IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

IUA 02-018 ACOD/B (Version 2013)

Explanatory Memorandum

Introduction

1. The original suite of Accident Circle Occupational Disease (ACOD) clauses were published in
1984 and were designed to define ‘occupational disease’ and outline the excess of loss
reinsurance treaty policy response to occupational disease claims arising from employers’
liability (EL) and workers compensation (WC) policies. Three clauses were initially published
(and were subsequently also given LSW references in 2000):

 ACOD/A (LSW1600) – this was designed for use in markets where liability was
established on a ‘manifestation’ basis. As we understand it, at the time this was
considered primarily applicable to the Australian liability market. ACOD/A outlines that
any one claim by any one employee is deemed to be one event.

 ACOD/B (LSW1601) – this addressed claims where liability was established on an

‘exposure’ basis (see further details below).

 ACOD/C (LSW1603) – this dealt with claims arising on a ‘claims made’ basis, meaning
that the loss occurrence was deemed to be the date the original insured advised of a
claim after diagnosis by a doctor. As we understand it, it was initially envisaged that this
clause would be applicable in particular to a number of South American, Middle Eastern
and Scandinavian liability markets.

2. Though there have been a number of other occupational disease clauses used in the market
since 1984, many of which use the ACOD clauses as a basis, we would highlight two further
ACOD clauses subsequently published:

 ACOD/B (Amended) (LSW1602) – this adds to ACOD/B (LSW1601) by also including the
‘claims made’ provisions of ACOD/C to address legal liability arising from retrospective
EL/WC policies.

 ACOD/Facility (LSW1604) – this outlined provisions as applying to reinsurance facility

arrangements.

3. For the purposes of the clause review noted below and this explanatory memorandum we are
only concerned with ACOD/B (Amended) (LSW1602).

IUA Accident Circle Occupational Disease (ACOD) Clauses Sub-Group

4. In August 2012 IUA’s Casualty Treaty Group (CTG) reconvened its ACOD Sub-Group with the
following objectives:
IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

(i) To identify and discuss issues in relation to occupational diseases, employers’ liability
and the ACOD clauses, considered to be of interest or concern to the casualty treaty
market.

(ii) To review and update (if appropriate) the current ACOD clauses used in the market.

5. The ACOD Sub-Group had been originally created in 2006 by the CTG following a number of
important common law decisions on the application of joint and several liability principles to
mesothelioma claims (including Fairchild v Glenhaven Funeral Services Ltd 1 and Barker-v-
Corus2) and consequent coming into force of the Compensation Act 2006. Following an initial
consideration of the issues arising, the Sub-Group agreed to limit its review to the ACOD/B
(Amended) clause with reference to the original ACOD/B clause where appropriate.

6. No changes were proposed to the ACOD/B (Amended) clause at that point and the IUA
Casualty Treaty Group agreed to stay its review in light of the on-going and expected future
litigation on the interpretation of common policy wordings governing the ‘trigger’ for liability
policies where cover was provided on an ‘occurrence’ or ‘causation’ basis. This litigation
concluded for employers’ liability policies in the 2012 Supreme Court decision in the EL
Trigger Litigation3. Most recently the Sub-Group also considered the implications of the
Court of Appeal decision in IEG v Zurich4.

7. It should be emphasised that the Sub-Group considered the common law and legislative
changes from the perspective of the potential impact upon reinsurance treaties and to ensure
that the ACOD/B (Amended) clause remained fit for purpose.

8. The Sub-Group received legal advice (from Kennedy’s LLP) on the common law and statutory
developments noted above and also on the interpretation of the ACOD/B (Amended) clause
provisions. Though the provisions of the Compensation Act 2006 changed the legal liability
of employers (and likely their insurers) in relation to mesothelioma claims, this did not strictly
impact the provision of reinsurance. Moreover, the landmark EL Trigger Litigation case
ultimately maintained ‘exposure’ as the basis for legal liability and so was broadly in line with
the operation of ACOD/B (Amended). Consequently, after consideration, the Sub-Group
were satisfied that a fundamental update of ACOD/B (Amended) was not required. However,
the Sub-Group did conclude that several changes could be made to tidy up the language and
provide additional clarity. The new clause, IUA 02-018 ACOD/B (Version 2013) is included in
the Annex below, as is a tracked version of the clause identifying the changes from the
ACOD/B (Amended) to IUA 02-018 ACOD/B (Version 2013) and ‘clean’ copies of the
ACOD/B (Amended) and the original ACOD/B clause.

