Insurers have had relatively good fortune this year on the legal front. Personal injury, asbestos and work-related stress cases are still dominating the agenda and insurance firms are waiting eagerly to see whether their luck will hold out across the board. Veronica Cowan reflects on the legal highlights of 2003
At the risk of becoming a hostage to fortune, it could be said that insurers won the legal lottery in 2003. However, compiling a legal review of the year is itself a game of chance depending on different lawyers' perceptions of what were the significant cases. But on balance - to use a safe legal term - it seems to have been a reasonable year for liability insurers in the courts.
While rampaging horses (Mirvahedy v Henly, March) saddled them with strict liability, those insuring airlines flew clear in the English Deep Vein Thrombosis and Air Travel Group litigation (July). And the overturning of a negligence award in September to a child, Ryan Simonds, who broke his arm in a fall from a swing, brought balance to the personal injury market. The Simonds case, coupled with Tomlinson v Congleton BC - in which the House of Lords found against a claimant who had dived into an artificial lake - are "important as a blow for liberty", according to Alan Dury, a partner with law firm DLA, who adds: "The House of Lords is trying to stamp on the suggestion that we are in a blame culture."
In insurers' favour
Certainly, Catherine Leech, a claimant lawyer with Manchester-based Pannone & Partners, perceives more decisions as having favoured insurers than claimants this year. For example, millions of pounds were saved for insurers when challenges by claimants to the discount rate for future loss in Cooke v United Bristol Healthcare failed. The claimants tried to establish that additional indexation should be applied to multiplicands, as opposed to the multiplier, for future loss to get around the effect of the 2.5% discount rate set by the Lord Chancellor under the Damages Act 1996.
Ms Leech explains that, because the cost of care has increased so much, awards are no longer enough for a lifetime's care. She adds: "The judges said they had no authority to interfere with the Act, and are bound by it." But will the claimants renew their application to appeal to the House of Lords? Andrew Underwood, a partner at Keoghs Solicitors, believes not.
"It's unlikely there will be any wrangling in the House of Lords over the issue; this would have happened by now."
Professional indemnity insurance, a large overhead for law firms and other professionals, has also been in the frame this year, notes Frank Maher, a partner with Legal Risk. In Barings v Coopers & Lybrand, although accountants were found to have negligently certified the accounts, Mr Maher points out that the greater part of the losses were blamed on Barings' own management failings, such that by the spring of 1994, negligence ceased to be an operative cause of the bank's losses. However, he alludes to the case's potential impact on other classes of insurance. "Most fault was put at the door of the directors, which is highly relevant for directors' & officers' insurers and insurance executives in companies," he observes.
D&O insurance implications might also spring from the Control of Asbestos at Work Regulations 2002, according to Peter Taylor, a partner with Lovells.
And Glyn Smith, health and safety officer at loss adjuster Cunningham Lindsey, explains why. "While the previous regulations put extensive duties on the employer to protect workers from asbestos exposure, the Health and Safety Executive realised it was unlikely that employers would successfully identify asbestos in buildings before carrying out maintenance and repair work. Hence, the additional duty on those 'in control of the building' to find the material and alert maintenance workers to its presence." He says current predictions suggest a trend of asbestos ill-health among the 500,000 maintenance and repair workers in the UK. And Mr Taylor warns that very few individuals are competent to carry out the required surveys.
Scope of employers' liability
Still on the asbestos front, the scope of employers' liability insurance indemnity for asbestos claims was reviewed in Phillips v Gunner (May), a mesothelioma case following Fairchild v Glenhaven Funeral Services.
The insurer argued that, since it was only on risk for part of the period of negligent exposure to dust, it should indemnify the claimant for that period alone. But the court held that it could not apportion the damages in this way. David Wynn, a partner at Keoghs, comments: "This case has significant ramifications for the insurance industry. Insurers will be required to contribute to uninsured periods of negligent exposure if it is proved that a policy of indemnity was in force at any time during the period of such exposure."
He adds: "This is effectively an extension of the principle in Fairchild and is another nail in the coffin of insurers' arguments on contributions in mesothelioma cases. It is of grave concern that it will have a significant impact on the solvent insurance industry, which will have to pay for dissolved insureds and defunct insurers."
Employers have also been in the spotlight this year, with over 100,000 applications to employment tribunals, and new family-friendly laws adding to their compliance burden. Sheena MacGregor, head of Lawphone at Allianz Cornhill Legal Protection, points to flexible working requirements and more extensive paid maternity leave as significant, while Claire Birkinshaw, legal information manager at Abbey Legal Protection, highlights paternity and adoption leave. On top of these, employers face new laws outlawing discrimination on the grounds of religious belief or sexual orientation, which came into force this month.
Utmost good faith - of the non-religious kind - featured in Brotherton v Colseguros, a case on material non-disclosure, where the Court of Appeal upheld the right of insurers to avoid the policy when policyholders fail to disclose material facts at the time the risk is presented and placed.
Quite a different kind of moral hazard went under the microscope this year in Jones v The University of Warwick in which video surveillance evidence was ruled admissible, despite having been obtained by deception and covert filming. But the sting in the judgement's tail for insurers was that if the claimant later showed there was an innocent explanation, the insurer would be ordered to pay all the costs. This is an important case, reports Mr Dury, who notes alongside it the Scottish case of Martin v McGuinness. In this second case the Court of Session held that it was not contrary to a pursuer's human rights to covertly video them, in order to check whether they were malingering or exaggerating their injury symptoms.
The pursuer in question was filmed in his garden from outside the grounds.
