entitled to recover under any available liability insurance directly from the relevant insurer. Granting leave in the absence of insurance would, the administrators argued, cut directly across the purpose of the administration orders.

The administrators therefore sought a number of declarations in order to establish the availability of insurance cover for, inter alia, the large number of 1930 Act claimants. T&N had taken out employer's liability (EL) policies with two insurers, the Royal as it then was and the Brian Smith Syndicate (45/177) at Lloyd's (the "Syndicate"). The Royal policy spanned from 1969 to 1977 and the Syndicate policy from 1977 to 1995.

In addition to involving the two insurers, the administrators also joined the estate of a representative 1930 Act claimant. Marine Insurance Co Ltd ("Marine") was also a party to the proceedings. Marine was partly owned by the Royal and was a party to a 1997 Settlement Agreement between T&N and various "London Market Insurers". Finally, Curzon Insurance Limited ("Curzon") was also brought into the action by the Syndicate as a Part 20 defendant. Curzon was a captive insurance company of T&N, which had agreed to indemnify T&N in respect of certain obligations that T&N had under the policy with the Syndicate.

The principal issues at trial concerned the construction of the Royal and Syndicate policies. The insurers also raised avoidance defences including non-disclosure and misrepresentation, but these issues will be tried at a later date.

The provisions of the policies included the following:

In the Royal policy:

In this Endorsement the expression 'pneumoconiosis' means fibrosis of the lungs due to asbestos dust and includes the condition of the lungs known as dust reticulation"

In the Syndicate policy:
"It is a condition of this insurance that:-

In relation to the Royal policy, as a preliminary point, Collins J noted joint medical evidence of the parties, which concluded that:

Collins J also noted that the Royal policy spanned the period in which the Employers' Liability (Compulsory Insurance) Act 1969 (the "1969 Act") came in to force. The judge noted that the 1969 Act did not expressly prohibit the exclusions or excesses, "but it is clear that the employer had to be fully insured".

The principal issues were as follows:

1. Royal policy: Ambit of the pneumoconiosis exclusion clause
   It was not in dispute between the parties that T&N had told the Royal at the time of inception of cover that (a) their internal policy was not to insure their employer's liabilities insofar as they related to asbestos claims; and (b) the Royal policy was a continuation of pre-existing arrangements, which had involved T&N handling asbestos liabilities themselves. T&N sought a declaration that the "pneumoconiosis exclusion" was not, on its proper construction, effective to exclude the liability of the Royal to indemnify T&N in respect of claims involving diseases other than pneumoconiosis as defined in the exclusion. In response, the Royal pleaded that there had been a common intention that the term "asbestosis" had a much wider meaning so that the wording of the exclusion incorporated all asbestos diseases, and that the previous policy of T&N to meet all claims relating from exposure to asbestos would continue. In the alternative, the Royal sought rectification of the exclusion clause to accord with the common intention it alleged, or that an estoppel arose (because of T&N's historic conduct in handling claims internally) against T&N.

Collins J held that the exclusion clause was clear and unambiguous in its literal meaning, so that it did not apply to asbestos-related diseases other than asbestosis and pneumoconiosis. The judge held that there was no legitimate process of interpretation which could give the exclusion the meaning which the Royal contended either by reference to the parties' intentions, or looking more widely at the factual matrix. Similarly, the Royal's rectification and estoppel arguments failed as there was no evidence which could support these remedies. The Royal was not assisted here because of delay in raising these arguments.

2. Royal policy: Extent of cover

T&N argued that the effect of discussions between the Royal and themselves in 1971 had resulted in an agreement whereby the Royal would provide full cover for all asbestos-related claims (so that T&N complied with the 1969 Act) but that T&N would, in practice, deal with the asbestos-related claims and bear the first £1,000 of all EL claims. T&N argued that the effect of the agreement was that the Royal still bore the risk of their (T&N's) insolvency.

Collins J agreed with T&N, relying on evidence of an "arrangement" being made and the fact that the Royal must have known that its policy was the only EL policy which T&N had. The judge found there was sufficient support for T&N's claim that the Royal had agreed to provide full cover, although T&N in practice would continue to deal with asbestos claims and that excess arrangements were to apply. The Royal's case (that the arrangements referred to simply meant the practical step of issuing of a certificate) was not realistic in the light of the evidence, which pointed to the arrangements going much further - i.e. that the Royal had agreed to provide a certificate indicating it was giving full cover.

3. Syndicate policy: Construction and set-off
   The Syndicate argued that its policy condition should be construed as an exclusion of its liability for asbestos claims, and that "asbestosis or mesothelioma" should be interpreted to include all other asbestosis related diseases. The judge rejected these arguments, finding that if an exclusion had been intended, there would have been no reason to express it as a condition. Similarly, the judge held that the meaning of the phrase "asbestosis or mesothelioma" in the Syndicate policy condition was not all-embracing, as it was well-known at the time that these were separate, distinct diseases.