1
[2002] UKHL 22; [2003] 1 AC 32

2
[2006] UKHL 20; [2006] 2 AC 572

3
BAI (Run Off) Limited (In Scheme of Arrangement) and others v Durham and others [2012] UKSC 14

4
International Energy Group Ltd v Zurich Insurance Plc UK Branch [2013] EWCA Civ 39
IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

9. Upon completion of its review IUA 02-018 ACOD/B (Version 2013) was considered by IUA’s
Clauses Committee, who agreed that it should be allocated an IUA clause reference,
published and made freely available from the IUA Clauses website (www.iuaclauses.co.uk).
This explanatory memorandum will also be added to the aforementioned website.

Commentary on IUA 02-018 ACOD/B (Version 2013)

General Comments

10. Following a thorough review of the legal developments and analysis of the existing ACOD/B
(Amended) clause, the Sub-Group concluded that the two key principles arising from the
existing ACOD/B language – firstly, that the clause defines what an event is for non-sudden
and accidental occurrences and emphasises that one claimant equals one event and,
secondly, that reinsurers’ liability shall be pro-rata of the proportion of the reinsurance period
to the total period of exposure to the hazard – remained suitable and therefore required no
fundamental change. There was a view, however, that a number of amendments might be
applied to a new clause to tidy up the language and clause construction. These are identified
in detail below.

11. Where the word ‘{Response, e.g. Contract, Agreement}’ appears in the clause, contracting
parties should insert the most appropriate term which reflects the terminology used in the
contract to which the clause is to be applied.

12. The numbering of the clause has been slightly amended.

Analysis of IUA 02-018 ACOD/B (Version 2013) in comparison to ACOD/B (Amended)

13. Paragraph 1 of IUA 02-018 ACOD/B (Amended 2013) defines an ‘event’ for the purposes of
recovery for occupational disease or physical impairment other than arising from a sudden
and identifiable occurrence. It is unchanged in meaning from ACOD/B (Amended) with the
only amendment adding ‘insurance policies providing’ in the first sentence, which it is felt
makes the paragraph read slightly better.

14. Sub-Paragraph 1.1 is unchanged in noting that any one claim by any one employee is
deemed one event.

15. Sub-Paragraph 1.2 includes two minor additions designed to clarify the application of the
clause. The key principle arising from the clause is unchanged from ACOD/B (Amended).

16. Article 1.2.1 – the purpose of this article is to set out how a claim is adjusted for the purpose
of the reinsurance treaty recovery. Where the original liability is established on an ‘exposure’
basis then the claim paid by any one period of reinsurance is reduced in proportion to the
total length of exposure (and not in this specific regard dependent upon the legal liability of
the employer and/or their insurers). There are a number of small changes to this Article that
are designed to further clarify this basis of recovery but the underlying principle underpinning
IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

the Article is unchanged from the previous iterations of ACOD/B. The words ‘any one
period’ and ‘concerned’ have been removed from the clause. In making this amendment, we
recognise that a ‘continuous’ treaty which automatically renews each year is a possibility.
However, it is understood that general and widespread market practice is that a new wording
is issued every year and we have assumed this to be the case here. There is not, therefore,
the need to try to introduce continuity into the clause.

Article 1.2.1 is designed to work based on the following formula:

Total Claims Payment Per Employee x 1 (Per Treaty Year)

________________

Total Number of Years of Exposure

17. Article 1.2.2 – this article provides that the treaty retention and limits of liability under the
reinsurance are reduced in amount in the proportion that each period of reinsurance bears to
the total period during which the employer was insured by the reinsured and the employee
was exposed to the hazard of the employment. Again, it is important to be clear that the
underlying principle underpinning the ACOD/B clause has not changed in the IUA 2013
clause. There are two small amendments in the 2013 clause. Firstly, it was felt that the
addition of a second ‘during which’ in the last sentence of the Article makes the clause read
slightly more clearly. More importantly, though, it also serves to emphasise that the reduction
in the limit of liability and the retention are calculated by reference to both the number of
insured years and employee exposure to the hazard in question. Secondly, the word ‘each’
has been removed for the reasons noted in the penultimate sentence in Paragraph 16 above
and replaced with ‘’the’.

