Keeping employees covered

On 28 March the Supreme Court gave its much-anticipated judgment in the employer’s liability (EL) policy ‘trigger’ litigation. In a majority decision the court reintroduced certainty in how certain types of EL insurance policies should respond to claims for mesothelioma, an invariably fatal cancer associated heavily with occupational exposure to asbestos.

The court’s decision in part overturns the controversial 2010 Appeal Court ruling and reinstates the historic practice that all EL policies ­respond to the culpable exposure of an employee to asbestos by their employer (ie the event that ‘caused’ the resulting disease) during the ­period of insurance. This was despite the ­express wording of the policies that all stated that they covered the ­employer for diseases ‘sustained’ or ‘contracted’ during the period of ­insurance. The insurers argued that these words pointed towards the date of development (not causation) of the disease, which occurs many years after exposure to asbestos. 

The effect of the decision for disease sufferers, their families and their employers, is to minimise the possibility that there will be no insurance cover capable of responding to their claims because the claims will be allocated to the insurance policy in place when the ­employer was ­actively – and culpably – exposing their employee to ­asbestos. It has been estimated that hundreds of ­millions of pounds worth of insurance and reinsurance liabilities turn on the outcome of the case.

There are a number of lessons commercial litigators can draw, both as a matter of principle and practice. The result was clearly another example of the court placing a ‘purposive’ approach to contractual interpretation above the strict natural meaning of the words used. It had been ­observed during the appeal that ­several weeks of court time had been spent agonising over the meaning of just a few words. 

However, the Supreme Court ­disapproved the over-concentration on the literal meaning of individual words in the contract in favour of a broader, contextual approach drawing on the other terms of the contract and the perceived commercial ­purpose of the transaction. In applying the increasingly influential Supreme Court decision in the 2011 Rainy Sky case, the court said that an outcome which left a small but “not insignificant” number of employers without EL cover for mesothelioma claims could not be the interpretation most consistent with business common sense.

Importantly, the court firmly ­rejected an attempt by some of the parties to rely on witness evidence from large numbers of insurance market practitioners about their ­perceptions and understanding as to how the policies worked. Just as the parties to a contract cannot be asked what they meant by their contract, it was also inadmissible to ask other persons ­operating in the market to give general evidence as to what they believed the parties intended.

The result will hopefully check the costly trend in commercial contract cases of presenting huge amounts of largely irrelevant material to evidence issues perceived to relate to the factual background to the contracts.