DMC Category Rating: Developed

This case note is based on an Article in the February 2006 Edition of the ‘(Re)insurance Bulletin’, published by the Insurance/Reinsurance teams at the international firm of lawyers, DLA Piper Rudnick Gray Cary. DLA Piper is an International Contributor to this website

Background
From 1960 to 1965 Bolton Borough Council's public liability insurance was provided by Ocean Accident and Guarantee Co Ltd, whose liabilities were subsequently assumed by Commercial Union. From 1 February 1979 to 1 December 1991, however, its public liability insurer was Municipal Mutual.

During the 1960s, Mr Green was employed by a company that worked for Bolton on various building sites. Due to Bolton's negligence, he was exposed to asbestos fibres. Later in his working life he was further exposed to asbestos while employed by another company. In January 1991, he was diagnosed as suffering from mesothelioma and he died in November that year. In February 1994, his widow started an action against Bolton and the other employer and they settled the claim on the basis that each paid half the compensation.

Bolton initially sought to recover under its public liability insurance with Municipal Mutual, the insurer on risk at the time Mr Green developed mesothelioma (in about 1980) and when the condition was diagnosed in 1991. Municipal Mutual, however, said it was not liable for occurrences that arose outside the policy period. The occurrence in this case was the exposure to asbestos in the 1960s, years before it was on risk.

Bolton then joined CU to the action, since Ocean was the insurer at the time of the exposure and CU had taken over Ocean's liabilities.

Although Bolton had known about the claim since 1994, it did not notify CU until October 1997. CU noted the late notification but denied liability on coverage grounds, because the injury occurred outside its policy period. When it became a party to the proceedings, however, it added late notification as an alternative defence.

The Municipal Mutual policy
Municipal Mutual agreed to indemnify the insured in respect of "sums the Insured shall become legally liable to pay as compensation arising out of:

when such injury illness loss or damage occurs during the currency of the Policy and arises out of the exercise of the functions of the Local Authority".

Under condition 6 of the general policy conditions, it provided:
"If at the time of an occurrence giving rise to a claim under this Policy there is or would but for the existence of this Policy be any other insurance applicable to such claim then unless the Policy expressly provides otherwise the Company shall not be liable in respect of that claim except insofar as concerns any excess beyond the amount which would be payable under such other insurance had this Policy not been in force".

The Ocean policy
The Ocean policy provided an indemnity against legal liability to pay compensation in respect of:

The notification clause provided:
"The Insured shall give written notice to the Head Office or Branch Office of the Company of any accident or claim or proceedings immediately the same shall have come to the knowledge of the Insured or his representatives."

Condition 10 was a general "sweep-up" clause:
"The due observance and fulfilment of the terms provisions conditions and endorsements of this Policy by the Insured insofar as they relate to anything to be done or complied with by him… shall be conditions precedent to any liability of the Company to make any payment under this Policy."

Accidental injury
Detailed medical evidence showed that, when asbestos fibres are inhaled, the body’s defence mechanisms are immediately brought into play. These cause microscopic changes in the cells, but nothing that could be called an injury. Many of the potentially harmful fibres are expelled from the body naturally. The development of mesothelioma does not begin for many years. It cannot be predicted if, or when, a malignancy will develop in a particular individual, but the chances of its happening are greatly increased by the presence of asbestos fibres.

So far as Mr Green was concerned, it was believed that malignancy developed in about 1980, but it was a further 10 years before symptoms became apparent.

Bolton argued that it had come under a legal liability to Mr Green, not when he inhaled asbestos while working on their site (because he did not sustain an injury or illness then), but when a cell became malignant in or about 1980, during the currency of the Municipal Mutual policy.

Municipal Mutual, however, argued that "injury" in the policy should be construed as "insult or injury". In a medical sense, the inhalation of asbestos fibres was an insult to the body, albeit not an injury. The only time there had been an accidental insult was when fibres were allowed to enter. The stage between inhalation and development of the disease was not an accident, but the inevitable (or at least unalterable) workings of the human body. In any event, the policy only covered Bolton’s liability arising out of the exercise of its functions as a local authority "during the currency of the Policy".