Article 1.2.2 will work as follows:

Retention & Cover x 1 (Per Treaty Year)

________________

Total Number of Years of the employee is insured by

the insurer and exposed to the Occupational Disease

Practical Claims Example5

An employee is exposed to a hazard in the course of their employment of 5 years in the

1970’s, resulting in an occupational disease. Insurer A provides employers’ liability cover for
the first 3 years and Insurer B provides cover for the remaining 2 years. Reinsurance is in
place with the same reinsurer for all 5 years, providing £90,000 in excess of £10,000

5
This is based on an example outlined in the initial guidance published with the ACOD/B clause in 1984.
IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

(retention) for Insurer A and £80,000 in excess of £20,000 for Insurer B. The employee
contracts an occupational disease in 2013 and claims under the EL policy. The claim, which
is settled, amounts to £300,000.

In accordance with Article 1.2.1 the amount of a claim payable in each treaty year would be:

£300,000 x 1/5 = £60,000 per Treaty Year

Based on Article 1.2.2 the retention and limits calculation for Insurers A and B will be:

Insurer A

£90,000 x 1/3 = £30,000 per Treaty Year (Non-Indexed Limit of Liability)

£10,000 x 1/3 = £3,333 per Treaty Year (Non-Indexed Insurer Retention)

Insurer B

£80,000 x 1/2 = £40,000 per Treaty Year (Non-Indexed Limit of Liability)

£20,000 x 1/2 = £10,000 per Treaty Year (Non-Indexed Insurer Retention)

As with most long-tail liability policies the retention and limits of liability will be subject to a
reinsurance indexation provision, which is designed to reallocate increases in the costs of
claims between the ceding insurer and its reinsurer through use of an inflation index. The
indexed retention will then be subtracted from the claim payable in each treaty year (in this
case £60,000) to identify Insurer A and B’s respective retentions. The same process would
be undertaken for each policy year.

18. It should be noted that the reinsurance response identified above applies notwithstanding the
legal liability of the employer and insurer, as long as the legal liability of the original insured
to the claimant is established on an exposure basis. Where there are multiple employers,
insurers and reinsurers involved the situation will be more complex but the principle of the
reinsurance treaty per year response and applicable limits of liability and retention remains
the same.

19. The final paragraph of Sub-Paragraph 1.2 has added the words ‘and no amount shall be
recovered hereunder otherwise’ to emphasise the application of the existing provision. For
the reasons noted in the penultimate sentence in Paragraph 16 above the words ‘which shall
be understood to mean exposure between each inception and annual renewal date of this
[Response, e.g. Contract, Agreement)’ have been removed.
IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

20. Sub-Paragraph 1.3 has been slightly amended to tie back the coverage into that noted in
Paragraph 1. However, this does not change the key aspect of the Sub-Paragraph – that if
legal liability is established on any other basis than an exposure basis then the date of the
loss occurrence will be deemed to be the date legal liability against the original insured is
established.

21. The structure of Paragraph 2 is amended to refer to ‘Retrospective Insurance’ policies

(capitalised and therefore defined under Definitions) rather than policies ‘issued on a ‘claims
made’ basis’. It also outlines (in Article 2.3) that in such cases Paragraph 1 will not apply.

22. Paragraph 3 replaces the introductory, uncited sentence in the ACOD/B (Amended)
language to note that the clause overrides conflicting policy provisions.

