Expertise in Action: Employers’ Liability: Taking the hit

Stormy weather lies ahead for the poorly performing employers’ liability market, according to leading insurers and brokers. They say it is unlikely to absorb the 2.74% levy on premiums – or £371m annual cost – that will fund compensation for mesothelioma sufferers unable to trace insurers or employers.

The levy is part of a package of reforms introduced in the Mesothelioma Act, passed by parliament at the end of January. Its aim is to plug a gap that left some sufferers of the fatal asbestos-related condition without access to compensation. But from this July, victims will be able to turn to a new compensation scheme if they are unable to trace the employer or their insurer from the time when they were exposed to asbestos, which in some cases may be as long ago as 30 years.

“The reality is that the market is already losing money on EL, so the last thing it can do is absorb an additional cost,” says David Williams, managing director of underwriting at Axa Commercial Lines and Personal Intermediary. With EL insurers having taken a big hit on industrial deafness claims in 2013, most are in no position to absorb any extra costs, he adds.

John Latter, director of the technical centre for claims at Zurich Insurance, agrees. He says: “This is an additional levy and we will have to flow it through to the pricing in future. Just how much impact it will have will depend on the profitability of EL books.”

While premiums will increase, the full cost of the levy is unlikely to feed through to policyholders, according to Bill Kirkham, occupational disease claims practice leader at Marsh Risk Consulting, who says: “It is possible that insurers will pass the cost of the scheme on to customers via increased premiums. While the impact assessment undertaken as part of the consultation process considered this to be [an] unlikely [outcome], it concluded that if such an approach were adopted, the impact on customers would be relatively low – estimated at 2.27% on EL insurance premiums over the first 10 years of the scheme.”

Tracing success
The new scheme will pay out 75% of the average court award for mesothelioma, based on an age-related tariff. It will be open to sufferers who have been diagnosed since 25 July 2012, with a cap on legal costs expected to be set at around £7000. Currently, awards are between £100 000 and £200 000 (with 75% of the average settlement at £115 000).

All claimants have to demonstrate is that they were negligently exposed to asbestos – not usually difficult to establish – and that they or their representatives have failed to trace the employer or their insurers.

The proportion of claimants who fail to find either employer or insurer has diminished rapidly since the Employers’ Liability Tracing Office took over from the previous voluntary scheme in May 2011. The ELTO has raised the tracing success rate on a throughput of 137 000 enquiries in 2013 from just over 60% to 77% – over three times as much as the old industry-led scheme.

Claimants who successfully trace an employer or insurer can then pursue their claim through the courts with the prospect of receiving 100% of the damages, subject to legal costs. Those mesothelioma sufferers left without someone to pursue will be referred to the new service, with current estimates agreeing that this will be around 300 a year to start with, followed by a gradual reduction from 2016 onwards. There is already a backlog of 600 claims in the system.

The scheme is currently being set up with the first key decision being who will get the job of running it. This has been put out to tender by the Department for Work & Pensions, which will not commit itself publicly to a date for announcing who has won the tender. The front-runner is believed to be third-party administrators Gallagher Bassett, although neither the DWP nor the company would confirm that.

This will disappoint many in the market who would have preferred to see the job done by the Motor Insurers’ Bureau, which already runs the ELTO.

“We would prefer to see the scheme consolidated around the existing compensation mechanisms in the market”, says Williams. “I worry that if it is an independent organisation, the scheme will be managed entirely on key performance indicators and price, and it may not be as quick and efficient.”

Others were less concerned – they believe the terms of the scheme should mean that claims can be dealt with quickly. “The scheme should work quicker than claims at common law,” says David Pugh, partner at Keoghs and head of the Forum of Insurance Lawyers’ disease sector focus team.

“Payments are tariff-based, so that will remove a significant area of enquiry. This should reduce delay. There will inevitably be some teething problems, as the scheme administrator and claimant representatives will both need to get used to the process,” he continues.

Following the appointment of an administrator, the DWP will have to appoint both an oversight committee to monitor its operation and a technical committee to deal with disputes. And not surprisingly, insurers, claimant and defendant lawyers are all lobbying hard to be represented on these committees.

Extension opposition
Looking further ahead, insurers are already digging in to resist attempts to extend the scope of the scheme. There is pressure from claimants to increase the percentage of the awards to 100% of the average compensation awarded in the courts, or to extend it to cover other asbestos‑related conditions or historic industrial injuries.

The Association of Personal Injury Lawyers backs calls – first made in the House of Lords by Labour DWP spokesman Lord McKenzie of Luton – to push compensation up to 100%. “We’ve always said that mesothelioma sufferers who can’t bring a claim should not be penalised by losing any of their compensation. Premiums have, after all, been paid over many years specifically to help people in this situation. For that reason we will, of course, continue to seek full compensation for these people,” says an Apil spokesman.

The Association of British Insurers said it saw no reason to increase the percentage paid out, with a spokesman saying: “The Act sets out the payments that mesothelioma sufferers will receive on the basis of as simple age-based tariff. The tariff will not change in relation to the number of claims to the scheme.”

Insurers will also resist any extension to other industrial injuries or disease, according to Latter. He says: “We have been very clear from the outset that it is to cover mesothelioma only. It is very clear that it is a unique condition – if you have it, it is through exposure to asbestos and that will have been at work. With other disease types there will be less clarity around causation and liability.”

Others were less sure insurers would be able to hold the line on this when the levy comes up for its first four-year review in 2018. “There is likely to be political support for extending the scheme,” warns Kirkham.

The DWP has already done the calculations for extending the scheme to other asbestos-related conditions and estimated that it would result in an additional 4500 extra claims over 10 years, adding £47m a year to the cost of the scheme and potentially doubling the levy on premiums.