Cover: The Insuring Clauses
8. Cover: The Insuring Clauses
Liability insurance provides cover in respect of the insured’s liability, usually for loss or damage to another person for which the insured is responsible. The contingency which triggers the insurer’s obligation turns on the insuring clauses of the policy. The exact trigger, the form in which liability appears, may be actual loss to the insured, the occurrence out of which the loss (actual or potential) arises or, more commonly today, the making of a claim by a third party, the victim, against the insured. When the contingency occurs, the insurer’s main obligation is to indemnify the insured against financial loss, to protect the assets of the insured. However, the insurer’s obligation is usually qualified by policy terms.
For example, a policy might cover (a) architects, Gloucester & Co, against claims for civil liability, unless (b) the claim is pursued in the courts of the United States, or (c) the claim is for punitive or exemplary damages, and provided that (d) the insured shall notify the insurer in writing as soon as practicable of any claim made against him. In this simplified example, term (a) functions as the insuring clause, one which describes the risk; it defines cover in positive terms of two kinds, the person or business insured and the peril insured against. Term (b) is an exclusion, which also serves to define cover, however, in negative terms: it qualifies the ordinary meaning of term (a) that the cover extends to all kinds of liability claim.462 Term (c) also qualifies the scope of cover but (arguably) in a different way and is called not an exclusion but a warranty.463 Term (d) is not concerned with the scope of cover as such but is designed mainly to make the contract less burdensome to the insurer; terms of this kind are often called procedural conditions.464 This section of the book is concerned with terms of type (a).
The event that brings a case within the scope of a particular period of cover is the event that is specified in the insuring clause.465 It may be loss in the definitive sense of the establishment of the insured’s legal liability.466 Alternatively it may be an earlier event such as the “occurrence” giving rise to the insured’s liability, or the damage which was inflicted on the third party, or the negligence on the part of the insured that caused the damage. However, liability for negligence arises not at the time of the negligence but “at the time of the accident, when negligence and damage coincide.”467 Thus it is important to be able to identify damage,468 as well as the time at which it occurs.
8.2 Damage: Time of Occurrence
The occurrence specified in the insuring clause of the policy may be the negligence of the insured.469 Alternatively it may be the damage inflicted. In a policy to cover a bank against the receipt of forged or stolen documents, for example, the occurrence was once construed to be each separate occasion on which this occurred.470 This kind of construction is all too familiar in, for example, theft cover. However, a senior judge once cautioned that, in seeking to identify the time of the occurrence in liability insurance, a “pure analogy” with property insurance is not appropriate.471 Judges in the past have pointed out that much depends on the particular policy and the particular context,472 and this kind of approach to the meaning of “occurrence” has been maintained by the courts: it depends on context, i.e., the surrounding terms of the policy and the object sought to be achieved by the policy.473
PI policies commonly exclude cover for “damage” to persons—death, bodily injury, or sickness—as well as damage to property.474 When, however, damage is an element in cover, the time of damage decides whether it falls within a particular (period of) cover or a particular policy. If it is clear that damage has occurred in one particular period of insurance, it may still be possible to contend that the damage is not confined to that period but straddles two or more periods of insurance. If during one insurance period property for which the insured is liable has not been damaged but the condition of the property has become dangerous and the period ends before the property explodes or catches fire, there can be no claim in respect of property damage under the policy then in force. However, it should be recalled that damage during one insurance period, which is but a development of damage such as spillage of toxic material in a previous period, is not covered in the later period but belongs to the previous period, unless there is a new, related but distinct development in the later period.475 Also covered by the earlier insurance is the case of loss that occurs in that insurance period, which exposes the property insured to the possibility of (further) loss outside the period.476 The further loss is likely to be seen not as a new development but as a development of the earlier loss.
Particular difficulty is encountered when the damage is of a kind that may be more or less latent for many years, such as that caused by asbestosis or cancer. Experience in the United States suggests that there are four major possibilities with regard to the time of damage.477
The first is a rule that looks to the time of exposure—the time when the third party is exposed to the hazard which gives rise to the action against the insured.478 The point of such a rule is mainly to deal with cumulative disease, bearing in mind that the:
underlying theory of tort liability is that the asbestos manufacturers continually failed to warn the asbestos workers … The insurance policies before us are comprehensive general liability policies which are designed to insure the manufacturers against products liability suits. The contracting parties would expect coverage to parallel the theory of liability.479
Moreover, if there is any doubt about what the policy means, the court in that case felt that it should interpret it so as to promote cover.480
In long-tail cases exposure occurs relatively early in the sequence; however, at this stage there has been no actual damage as is usually necessary for liability in tort:481 “words such as ‘injury’ or ‘damage’ in indemnity agreements do not include injury or damage which will happen in the future”;482 hence there could be no liability on the part of the insured.
