Phillips v Syndicate 992 Gunner & Ors

The Claimant is the widow and executrix of the estate of the late Arthur Phillips. She sues under the Third Parties (Rights against Insurers) Act 1930 for the outstanding balance of £56,375, plus interest, in respect of a judgment for £205,000 entered by consent against a company called Kinkia Limited on 10 October 2002.

The judgment represents the value of the claim against Kinkia Limited arising out of its admitted negligence during the periods of her late husband’s employment with that company. It seems that he was employed between 1955 and October 1957 and then again, for a second period, between October 1959 and 1970. Throughout those periods the deceased was exposed to asbestos dust and he subsequently contracted malignant mesothelioma. It is common ground that the Defendants were the insurers of Kinkia Limited during part only of Mr Phillips’ employment (i.e. between October 1959 and 18 November 1968). This is the reason why they are refusing to pay the balance of the judgment debt. It is their contention they are only liable as insurers for a proportion of the damages corresponding to the proportion which their period of insurance bears to the total period of Mr Phillips’ employment with Kinkia Limited.

There is no dispute that the Claimant in these proceedings can be in no better position, by reason of the 1930 Act, than that of Kinkia under the relevant insurance contract. The court’s task, therefore, is to determine what rights Kinkia would have had under the insurance contract had it been seeking an indemnity.

In so far as it is relevant, the history of Kinkia Limited may be briefly summarised as follows. It was incorporated on 23 November 1955, having the name Thermac Insulation Limited and it went into voluntary liquidation on 26 May 1972. It was during the period of liquidation that the name was changed to Kinkia Limited on 12 February 1979. The company was dissolved on 29 April 1979.

Mr Rodney Nelson-Jones is the solicitor acting for the Claimant in the present proceedings, and he has given evidence before me to the effect that he organised the restoration of the company to the Register in February 1981 purely for the purpose of its being sued (on behalf of other claimants). Mr Nelson-Jones explained that he is a specialist in asbestos-related disease claims and has some 25 years experience in that field. For the past 20 years, he told me, this type of work has represented about 90% of his practice. His best estimate was that he had conducted at least 250 mesothelioma cases in the course of that time.

What is unique about this case, as Mr Nelson-Jones confirmed, is that in his experience mesothelioma cases had in the past been settled on a full liability basis. No claimant has suffered a shortfall in the amount of compensation for any comparable reason to that now put forward. He has not previously encountered any situation in which an insurer sought to reduce liability on a proportionate basis.

I have been grateful to counsel for their full and clear submissions. The trial has essentially turned on arguments of law and construction, there being very little in dispute on the factual evidence.

One of the matters on which the parties are agreed is that I should proceed on the basis that the terms governing the contract or contracts of insurance over the relevant period correspond to those in a sample employer’s liability policy appearing in the bundle. It is accepted that I need to determine the rights of the parties, having regard to the terms of the 1930 Act, in the light of those contractual provisions. Naturally, during the period with which I am concerned (i.e. 1959 to 1968) people in the insurance industry had very little (if any) experience of “long tail” claims, in general, or claims relating to mesothelioma in particular. Moreover, at that time no one was familiar with the concept of “divisible” and “indivisible” diseases or of the contrast which is drawn, in this respect, between asbestosis on the one hand and mesothelioma on the other. That is a relatively recent development.

As one would expect, therefore, the language of the contract does not take account of these matters and is geared to the experience of the insurance community at the relevant time. As was observed in the American case of Keene Corporation v. Insurance Company of America, 667 Federal Reporter, 2d Series, 1034, 1041, “… the insurance companies failed to develop policy language that would directly address the full complexity entailed by asbestos- related diseases”.

It is the Defendants’ case that they are entitled to withhold 27.5% of the sum due under the judgment, either because of the express terms of condition 6 of the relevant employer’s liability policy or because of a term to be implied in the contract by reason of custom and practice (or possibly to give business efficacy).