The judge also dismissed the Syndicate's argument that it was entitled to set-off any liability it had as a result of T&N's failure to pay the relevant claims. Collins J held that the "whole purpose of the transaction... was to make the Syndicate liable under the policies if T&N were not in a position to meet claims covered by the Asbestos Condition. For the parties to have envisaged a set-off in the circumstances would have made the arrangement a sham."

4. 1997 Settlement Agreement: Did it release the Insurers?
   Neither the Royal nor the Syndicate were specifically named in a 1997 Settlement Agreement (the "Agreement") involving T&N and various "London Market Insurers" but sought in various ways to benefit from it. The Agreement purported to settle various insurers' liabilities under a range of policies T&N had taken out to cover its various asbestos liabilities. In relation to the Royal, Marine had indisputably obtained a release under the Agreement, and it argued that the Agreement extended to the Royal because of certain wording referring to "shareholders, members, ... affiliates". In response, T&N argued this could not release shareholders (i.e. the Royal) from their liabilities under separate contracts with T&N (i.e. the Royal EL policy), and the judge agreed.

The Syndicate raised an analogous argument on the wording of the Agreement, pleading that it fell within the description "all Names, Underwriters and syndicates at Lloyds, whether or not identified in Attachment B hereto that subscribed to any liability insurance policies (a) the existence of which have not presently been established but which were issued to T&N or (b) the existence of which has been established but the identities of the Names, Underwriters and syndicates at Lloyds are not presently known". T&N argued that the Syndicate was not one of the London Market insurers referred to by the Agreement, nor were its policies being referred to, and the Agreement therefore had no relevance.

The judge considered the legal principles on the interpretation of release clauses, relying on the House of Lords authority on their construction in Bank of Credit and Commerce International SA [2001] UKHL/8 [2002] 1 AC 251, and found that the Agreement was in fact a resolution of issues which had arisen from an earlier 1988 ("Wellington") Agreement. Accordingly, it rejected all of the Syndicate's arguments that it was a party or should otherwise benefit from the Agreement.

5. Captive insurer: Whether the Syndicate had 1930 Act rights
   As an alternative argument, the Syndicate pleaded that it was entitled to the proceeds of a Curzon policy arranged by T&N. The Syndicate's position centred on a provision in the policy which allowed T&N to be "indemnified ... in respect of any and all payments they may become liable to make to Underwriters at Lloyd's by virtue of the agreement entered into with them..." . The Syndicate's case was that this allowed it to have a claim under the 1930 Act as a third party, i.e. that it could enforce its rights against Curzon because T&N was in administration and therefore T&N's rights had vested in the Syndicate. If this was incorrect, then the Syndicate was subrogated to T&N's rights under the Curzon policy or was a beneficiary under a Quistclose or purpose trust of the proceeds. The judge rejected all of the Syndicate's arguments. Collins J held that the Curzon policy covered T&N in respect of its obligations to the Syndicate, and this did not give rise to 1930 Act rights for the Syndicate as a consequence. There was also no merit in finding there was a purpose trust created for the Syndicate's benefit because Curzon had not undertaken to pay T&N for the purpose of paying the Syndicate. The judge relied on established principles from Re Harrington Motor Co Ltd [1928] Ch 105, that the proceeds of an insurance policy go to the insured's general assets and are not allocated as trust funds for a particular purpose.

As set out above, Collins J held in favour of the administrators of T&N on every issue. While cases involving the construction of terms of a policy may have limited value as precedents, turning often on the particular wording and factual matrix in each case, the ruling demonstrates difficulties insurers encounter if they seek to supplant a literal meaning of an exclusion or condition in order to limit their liabilities. Where wordings are, as held here, clear and unambiguous, the judge stated that it would require very exceptional circumstances for any departure from this meaning. In relation to asbestos wordings in particular, the judge favoured a narrow interpretation of particular terms and diseases, as defined medically or under a statutory regime. The arguments raised had parallels to the decision of Mr Justice Rix in Cape plc v. Iron Trades Employers Insurance Association Ltd [1999] PIQR Q212, and the judgment of Collins J is consistent with that earlier authority.

On wider issues, the judgment also demonstrates the very significant hurdles parties face where they seek equitable or other remedies to prevent a party benefiting from a clear meaning of a form of words in an insurance policy. The evidential threshold for such judicial intervention remains high. Establishing that a common intention, a shared assumption or a mistake by the parties existed or occurred will prove a difficult task in many cases.

Article by Martin Bakes, Neil McInnes, Lynne Atherton

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