David Lewin, Managing Director
A Swedish manufacturer of industrial fire protection systems sold and delivered equipment to a manufacturing company in the state of Michigan, United States. In May 2001, two employees of the U.S. company were seriously injured during working hours when they tried to extinguish a fire on company premises.
The injured workers began legal proceedings before a U.S. court against the Swedish fire protection system manufacturer. Based on product liability, the workers claimed compensation for personal injuries allegedly caused by the manufacturer’s negligence or alternatively by the breach of an implied warranty.
The workers also sued their employer and claimed compensation based on employers’ liability. While the claim against the Swedish manufacturer was eventually withdrawn, the manufacturer had incurred defense costs and expenses related to the claim.
Swedish Model for Compensation of Occupational Injuries
In principle, the purpose of the Swedish model for compensation of occupational injuries is to restore the economic position of a person who is injured at work or suffers from a work-related disease to the position he/she would be in if the injury/disease had not occurred. The model is a three-tier system:
- In principle, anyone living in Sweden injured or suffering from a disease caused at work is entitled to basic compensation from the social insurance system (allmän försäkring).
- In addition, anyone who works in operations in Sweden is insured in accordance with the Social Insurance Code (Socialförsäkringsbalken).
- For most employees, protection provided by the social insurance system and under the Social Insurance Code is supplemented by industrial injuries insurance (Trygghetsförsäkringen), which is a kind of strict liability insurance financed by employers. Industrial injuries insurance covers the gaps in coverage that are not provided under the other two insurance schemes, for example, compensation for pain and suffering and permanent disability.
In practice, this model excludes private employers’ liability insurance in the Swedish market.
Scope of the Manufacturer’s Liability Insurance Cover
The policy under review here, a general liability and product liability policy, applies worldwide with the exception of the United States and Canada. Through a separate agreement, the coverage was extended to encompass product liability, personal injury and property damage worldwide, including the United States and Canada, at an additional premium.
The policy encompasses two forms of obligations on the insurer (a Swedish insurance company):
- The obligation to conduct the insured’s defense in proceedings instituted by a third party, including bearing the insured’s legal costs.
- The obligation to indemnify the insured in the event that the insured is found to be legally liable to the third party.
Among the applicable exclusions in the policy, the occupational injury exclusion is the one of interest. It states “the insurance does not cover occupational injury (arbetsskada). The insurance covers, however, injury occurred in Sweden, excluding compensation paid by The Occupational Injuries Insurance (Arbetsskadeförsäkringen) or the social insurance or compensation scheme or as an occupational benefit.”
Insurer’s position: Referring to the occupational injury exclusion, the insurer denied coverage and refused to conduct the manufacturer’s defense in the U.S. proceedings. The insurer took the position that the exclusion applies to all occupational injuries, meaning all injuries that arise out of work.
Policyholder’s position: The manufacturer maintained that the exclusion does not apply since the liability for occupational injuries lies with the employer and the injured workers were not the manufacturer’s employees. The manufacturer’s liability, if any, concerned injuries caused by the products they had manufactured and delivered.
District Court and Court of Appeal
The District Court and the Court of Appeal both found in favor of the insurer. In summary, the courts stated that the manufacturer’s interpretation was more reasonable since the insurer’s interpretation would result in very narrow insurance coverage. In reviewing the meaning of the term “occupational injury,” its meaning, from an everyday language perspective, was clear and left no room for interpretation.
Supreme Court Findings
The Swedish Supreme Court found that there was no common party intent as to how the occupational injury exclusion should be interpreted. The exclusion was not discussed during the insurance contract negotiations, including the separate agreement to extend the coverage to encompass product liability, personal injury and property damage worldwide, including the United States and Canada, at an additional premium. The court also found that no settled trade custom exists and that the linguistic formulation does not exclude any of the interpretations maintained by the parties.
The exclusion appears in numerous standard business insurance policies and is related to the creation of industrial injuries insurance (Trygghetsförsäkringen) in the 1970s and the Act (1976:380) on Occupational Injuries Insurance (Arbetsskadeförsäkring). Industrial injuries insurance and the legislation, which constituted an obligation to indemnify regardless of the employer’s guilt, meant that employers essentially had no need to insure themselves against liability for occupational injuries. Accordingly, there was no reason that insurance policies should encompass such protection. This highlights the fact that the exclusion is meant for occupational injuries that affect the policyholder’s employees.
An interpretation that stems from the term “occupational injury” is fraught with difficulties since the meaning of the term depends on its context. The term might relate to a description of the injury and the fact that the injury arises out of work. The definition of “occupational injury” found in the Swedish Social Insurance Code (Socialförsäkringsbalken) states that the term encompasses injury due to an accident or other harmful impact at work. This definition does not address the issue of who is liable for indemnity. Therefore, the term itself cannot form the basis for interpreting an exclusion in a liability insurance contract where the liability to indemnify is first priority.
The term “occupational injury” might also focus on the relationship between employee and employer and refer to an injury suffered by the employee for which the employer is liable. When private liability insurance is issued, the liability must affect the policyholder for payment of compensation. In this context, it is natural to assume that the term “occupational injury” focuses not only on the injury but also on the employer/policyholder’s liability for the injury.
The scope of product liability includes the workplace where products are used, and in these cases employees may sometimes be injured in the workplace using these products. If these injuries were not covered by product liability insurance, the employer/policyholder’s protection against liability to indemnify personal injuries would be strongly limited. Product liability insurance provides protection against claims for damages due to injuries caused by products, and if coverage was excluded for situations where the injury might be described as an occupational injury, the protection would be inconsistent and dependent on random factors.
The actual policy condition is part of a standard policy provided by the insurer. In this case, the insurer was provided with information regarding the manufacturer’s business operations and its need for insurance before entering into the contract. The insurer must have known that the actual policy condition was interpreted differently among insurance companies in the Swedish market. The insurer could have worded the condition to clearly indicate that the exclusion applied to all injuries suffered by employees at work, regardless of whether the injury took place at the policyholder’s workplace or some other employer’s premises. Notably, other insurance companies have taken measures to clarify the clause so the exclusion is explicitly limited to the policyholder’s employees.
The clause should therefore be interpreted as the policyholder asserts. The occupational injury exclusion does not apply in the case of the injuries suffered by the U.S. company’s employees.
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