Mr Dury explains that, while the surveillance breached the claimant's right to privacy, a fair trial and fraud prevention took precedence. He adds: "It suggests that video evidence can be used, and the defendant will only be penalised in costs when the investigator's actions were intrusive and extreme."
More good news for insurers this year came in the form of stress cases.
"There have been a few robust stress cases against claimants in 2003," says John Goodman, a partner with Barlow Lyde & Gilbert. One was Pratley v Surrey County Council, which showed that the defendant could succeed by demonstrating that the actual injury suffered was not reasonably foreseeable, even if it was on notice of the potential for another psychiatric injury: "The claimant failed to surmount the strict foreseeability test of Hatton - that there was a real risk of breakdown," he observes. However, it should be noted that the stress case concerning a maths teacher - Barber v Somerset CC - is going to the House of Lords next year.
The predictable costs scheme, for all road traffic accident claims below £10,000 settled pre-issue, was a contentious aspect of the legal landscape in 2003. Claire McKinney, a partner with Davies Lavery, and president of the Forum of Insurance Lawyers, explains that the Civil Justice Council wants to see how this is working before extending it to employers' liability cases (PM, 11 December, p28), but adds: "Meanwhile, FOIL will try to use it for all fast-track cases, whether employer or motor."
Another aspect of costs that has risen to the top of insurers' agendas this year is structured settlements. The Courts Bill - due to become law in April - introduces a judge's right to impose structured settlements, in lieu of lump sums, for future loss and care costs in personal injury cases of over £500,000. The current lack of capacity in the structured settlement annuity market and, therefore, the ability of liability insurers to comply with such court orders, is causing much concern (PM, 11 December, pp30,31). Mr Underwood believes this will bring big challenges over the next six months. "The implementation of the Act, of the rules and the court's interpretation, will be of major significance on all high-value cases involving claimants under a disability, or minors. The Court of Protection will not - or is certainly highly unlikely - to approve settlements pending the rules and so we will have a period of uncertainty."
He adds that the disparity between the cost of a conventional lump sum award, as against the cost of a structured settlement, which must be index-linked, leaves insurers in a potential 'no-win' situation. "The rules will also deal with variation. How insurers achieve orders to cater for improvement, as well as deterioration, is an important issue. Both individual companies and the Association of British Insurers need to lobby over the rules to try to make the best of a difficult situation."
Ms Leech stresses the very real possibility, going forward, of insurers not being able to comply with a court order for structured settlement due to annuity providers having dropped out of the market. "The government wants to see more settlement by these means, but the practicalities of funding them in a lot of catastrophic injury cases leaves a question mark over what will happen."
The Disease and Illness Pre-action Protocol, due to come into force this month, also brings a new compliance burden to insurers and their clients.
Personnel files and occupational health records for potential claimants must be provided within 40 days of a request by individuals considering making a disease claim (PM, 16 October, p36). However, the protocol accepts that a single joint medical expert may not be appropriate. Mr Dury explains: "There is usually a wide issue of causation in medical cases, and this allows more than one medical report, so the defendant can now get its own pre-action report."
According to Paul Evans, a partner at Pricewaterhouse Coopers, the Insurers' Reorganisation and Winding Up Directive, which came into force this year, will have a huge impact on future insurance insolvencies. Its aim is to protect insurance creditors, since few EU countries have a policyholder protection fund to guarantee payment to policyholders in the event of a local insurer's failure. Apart from the usual preferential creditors, insured policyholders now get priority of payment in winding up proceedings over all other unsecured creditors. Mr Taylor adds that the solvency of insurers will be looked at differently, and while this consumer-friendly measure is good for insureds, reinsureds will not get priority.
Looking ahead to 2004, the revised General Product Safety Directive will be implemented in January. Graeme Berry, director of insurance claims for PwC, says this is significant for first-party and third-party insurers when losses result from the recall of defective products. The draft directive on gender, relating to the provision of services, could also affect the underwriting freedom of the insurance industry, although insurers will hope for a dispensation. Ms MacGregor points to the potential impact of the Enterprise Act 2002, which brings a revision of insolvency laws in 2004. This will allow sole traders to be discharged from bankruptcy after one year rather than three.
However, as if to counter the opening assertion that insurers were the legal winners in 2003, the House of Lords overturned a Court of Appeal judgement earlier this month, that will have left household insurers bitterly disappointed. In Marcic v Thames Water Utilities, the Lords withdrew the right of a claimant's home insurer to recoup money for damage caused by sewage overflows (PM, 11 December, p4). So unfortunately for insurers, no chance of opening that floodgate on their account.
THINGS TO WATCH OUT FOR IN 2004 AND BEYOND
- European Gender Discrimination Directive
- Age discrimination - 2006
- Enterprise Act 2002 - revised insolvency laws
- Recovery of NHS charges for all personal injury claims
- Courts Act - on periodical payments
- Code of Practice - use of surveillance cameras
- Revised General Product Safety Directive
- Corporate Manslaughter Bill
- Barber v Somerset County Council appeal to House of Lords
- Asbestos at Work Regulations 2002 - additional duties
- The Insurers' Reorganisation and Winding Up Directive
- Equitable Life case going ahead in 2004
- Proceeds of Crime Act 2002 - regulations in 2004 statutory minimum disciplinary and grievance procedures.
- Analysis: The mystery of the missing Insurance Fraud Taskforce report
- Green light for UK-US insurance trade deal
- Roundtable: Is a single customer view taking off in insurance?
- Travel insurtech Pluto begins beta test
- O’Connor replaces Fairchild at the helm of Broker Network
- Majority of customers support a ban on dual pricing
- Blog: What workplace inequality means for insurers