It is accepted that the wording of condition 6 represents a standard “rateable proportion” clause as used in employer’s liability policies at the relevant time:

“If at the time any claim arises under this policy there be any other insurance covering the same liability the Underwriters shall not be liable to pay or contribute more than their due proportion of any such claim and costs and expenses in connection therewith”.

Mr Burton Q.C., on behalf of the Claimant, submits that the meaning and purpose of this condition are plain and unequivocal. It is designed to provide for the possibility of reduced payment in a case of double insurance. That is to say, it caters for the situation in which there are subsisting at the same time two or more policies covering the same risk; its wording is not apt to cover circumstances where there have been successive policies of insurance – covering different periods and thus different risks.

The only example of double insurance that was given, in an employer’s liability context, was somewhat quaint. It was simply that there might be cover for injuries to domestic servants deriving from such a policy which were also covered by the employer’s ordinary household policy.

Mr Burton submits that there is no evidence of any relevant custom or practice, being effective to qualify or undermine the meaning of condition 6, or that of the basic provision for indemnity cover, whether at the material time or indeed later. Neither, he argues, is it necessary for business efficacy to imply any term providing for “rateable proportion” by reference to successive policies. I shall return to these points shortly.

The nub of the Defendants’ case is that Mr Phillips’ periods of employment with Kinkia do not match precisely the period of their cover. He was employed for periods preceding and subsequent to that nine year span. The claim against Kinkia was framed on the basis that his exposure to asbestos over the whole of the span of his employment made a material contribution to the risk of incurring mesothelioma. No doubt the claim could have been confined, so as to correspond exactly with the period of the Defendants’ cover. It could hardly be suggested that his exposure over that nine years did not make a “material contribution” (so as to enable the Claimant to establish liability in accordance with the principles expounded in Fairchild v. Glenhaven Funeral Services Limited [2002] 3 WLR 89). It would be more surprising if the Defendants, in the face of such a pleading, were to deny liability on the basis that there had been other periods of exposure which had also made a material contribution. (It may be that they could seek a contribution from any identifiable and extant insurer who had been on risk for any such period – placing reliance upon general legal principles. But that is a separate matter.)

Mr Feeny, appearing for the Defendants, said that if the claim had been confined so as neatly to correspond with their period of cover up to November 1968 “no insurer would wear it”. That was, as I understand it, shorthand for the proposition that it would make no difference how the claim was pleaded; the Defendants would be able to point to any other period of relevant exposure to asbestos (pleaded or not) and claim a rateable reduction in liability, whether sued by their insured for an indemnity or by a third party under the 1930 Act.

I agree with Mr Feeny to the extent that it cannot make a difference to the parties’ respective rights and obligations whether the claim is confined, as I have suggested, or extends over the whole period of exposure. It is necessary, in my judgment, to focus on the nature of the risk covered by the relevant policy – bearing in mind the point made in Keene Corporation to the effect that policy language in the fifties and sixties had not yet developed so as to “address the full complexity entailed by asbestos-related diseases”.

In any employer’s liability policy, the risk insured against is that of being held liable in respect of disease or injury incurred through the employer’s breach or breaches of duty towards an employee. What gives rise to legal liability, in many cases, is the failure to protect the employee at a particular moment in time when going about his duties. In the present context, however, what gives rise to legal liability is the continuing failure to protect the employee from asbestos fibres over a period of time. Of course, at no time between 1957 and 1968 would a lawyer, let alone the employer or insurer, have been familiar with the principles identified in the Fairchild case or, for that matter, in McGhee v. National Coal Board [1973] 1 W.L.R. 1. Nor would they have known about the conceptual differences between divisible and indivisible diseases. There happens to have been a striking and fundamental development in the jurisprudential approach to establishing liability in the context of asbestos-related disease. No doubt, however, the situation can be replicated less dramatically in other contexts. No one can guarantee at the time a contract of insurance is entered into that during the term of the policy there will not be some development of the law, whether by way of judicial development or by statutory intervention, which will render the assumption of risk less commercially attractive. The question is always whether the legal liability at the time it is established is such as to fall within the scope of the risk insured against. Here that is not in dispute. I must suppose here that judgment was entered on the basis of a common understanding that the continuing exposure to asbestos fibres, over the 13 years of Mr Phillips’ employment with Kinkia, arising through continuing breaches of duty, made a material contribution to his contracting mesothelioma (many years later).