At first instance, the judge found that the Municipal Mutual policy responded to the claim. CU had no liability under the Ocean policy because no injury or illness occurred when the fibres were first inhaled.

Had this not been the case, however, CU would have been able to rely on its late notification defence because there had been a breach of condition precedent. CU’s decision to rely on the coverage defence was not a waiver of its right to rely on late notification.

Judgment
The Claim against Municipal Mutual
The Court of Appeal agreed that Municipal Mutual was liable to indemnify Bolton against its share of the settlement sum. The argument that injury occurred when asbestos fibres were first inhaled was inconsistent both with principle and authority.

The insurance contract agreed to indemnify Bolton against liability. At the initial exposure or initial bodily reaction to exposure, Bolton had no liability. Mr Green could not have sued for personal injury in the 1960s because at that stage he was not suffering from any injury at all.

It is well accepted that words such as "injury" or "damage" in indemnity agreements do not include injury or damage which will happen in the future (Promet Engineering v Sturge (The Nukila) [1997] 2 Lloyd's Rep 146). In addition, courts at first instance have routinely held that 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 date is when a malignancy is created or when identifiable symptoms first occur did not matter for the purpose of this case.

Injury could not be equated to the "insult" received by the body when exposure first occurred. The word "accidental" did not mean that the bodily injury had to occur at the same time as the accident which was the exposure. It was enough if the injury occurred within the currency of a policy and that it was caused accidentally from the point of view of Mr Green and Bolton.

Municipal Mutual's point that its liability had to arise out of Bolton's exercise of its functions during the currency of the policy was an impossible argument. "During the currency of the policy" would have to appear at the end of the sentence, not in the middle. In any event, it was highly unlikely the parties had any such intention, since it would mean Bolton would be its own insurer for any injury which occurred in a different year from the year in which it was exercising the functions that gave rise to its liability.

The claim against CU
The Ocean policy was in force when Mr Green was exposed to asbestos fibres, not at the time when injury occurred. No bodily injury or illness occurred during the policy period. Consequently, the Ocean policy did not respond to the claim.

There are decisions in the US to the effect that all insurers at risk from the time of first exposure to the diagnosis of disease should be liable to the insured (Keene Corporation v Insurance Co of North America 667 F 2d 1034 (1981). This multiple trigger theory has been adopted in the US for policy reasons in response to the vastly greater numbers of asbestos-disease sufferers. There was no need for the English court to adopt the same approach in the case of a public liability insurance on the specific wording used, where the same policy considerations were not present.

It followed that when Bolton's liability to Mr Green arose, only the Municipal Mutual insurance could respond to Bolton's claim. Condition 6 of Municipal Mutual's policy, therefore, had no effect.

Late notification and waiver
Although it was no longer relevant, the Court of Appeal commented on CU's defence of late notification. It was not disputed that Bolton had breached the notification clause in the Ocean policy. But had CU waived its right to rely on this as a defence because it chose to rely on the coverage argument?

A waiver can only arise if the insurer knows of the facts giving rise to the right it is choosing to forego. The evidence here was that CU was considering late notification in 1997 (as Bolton was aware) but chose to rely on the coverage point.

The judge at first instance had held that CU did not exercise a choice between inconsistent courses and so made no election by which it was bound. It merely left late notification "in the air". Consequently there was no waiver by election.

The Court of Appeal agreed. The legal doctrine of election by waiver only arises when a defendant is facing two inconsistent rights or remedies (The Kanchenjunga [1990] 1 Lloyd's Rep 391). It is not sufficient for a party to have alternative courses. In order for the doctrine of election to apply, the options must be inconsistent or mutually exclusive.

In this case, CU had three options: to deny liability on coverage grounds; to deny liability for late notification; or to deny liability on both grounds. These were not inconsistent with each other because they each led to a denial of liability. The inconsistent course would have been for CU to accept liability.

Bolton's failure to comply with the requirement of immediate notification was understandable, but had CU been potentially liable under its policy, it could have relied on late notification as an additional defence to Bolton's claim.

In the absence of any express communication to the contrary, therefore, an insurer choosing to rely on a coverage point is not precluded from subsequently raising an alternative defence based on a breach of condition precedent.

Back to Top