Contrast the “Trigger Litigation” in England: in Durham v BAI the employer’s liability insurance covered “injury sustained or disease contracted during the policy.”483 In an expedited appeal to the Supreme Court on this wording, the point of exposure was preferred.484 Lord Mance, with whom the rest of the panel agreed, said:485
To resolve these questions it is necessary to avoid over-concentration on the meaning of single words or phrases viewed in isolation, and to look at the insurance contracts more broadly. As Lord Mustill observed in Charter Reinsurance Co Ltd v Fagan … all such words “must be set in the landscape of the instrument as a whole” and any “instinctive response” to their meaning “must be verified by studying the other terms of the contract, placed in the context of the factual and commercial background of the transaction.” The present case has given rise to considerable argument about what constitutes and is admissible as part of the commercial background to the insurances, which may shape their meaning.
He noted486 that the majority of the Court of Appeal considered that “it was impossible to view policies with pure ‘sustained’ wordings as operating by reference to the initiating or causative factor of a disease”; and did so “primarily by reference to the wording of the insuring clauses” Lord Mance concluded, however, that a “broader approach is necessary,”487 and that:
although the word “sustained” may initially appear to refer to the development or manifestation of such an injury or disease as it impacts employees, the only approach, consistent with the nature and underlying purpose of these insurances … is one which looks to the initiation or causation of the accident or disease which injured the employee. The disease may properly be said to have been “sustained” by an employee in the period when it was caused or initiated, even though it only developed or manifested itself subsequently.488
The second possibility is one that refers to the “injury in fact”—the time when the hazard actually causes damage.489 An obvious objection to such a rule lies in the difficulty of proving when damage actually occurred.490 Another objection is that application of the rule would require a case-by-case study which, in the end, has little value as precedent. The Court of Appeal did apply the “injury in fact” rule in Bolton v Municipal.491 However, public policy considerations, which might have led the court to a different rule, were not pressed in this case because the insurance period could be ascertained.
In the United States, objections such as those mentioned above (8.2.2) led to a third rule, the manifestation rule, which looks to the time when the damage becomes manifest.492 An obvious objection to this rule is that it is a “cut-and-run concept,” which has the effect of reducing cover: “insurers would refuse to write new insurance for the insured when it became apparent that the period of manifestations, and hence a flood of claims, was approaching.”493
Concerns like this led to a fourth rule in the United States, according to which any insurer, with a policy in force at the time of initial exposure, continued exposure or manifestation,494 was liable for the entire amount; this was called the “triple trigger” rule. The drive in this direction was fuelled by public policy in favor of victims.495
Although similar concerns were apparent in England at first such decisions seemed unlikely. However, the decision of the Court of Appeal in Fairchild,496 that a claimant could not recover damages because it could not be established on the balance of probabilities when it was that he inhaled the asbestos fiber caused the mesothelioma and hence which company employed him at the time and which insurer was on risk, was reversed by the House of Lords on what were, clearly, grounds of public policy: the injustice that might arise from the imposition of liability on any particular employer was greatly outweighed by the injustice of denying redress to the victim.497 Subsequently, in Barker v Corus498 the House of Lords held that each employer (and insurer) sued was liable only for the amount of the damage that employment had probably caused, the amount to be determined by an apportionment between the employers in question.499
Liability for damage premises that damage, for which the policyholder might be liable, has occurred. In this regard various issues are current. One concerns environmental damage. The risks that are insurable in respect of climate change is the subject of debate and discussion in insurance markets such as Lloyd’s, as well as being a major insurance concern in Asia.500 Of climate change, an experienced English practitioner observed501 that contract “provision is always harder where invariably, as here, a combination of causes will be responsible for losses.”502 Traditional limiting phrases such as “exclusively caused by” or “exclusively attributable to” will make forms with such phrases hard to sell.503 Moreover, the effects of climate change will not be insurable unless limited by aggregation clauses and the like.504 The factor of insurability also suggests that third parties should have no rights or standing in such matters but, of course, some influential social groups will not agree.505
One associated issue, for example, is what amounts to a “flood”;506