23. Definitions – as noted a definition of ‘Retrospective Insurance’ policies has been included.

DISCLAIMER

24. The views expressed in this document and the accompanying model clause are not to be
regarded as either definitive or mandatory. All contract terms and conditions must be
negotiated between the parties to a contract and IUA is not in any way either endorsing this
commentary as the typical interpretation or suggesting that the model clause, or any part
thereof, is typical in the London Market. Each party to a contract should reach its own view
on the appropriateness of model clause(s) / wording(s) according to their own circumstances
and may accept, disregard or modify the model clause(s) / wording(s).

25. This commentary represents the consensus views of the individuals (not their employer
organisations) involved at the time of drafting the model clause(s) / wording(s). It does not
form part of any model clause(s) / wording(s) and has been prepared in order to provide
guidance on the understanding of the accompanying model clause(s) / wording(s) and a
possible starting point for negotiating contract clause(s) / wording(s).

26. This commentary is not intended to be exhaustive or definitive and is subject to any views or
interpretation by a Court, regulator or similar body. By including this commentary, IUA is not
providing legal advice and IUA does not accept any responsibility for subsequent
interpretation of the commentary or the accompanying model clause(s) / wording(s), or any
part thereof. Any party considering adopting any of the model clause(s) / wording(s), or any
part thereof, should seek their own legal advice for clarification of the use and intention of the
model clause(s) / wording(s).

International Underwriting Association

July 2013
IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

ANNEX 1

IUA 02-018 ACOD/B (Version 2013)

Employers’ Liability / Workers’ Compensation

DEFINITION OF OCCUPATIONAL DISEASE COVER

1. Insofar as liability is incurred by the reinsured under insurance policies providing coverage for
employers' liability and / or workers' compensation in respect of legal liability for occupational
disease or physical impairment which does not arise from a sudden and identifiable
occurrence this [Response, e.g. Contract, Agreement] shall only provide cover for such
liability on the following basis:

1.1. Where the occupational disease or physical impairment results from exposure to a
hazard of the employment of the claimant, any one claim in respect of any one
employee of an original insured arising out of this exposure shall be considered
individually as one occurrence for the purpose of recovery hereunder.

1.2. Where the legal liability of the original insured to the original claimant is established on
an exposure basis, that is legal liability of the original insured attaches for the whole or
part of the period for which the claimant employee was exposed to the hazard of the
employment, then recovery hereunder shall be on the following basis:

1.2.1. the proportion of the total claim amount in respect of any one employee that
shall be attributable to this [Response, e.g. Contract, Agreement] shall be no
greater than the proportion of such amount which the period of this [Response,
e.g. Contract, Agreement] bears to the total period during which the employee
was exposed to the hazard of the employment; and

1.2.2. the retention of the reinsured and the limit of liability of the reinsurers under this
[Response, e.g. Contract, Agreement] shall be reduced in the proportion that the
period of this [Response, e.g. Contract, Agreement] bears to the total period
during which the employer was insured by the reinsured and during which the
employee was exposed to the hazard of the employment.

Provided always that the exposure shall have taken place during the period of this
[Response, e.g. Contract, Agreement] and no amount shall be recovered hereunder
otherwise.

1.3. In the event of legal liability against an original insured being established for
occupational disease or physical impairment which does not arise from a sudden and
identifiable occurrence on other than an exposure basis (as set out in 1.2. above) then,
IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

for the purpose of recovery hereunder, the date of the occurrence shall be the date from
which such legal liability against the original insured is established.

2. Insofar as liability is incurred by the reinsured under Retrospective Insurance coverage for
employers’ liability and / or workers’ compensation for occupational disease or physical
impairment which does not arise from a sudden and identifiable occurrence, this [Response,
e.g. Contract, Agreement] shall provide cover on the following basis:

2.1. any one claim in respect of any one employee of an original insured shall be considered
individually as one occurrence for the purpose of recovery hereunder; and

2.2. the date of the occurrence shall be deemed to be the date the original insured is advised
of such claim.

2.3. Clause 1 above shall not apply.

3. To the extent that any provision elsewhere in this [Response, e.g. Contract, Agreement]
conflicts with any provision contained within this Definition of Occupational Disease Clause,
the provisions in this clause shall take precedence over any other provision.