There is no doubt that the continuing breach of duty, as we now know it to have been, included the second period of Mr Phillips’ employment between October 1959 and November 1968. Throughout the whole of that period of continuing exposure, the Defendants were on risk in respect of any acts or omissions giving rise to any legal liability to an employee.

I am not here concerned with the risk that the fatal fibre may have been ingested at some point outside the nine year period. That is not relevant to the basis of legal liability underlying the judgment. That was founded upon the continuing nature of the material contribution made by Kinkia’s negligence. That is the approach now adopted by the law of tort in respect of an indivisible disease.

Mr Feeny argues that it would be wrong to import changes in the law of tort wholesale into the law of contract. No one, however, is inviting me to do that. I am being asked to apply the law governing the contractual relations between Kinkia and the Defendants, partly by reference to common law and partly by reference to the terms of the contract itself. As I understand it, the only relevance of Fairchild in that context is that it no doubt informed the common understanding of the parties, at the time when the judgment was entered by consent against Kinkia, as to the basis on which its liability arose (in tort). It is to the law of contract that I must look in determining whether there is any basis (as between insured and insurer) to justify the Defendants in refusing to offer a full indemnity in respect of that liability.

I must therefore consider the arguments advanced in support of the proposition that, vis à vis the insured, the Defendants’ liability is confined to a contribution rather than an indemnity. First, reliance is placed on condition 6 (set out above). That seems to me untenable. The plain purpose of the provision is to give the insurer the right to pay a “rateable proportion” in cases of double insurance (i.e. two or more policies covering the same risk at the same time). I can see no basis in authority, or on the construction of the language, for treating it as embracing successive policies of insurance.

Next, it is said that it is necessary to imply such a “rateable proportion” provision covering successive policies to give the contract business efficacy. It can hardly be suggested that the contract needs such a provision to make it workable. I cannot see why it is necessary, whether one applies the old “officious bystander” test from the Moorcock line of authorities or the modern approach described by Lord Hoffmann in Investors’ Compensation Scheme v. West Bromwich Building Society [1998] 1 All ER 98, 114.

Finally, there was an argument based on custom and practice. It did not seem to be part of the case that any such custom or practice existed at the time when any relevant contract of insurance was entered into (i.e. between 1957 and 1968). Reliance was placed on a limited number of (much later) examples, where insured persons had agreed to accept only a contribution. It is said that this provides a guide as to how the parties would have agreed to approach the matter in the fifties or sixties had they known about “long tail” claims and the concept of an “indivisible” disease. That is, of course, not a conventional “custom and practice” argument, which would depend upon the parties having regarded the particular custom or practice as so well established at the time of the contract that it would be taken for granted as applying to that agreement. The argument really forms part of Mr Feeny’s submissions on business efficacy. It does not, however, assist him in demonstrating that the implication of such a term is necessary.

It is said that it became recognised at some point that insurers would only indemnify on a “time exposed” basis in cases of indivisible diseases. I heard evidence from two witnesses, Mr Christopher Williams and Mr Duncan McMillan, for the purpose of establishing such a practice. The object of this was to “add to, vary or contradict” the basic indemnity provision contained within the written contract of insurance. Accordingly, I agree with Mr Burton that it was strictly inadmissible. The evidence was inadequate to prove the custom in any event.

At best, there seems to have been an intra-insurer understanding from some point in the late eighties or early nineties as to how they would approach “long-tail” claims as between themselves. They seemed ready to share out the responsibility on a “time exposed” basis and where, for any relevant period, it proved impossible to establish that insurance cover had been in place at all, or to identify a relevant insurer, the employer would sometimes be asked to make a contribution rateably for the “missing years”. An example was given in relation to a case called Edwards v. Morfax Limited in July 1992, where a solicitor called Mr Champneys of Greenwoods was representing the employer in question and appeared to accept this without demur. That situation could hardly have relevance, as Mr Williams agreed, if the employer in question was insolvent.

