Insurance warning for group companies

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This article appeared in the Hampshire Chamber of Commerce Chamber News Magazine for July 2012.

A parent company has been held liable for a claim made by an employee of a subsidiary.  The case, thought to be a first, has obvious ramifications for the management and insurance provision of companies within a group structure.  It also provides a reminder of the need to keep copies of all insurance polices for your business, as claims of this type can be made many decades after the event.

The employer was a wholly owned subsidiary of the defendant and was in the business of manufacturing asbestos.  In 2007 the Claimant discovered he had contracted asbestosis as a consequence of exposure to asbestos dust whilst employed by the subsidiary between 1959 – 1962.  By that time it no longer existed and had no known policy of insurance that would indemnify it against claims for asbestosis. The Claimant issued proceedings against the parent company on the basis that it was jointly and severally liable to pay him damages.

The court decided that the parent company owed a duty of care to the employees of the subsidiary and that it had failed to advise on precautionary measures despite its knowledge about the nature and management of asbestos risks. The court went on to say that in appropriate circumstances the law could impose on a parent company responsibility for the health and safety of its subsidiary’s employees.  Those circumstances included a situation such as this case where it was said that:

(a) the businesses of the parent and subsidiary were in a relevant respect the same;
(b) the parent had, or ought to have had, superior knowledge on some relevant aspect of health and safety in the particular industry;
(c) the subsidiary’s system of work was unsafe as the parent company knew, or ought to have known;
(d) the parent knew, or ought to have foreseen, that the subsidiary, or its employees, would rely on it using that superior knowledge for the employees’ protection.

This is an important case for companies to consider.  It will impact on the management of companies within a group structure as well as their insurance requirements.  Traditionally the courts have not “pierced the corporate veil” lightly and it will still be unusual.  However, this case does now provide a test for considering when it may be appropriate.

It is also a reminder that businesses, whether still trading or not, need to keep records of all insurance polices, as claims of this type can be made many years after the event. The problem of tracing historical Employers’ Liability insurers to enable claims to be lodged where an injury or disease may have been caused several years previously has long vexed those involved in the claims process.  In 1999, a voluntary Employers' Liability Code of Practice (ELCOP) established a voluntary tracing process that worked well, helping around 20,000 claimants trace the relevant insurer to pursue a claim.

In February 2011, the Financial Services Authority (FSA) published proposals to replace the voluntary code with a mandatory reporting process with strong sanctions for any non-compliance by insurers.  The Employers’ Liability Tracing Office (ELTO) www.elto.org.uk was introduced to enable searches using a central database. Due to the size of the task, the FSA has now said that failure to submit data by April 2012 will not be treated as a breach of the regulations until April 2013.  Insurance Brokers will assist Clients but it is essential that data is collated before next April, regardless of the source of cover, to prevent loss of insurance (a statutory offence in itself).

This article was contributed by two members of Hampshire Chamber’s Tax, Finance and Legal Committee.  Kelvin Farmaner, Partner and Head of Insurance Litigation Team, Trethowans LLP Email: kelvin.farmaner@trethowans.com and Tony Knight, MD of Knightsure Insurance Brokers Ltd Email: bestcover@knightsure.co.uk.