Definitions

Retrospective Insurance means insurance policies (issued on a claims made basis) which cover
an exposure period prior to the inception date of the insurance policy covered under this
[Response, e.g. Contract, Agreement].

IUA 02-018 ACOD/B (Version 2013)

25 July 2013

________________
IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

Annex 2

Tracked Changes from ACOD/B (Amended) (LSW1602) to IUA 02-018 ACOD/B ( Version 2013)

EMPLOYERS LIABILITY/WORKER'S COMPENSATION

Definition of Occupational Disease Cover

The provisions of this clause shall override any provisions of any other clause contained herein
which may conflict.

1. Insofar as liability is incurred by the Rreinsured under insurance policies providing

coverage for an Eemployers lLiability Policy and/or Wworkers’ cCompensation Policy in
respect of legal liability for Ooccupational dDisease or pPhysical iImpairment which does
not arise from a sudden and identifiable occurrence thisaccident or event [Response, e.g.
Contract, Agreement] this Agreement shall only provide cover for such liability only on the
following basis:

2.1.1 Where the Ooccupational Ddisease or Pphysical Iimpairment results from

exposure to a hazard of the employment of the claimant, any one claim in respect
of any one employee of an original insured arising out of this exposure shall be
considered individually as one event for the purpose of recovery hereunder.

3.1.2 Where the legal liability of the original insured to the original claimant is
established on "exposure basis", that is legal liability of the original insured
attaches for the whole or part of the period for which the claimant employee wasis
exposed to the hazard of the employment, then recovery hereunder shall be on the
following basis as follows:

(a)1.2.1 the proportion of the total claim amount in respect of any one employee
that shall be attributable to any one period of this [Response, e.g.
Contract, Agreement]Agreement shall be no greater than thethat
proportion of the total of such amount which the period concerned of this
[Response, e.g. Contract, Agreement] bears to the total period during
which the employee was exposed to the hazard of the employment and,

(b)1.2.2 the retention of the Rreinsured and the limit of liability of the Rreinsurers
under this [Response, e.g. Contract, Agreement] Agreement shall be
reduced in the proportion thatwhich each the period of this [Response,
e.g. Contract, Agreement] Agreement bears to the total period during
IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

which the employer was insured by the Rreinsured and during which the
employee was exposed to the hazard of the employment.

Provided always that exposure shall have taken took place during the period of this
[Response, e.g. Contract, Agreement] Agreement which shall be understood to mean
exposure between each inception and annual renewal date of this and no amount shall be
recovered hereunder otherwise.

41.3. In the event of legal liability being established toagainst an original insured being
established for occupational disease or physical impairment which does not arise
from a sudden and identifiable occurrence on other than an "exposure basis" (as set
out in 1.2described above) then, for the purpose of recovery hereunder, the date of
the loss occurrence hereon shall be the date applicable tofrom which such legal
liability against the original insured is established.

5.2 Notwithstanding anything contained herein to the contrary should the Reinsured Insofar as
liability is incurred legal liability by the reinsured under Retrospective Insurance policies of
retrospective coverage for Eemployers’ Liability and/or Wworkers’ Ccompensation (issued
on a “claims made” basis) for Ooccupational Ddisease or Pphysical iImpairment which
does not arise from a sudden or identifiable occurrence, accident or event this [Response,
e.g. Contract, Agreement]Agreement shall provide cover on the following basis: that

2.1 (a) any one claim in respect of any one employee of an original insured shall be
considered individually as one event for the purpose of recovery hereunder, and

2.2 (b) the date of loss occurrence shall be deemed to be the date the original insured
is advised of such claim.

2.3 Clause 1 above shall not apply.

3. To the extent that any provision elsewhere in this [Response, e.g. Contract, Agreement]
conflicts with any provision contained within this Definition of Occupational Disease Clause,
the provisions in this clause shall take precedence over any other provision.

Definitions

Retrospective Insurance means insurance policies (issued on a claims made basis) which cover
an exposure period prior to the inception date of the insurance policy covered under this
[Response, e.g. Contract, Agreement].