Such a practice, if it existed between insurers, is quite different from an established custom or practice governing transactions between insurers and insured. There was no evidence to that effect. Had there been anything remotely to be characterised to a “custom or practice” in that context, it could hardly have escaped the attention of Mr Nelson-Jones during his long specialist career.

My attention was also drawn, by way of illustration, to a letter from another very experienced solicitor dated 31 August 1995 in connection with a case called Ward v. MorfaxLimited. Mr Reid of Davies Arnold and Cooper was writing to Cornhill Insurance specifically on the proposal that insurers could avoid liability because of periods where cover could not be proved. What he wrote was this:

“2.

Uninsured period/unidentified insurers

The schedule prepared by B.R. Smith proposes that Insurers are not responsible for those periods where Morfax were either uninsured, or have been unable to identify their insurers. However, in our view each insurer on risk for a relevant period of employment/exposure will be responsible for the whole of the Plaintiff’s damages and costs and cannot make a deduction for any uninsured/unidentified period.

This is a mesothelioma case. The state of medical knowledge is such that it is impossible to identify exactly which period of exposure caused the development of the mesothelioma. All that it is possible to say is that the greater the exposure, the greater the risk. We consider that a Court will take the approach that each period of employment/exposure will have materially contributed to the development of the disease, and that this will enable the Plaintiff to discharge the burden of proving causation for any particular period of employment/exposure. In our view, the result will be that any relevant period of employment/exposure which materially contributed to the development of the disease will be held as be responsible in full. This is an approach which has previously been adopted by the Courts, in particular in the cases of McGhee v. National Coal Board and Bryce v. Swan Hunter Group. Any insurer on risk for a relevant period of employment/exposure, subject to any arguments about latency periods etc., will therefore be responsible in full for the claim”.

I am quite satisfied that no generally recognised custom or practice can be established even in the mid-nineties, when long-tail claims had become familiar, let alone in the fifties or sixties. Indeed, Mr McMillian’s evidence was to the effect that in those days the insurance market was relatively “unsophisticated”, and that it was only much later that “ad hoc market agreements began to emerge” regarding the sharing of asbestos claims. Moreover, he was unable to cite a single example from his knowledge where, in such a case, any syndicate had refused to pay a claimant at full value. He had no personal experience of mesothelioma claims. He spoke of an understanding developing with regard to deafness claims from the mid-seventies, but that would now be regarded as “divisible” or arising from the cumulative effect of excessive noise over time.

One of Mr Feeny’s arguments was that, bearing in mind the Fairchild approach, Mr Burton is wrong to characterise the successive periods of insurance cover, for the purpose of condition 6, as not relating to “the same liability”. He argues that the insurers both before and after the Defendants’ period of cover would have been covering “the same liability”. I disagree.

First, it is to be noted that condition 6 is framed in terms of a specific point in time (i.e. “the time any claim arises”). Secondly, the separate periods of insurance cover relate to different slices of a continuing breach of duty. What gives rise to liability in the present context is the fact of the employer’s having made a material contribution, through negligent acts or omissions, to the deceased’s having contracted mesothelioma.

It would be possible to prove over a long employment career that a material contribution was made in (say) years one to two and years eight to ten. In my judgment, however, it would be a mistake to speak of “the same liability” in that context. There would be two periods of “material contribution”, each of which would thus give rise to liability on the employer’s part. Correspondingly, an insurer giving cover in respect of either of those periods would thus be bound contractually to indemnify the employer in respect of the liability. Of course, the law would not permit double recovery. Moreover, the availability (or otherwise) of contributions between insurers (whether under the law or an intra-insurer agreement) does not affect the contractual liability to the insured.

I have come to the conclusion that the Defendants were bound under the contract to indemnify Kinkia in respect of the “material contribution” made by its continuing negligence throughout the period of cover between October 1959 and November 1968. Accordingly, the Defendants are not entitled to confine their liability in the proceedings brought under the 1930 Act. The Claimant is entitled to judgment.