Asbestos claims have transformed the face of insurance forever, and their impact continues to be felt. But was the asbestosis crisis inevitable, as many now believe? I would suggest otherwise. Information revealed in US courtrooms has shown that directors of producing companies knew long ago about the damage being done.
Today many former participants in the London Market are still struggling to resolve of the legacy of asbestosis economically.
However, ongoing developments make it impossible to estimate the final reserves that will be required. Resolving this complexity is costly, hence the growing role for third-party specialists able to generate economies of scale in the resolution of these issues.
It can take up to 40 years from the time of inhalation for the diseases associated with asbestos to manifest themselves. So old policy years will continue to generate claims for at least two decades. As original insurers are bankrupted, the search for defendants accelerates.
In the UK most claims have been on employers' liability (EL) policies. The date of loss, and the policy impacted, has been taken as the time when the injury “occurred”, i.e. when the dust was inhaled. Where inhalation took place over a period, the award is pro rated across policies in force for the duration of a worker's exposure.
Up until the 1970s, USA asbestos claims came under the Workers' Compensation Act (WCA). The WCA has tightly prescribed monetary benefits, and reinsurers did not then feel the impact. But by the early 1970s, the US product liability regime had been liberalised. Where awards were not prescribed, the amount was dependent upon jury generosity.
The trigger mechanism for US policies produced the biggest impact on the cost of asbestos claims when in 1981 (in The Keene Corporation vs INA) the “triple” or continuous trigger doctrine emerged. Previously, there were two views about the policy trigger, with opinions divided.
One view (exposure) was that the policy at risk when the dust was inhaled should pay. The other held that the insurers at risk when the victim fell ill should pay (manifestation). The US courts decided both should pay, as should the insurers behind policies between exposure and manifestation (exposure in residence). This was dynamite, opening up full policy limit in each year.
The reinsurance market felt the greatest impact. A concept known as the “aggregate extension clause” had been introduced into reinsurance contracts following the Texas cattle feed loss; this permitted the reinsured to aggregate the liability to all victims together for the purposes of reinsurance recovery. Without this, excess loss reinsurers might have escaped unscathed, arguing that each victim represented a separate “event” and could not be aggregated. Therefore while victim numbers fall within actuarial projections, each victim was previously suing only a limited number of companies.
Now lawyers are widening the net and suing many more producers of asbestos products – exposing each defendant to a greater number of claimants. Recent asbestos producer bankruptcies will also increase costs to those still solvent.
The problem in the UK relates primarily to EL claims. Chester Street Insurance recently called in the liquidators as a consequence of a deteriorating pattern of such claims. We can assume that the Policyholders Protection Board will meet their EL shortfall. But this only protects statutory classes, and only for losses “occurring” after 1972. This may leave victims uncompensated in earlier years, because many of the injuries were inflicted long before 1972, and because EL only became a statutory class in 1969.
It has taken much longer for extensive UK litigation to get under way. But there are signs that this is changing, and there have been several decisions in the courts that may increase insurers' exposure. Workers employed by Cape Asbestos, which operated in South Africa, have recently won the right to sue in the UK.
The asbestos debacle looks set to escalate in the London Market at least; a strict lesson to the industry that the awareness, pricing and reserving of industrial health risks is critical.