________________________________
IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

Annex 3 – ACOD/B (Amended) LSW1602 (clean version)

ACOD/B (Amended) EMPLOYERS LIABILITY/WORKER'S COMPENSATION

Definition of Occupational Disease Cover

The provisions of this clause shall override any provisions of any other clause contained herein
which may conflict.

1. Insofar as liability is incurred by the Reinsured under an Employers Liability Policy and/or
Workers’ Compensation Policy in respect of legal liability for Occupational Disease or
Physical Impairment which does not arise from a sudden and identifiable accident or event
this Agreement shall provide cover only on the following basis:

2. Where the Occupational Disease or Physical Impairment results from exposure to a hazard
of the employment of the claimant, any one claim in respect of any one employee of an
original insured arising out of this exposure shall be considered individually as one event
for the purpose of recovery hereunder.

3. Where the legal liability of the original insured to the original claimant is established on
"exposure basis" that is legal liability attaches for the whole or part of the period which the
claimant is exposed to the hazard of the employment then recovery hereunder shall be as
follows:

(a) the proportion of the total claim amount in respect of any one employee attributable to
any one period of this Agreement shall be that proportion of the total of such amount
which the period concerned bears to the total period during which the employee was
exposed to the hazard of the employment and,

(b) the retention of the Reinsured and the liability of the Reinsurers under this Agreement
shall be reduced in the proportion which each period of this Agreement bears to the
total period during which the employer was insured by the Reinsured and the employee
was exposed to the hazard of the employment.

Provided always that exposure took place during the period of this Agreement which shall
be understood to mean exposure between each inception and annual renewal date of this
Agreement.

4. In the event of legal liability being established to an original insured on other than an
"exposure basis" as described above for the purpose of recovery hereunder the date of
loss occurrence hereon shall be the date applicable to which such legal liability is
established.
IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

5. Notwithstanding anything contained herein to the contrary should the Reinsured incur legal
liability under policies of retrospective Employers’ Liability and/or Workers’ Compensation
(issued on a “claims made” basis) for Occupational Disease or Physical Impairment which
does not arise from a sudden or identifiable accident or event this Agreement shall provide
cover on the basis that

(a) any one claim in respect of any one employee of an original insured shall be
considered individually as one event for the purpose of recovery hereunder,

and

(b) the date of loss occurrence shall be deemed to be the date the original insured is
advised of such claim.

LSW1602

__________________________
 IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

Annex 4

ACOD/B EMPLOYERS LIABILITY/WORKER'S COMPENSATION

Definition of Occupational Disease Cover

The provisions of this clause shall override any provisions of any other clause contained herein
which may conflict.

1. Insofar as liability is incurred by the Reinsured under an Employers Liability Policy and/or
Worker's Compensation Policy in respect of legal liability for Occupational Disease or Physical
Impairment which does not arise from a sudden and identifiable accident or event this Treaty
shall provide cover only on the following basis:

2. Where the Occupational Disease or Physical Impairment results from exposure to a hazard of
the employment of the claimant, any one claim in respect of any one employee of an original
insured arising out of this exposure shall be considered individually as one event for the purpose
of recovery hereunder.

3. Where the legal liability of the original insured to the original claimant is established on
"exposure basis" that is legal liability attaches for the whole or part of the period which the
claimant is exposed to the hazard of the employment then recovery hereunder shall be as
follows:

(a) the proportion of the total claim amount in respect of any one employee
attributable to any one period of the Treaty shall be that proportion of the total of
such amount which the period concerned bears to the total period during which
the employee was exposed to the hazard of the employment and,

(b) the retention of the Reinsured and the liability of the Reinsurers under the
Treaty shall be reduced in the proportion which each period of the Treaty bears
to the total period during which the employer was insured by the Reinsured and
the employee was exposed to the hazard of the employment.

Provided always that exposure took place during the period of the Treaty which shall be
understood to mean exposure between each inception and annual renewal date of the Treaty.

4. In the event of legal liability being established to an original insured on other than an "exposure
basis" as described above then for the purpose of recovery hereunder the date of loss
occurrence hereon shall be the date applicable to which such legal liability is established.
 IUA 02-018 ACOD/B (Version 2013) – Explanatory Memorandum

LSW1601