Employers' Liability Policy "Trigger" Litigation

The Court of Appeal recently handed down its decision on the appeal from the decision of Burton J on the six actions, collectively called the "Trigger Litigation". In issue in the case is whether the employers' liability ("EL") insurers who were liable to meet claims arising out of the death of employees from mesothelioma were:

  • those who insured the employer at the date of inhalation of asbestos fibres; or
  • those who insured the employer (if still in business) when the onset of the disease took place (in many cases, some 35 years after inhalation).

The policies in question (broadly) covered "injury sustained" or "disease contracted" during the policy period. Unfortunately, the Court of Appeal delivered three judgments which varied considerably in their reasoning. Lord Justice Rix, delivered the leading judgment and described the outcome of the case as "an unfortunate conclusion." This assessment is reflected in the general disappointment that the judgment has failed to deliver a more cohesive determination.

The conclusion of the Court of Appeal is that different results arise from the different policy language.

Policies including "disease contracted" language are to be construed as being equivalent to policies covering injury "caused" during the policy period, with the result that the policy covering at the time of inhalation will respond. (Rix LJ reached this conclusion on the basis that it reflected the commercial purpose of the policies, although this view was not considered persuasive by Burnton LJ).

"Injuries sustained" language in EL policies is to be construed as meaning the time when the tumour started to develop, although Lady Justice Smith dissented from this view. Accordingly, when "sustained" language is used the policy in effect when the tumour develops responds.

The conclusion with regard to "sustained" wordings is that mesothelioma is not an "injury" until its onset. This conclusion was reached by the Court of Appeal on the basis that they were bound by the earlier Court of Appeal decision in Bolton MBC v MMI [2006] (concerning mesothelioma in relation to public liability policies). Although Rix LJ did not say that Bolton was wrongly decided, he did indicate that, had he not been bound by the precedent, he would have preferred the view that, once mesothelioma develops, it is the risk of mesothelioma created by the exposure which is the injury. In contrast, Burnton LJ found the reasoning in Bolton convincing.

Permission to appeal to the Supreme Court on all the above issues has been granted.

COMMENT: From a practical viewpoint, it is arguable that linking cover to the date of onset (for injury sustained wording) is unsatisfactory. Whereas the date of causation can be fixed with relative certainty, victims will often only learn that they are suffering from mesothelioma once they have started to experience symptoms. Onset will usually be "around 5 years" before manifestation but (retrospectively) determining the exact date of onset will be almost impossible in most cases. As a result of this, Burton J suggested the adoption of a prima facie rule of 5 years before manifestation, but this issue was not argued on appeal. More importantly, though, where an employer has become insolvent or is no longer in business, there will be no policy in place at the time of onset of mesothelioma. It might be expected that the Supreme Court and/or government will not favour an approach which leaves victims without any redress against an employer/insurer.

Employers' Liability Insurance Trigger Litigation [2010] EWCA Civ 1096

Waiver of privilege in relation to application to sanction of a scheme of arrangement

In July this year, Lord Glennie issued a further opinion in connection with the scheme of arrangement proposed by Scottish Lion Insurance Company Limited under section 899 of the Companies Act 2006. The latest opinion followed on from Lord Glennie's earlier dismissal of Scottish Lion's petition to sanction the scheme, on the basis that where there was opposition to a solvent scheme, sanction could not be granted unless the proposing company could demonstrate that the scheme resolved a problem facing both the company and its creditors. That decision was overturned on appeal, and the case remitted to Lord Glennie for a full hearing of the petition.

In addition to objecting to sanction of the proposed scheme as a matter of principle, the objecting creditors challenged the conclusion of the chairman of the meetings of creditors that the necessary majorities had been achieved to approve the scheme. This fundamental question goes to the power of the court to sanction a scheme, since the court is only able to consider whether to do so if the scheme has been approved by a majority in number constituting 75% in value of creditors voting at each meeting. The margin by which majorities have been achieved and the credibility of the process for valuing votes may also be taken into account by the Court in deciding whether to exercise its discretion to sanction a scheme, even where it has jurisdiction to do so.

In Scottish Lion's case, the chairman's decision as to the values at which claims should be admitted for voting purposes was to be reached having taken account of the documentation submitted by creditors along with their voting forms, the advice of the Scheme Actuarial Adviser and the report of an Independent Vote Assessor. A number of votes, both for and against the scheme, were adjusted downwards, the reductions to votes against the scheme being proportionately larger. It was clear that in the absence of these adjustments, the majority in value required to approve the scheme at the meeting of IBNR creditors would not have been achieved. The objecting creditors sought to challenge the methodology used in the assessment of the value of claims and the consistency of its application as between claims of supporting and opposing creditors. In order to support their challenge, they sought disclosure of documents provided to Scottish Lion by the other creditors who voted at the meetings. Some of these creditors, referred to in the Opinion as the Noters, argued that this documentation was privileged. The objecting creditors and Scottish Lion argued that, even if this were the case, the Noters had impliedly waived any privilege by submitting documents in the voting process.

Generally, implied waiver occurs to prevent a party "cherry picking" i.e. waiving privilege in such a partial and selective manner that unfairness or misunderstanding may result. However, in this case, there was no "cherry picking" - the Noters did not want to disclose any of the documentation at all. To use the language of Elias J in the case of Brennan v Sunderland City Council [2009] "they placed no cherries before the court". They argued that they had not originally been parties to the scheme proceedings and had only become parties in order to seek to protect the privilege attaching to their documents.

Lord Glennie nevertheless held that there had been an implied waiver of privilege. Creditors who lodge documentation with the petitioners for voting purposes do so as part of a court process that "is always potentially adversarial and may well become highly contentious". The Noters lodged the documentation knowing that it would be examined by the Scheme Actuarial Adviser and possibly the Independent Vote Assessor as well. They were also aware that the documents might be inspected by the Reporter (who is invariably appointed by the court in a company petition procedure in Scotland), who would incorporate his findings on it in his report to the court. Furthermore, they allowed the documentation to be assessed by the chairman of the creditors' meetings. They therefore wanted the documents to be relied upon so that the scheme would succeed and they must be taken to have waived, vis-à-vis other creditors and those involved in the court process, any privilege in the documents.

Lord Glennie pointed out that the value at which claims were admitted for voting purposes was absolutely central to the issues before the court, because it affected both the question of whether the necessary voting thresholds had been met and the Court therefore had jurisdiction to sanction the scheme; and whether the Court should exercise its discretion to do so. It was essential that (in the rare cases where there is a full challenge to the voting process) the documents lodged by creditors for the purpose of valuing their claims for voting purposes should be available to the other parties to the process.

Nor were the Noters able to rely on certain confidentiality agreements entered into between themselves and the petitioners. The documents were relied on by both the petitioners and the Noters to ensure that a vote in support of the scheme could be registered at an appropriate value and, therefore, in support of the application for sanction. A party who has lodged evidence with the petitioners cannot "seek by private agreement to prevent its circulation to other parties to the litigation".

However, although the documents supporting vote values had to be available to the other parties, this did not mean that the Court would allow the documents to be circulated without any regard to legitimate concerns about commercial confidentiality. A balance would have to be struck. The desire to protect confidentiality would not prevent the substance of the documents being scrutinised so far as is relevant in order to enable a proper assessment to be made as to the fairness and consistency of the valuation process.

It is fairly common in the context of the scheme of arrangement for creditors to ask the company proposing the scheme to enter into confidentiality agreements covering information provided to the company in the course of discussions about claim values. It is now clear that these cannot necessarily be relied upon to prevent disclosure of these documents to other creditors and the court in the context of a challenge to the integrity of the voting process. In most cases, confidentiality agreements would in any event permit disclosure if required by a court order. It is possible to protect confidentiality by asking the court to permit the material to be redacted to remove confidential information that is not relevant to the matter at issue, although there may be some room for debate as to what is and is not relevant. Creditors should give careful consideration to the information they submit, and the format in which they submit it, in light of the potential for it to be disclosed to other creditors in the event of a dispute as to the outcome of the vote.

As a decision of the Scottish court, Lord Glennie's opinion will be of persuasive rather than binding force in England. There does not appear to be any English authority on the issue.

Petition of the Scottish Lion Insurance Co Ltd [2010] CSOH 87

First "Solvent Scheme" in the US

On 21 July 2010, GTE Re obtained clearance from the Providence County Superior Court to convene a single meeting of creditors to vote on an accelerated closure plan under Rhode Island's Voluntary Restructuring for Solvent Insurers statute. The statute has been in force since 2004, but this is the first time it has been used.

Rhode Island is the only state in the US that provides for a global commutation plan for solvent insurers. The procedure is similar to the scheme of arrangement procedure available under British companies legislation, although it is more limited in scope. It cannot be used to deal with discrete books of business – the whole of a company's business must be included in the plan; and it only applies to commercial insurers and reinsurers.

As insurance is regulated on a state by state basis in the US, the procedure is only available to (re)insurers domesticated in Rhode Island. This need to redomesticate in order to use the process may be one of the reasons why the procedure has not yet been used.

GTE Re is a reinsurer that has been in run-off for 20 years, and would seem to be the ideal candidate for such a closure plan. The UK solvent scheme of arrangement process is highly controversial among US direct policyholders, and schemes covering US direct business almost routinely face objections from such policyholders. GTE Re's plan will not face the same issue, but if the plan is a success, other US insurers, including those with direct business, may be encouraged to follow suit. If the procedure proves popular, it will be interesting to see if other states follow suit and implement a similar process.

The GTE Re's meeting of creditors is due to take place on 30 November 2010.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.