Supreme Court reverses decision on proportional recovery in mesothelioma claims
International Energy Group Ltd v Zurich Insurance PLC UK1
Supreme Court, 20 May 2015
The deceased, Mr Carré, and his insured employer, International Energy Group Ltd (”IEG“), were based in Guernsey. Mr Carré was exposed to asbestos during his employment with IEGover a period of 27 years between 1961 and 1988. Following this, he was employed elsewhere for another 20 years and was diagnosed with mesothelioma shortly after. Not long before his death, Mr Carré brought a claim against IEG (which was later settled) on the basis that IEG had negligently exposed Mr Carré to asbestos dust and fibres in breach of their duty of care.
IEG then sought indemnification from Zurich Insurance Plc UK (”Zurich“), whose predecessor had been the insurer on risk from 1982 to 1988. Zurich contended that its liability only extended to a proportion of the overall liability, corresponding to the six year period (or 22.08% of the total loss) of which it insured the employer.
The Compensation Act 2006 (the “Act“) states that a responsible person is jointly and severally liable for the whole damage caused. Since the Act only applied in the UK but not in Guernsey, at first instance, Cooke J applied the principles in Fairchild v Glenhaven Funeral Services Ltd2 (“Fairchild“) and Barker v Corus (UK) Plc3 (“Barker“) and found in favour of the insurer, holding that Zurich was only liable to indemnify IEG for the six year period that it was on risk. Fairchild held that a claimant who contracts mesothelioma, which was caused negligently or in breach of duty by one of his employers, may still have a claim against any one employer, despite not being able to show which period of employment led to or contributed to the disease. Barker had then limited the insurer’s potential liability to their contribution of the risk of the harm arising, often expressed as the length of time that they exposed the individual to asbestos. IEG appealed.
The Court of Appeal found Zurich liable to indemnify IEG for the entire claim, on the basis that the mesothelioma could have been contracted at any time in the 27 years, including in the six year window, on the premise that the cause of action is not the exposure to the risk of mesothelioma, but rather the actual contraction of the disease
We have previously commented on the First Instance decision in the Commercial Court (24 January 2012)4 and the Court of Appeal decision (6 February 2013)5. You can find this commentary in a previous Insurance and Reinsurance Review (pages 10-11).
Supreme Court judgment
Zurich appealed to the Supreme Court and judgment was handed down on 20 May 2015.
The Supreme Court firstly considered whether Barker remained good law in jurisdictions where the Act did not apply (in this case, Guernsey). The Supreme Court held that Guernsey common law should be treated as identical to English common law and that, as the Act could not have any effect, Barker was applied.
Consequently, the Court reversed the Court of Appeal’s decision and unanimously awarded in favour of the insurer, restoring Cooke J’s first instance order in full. The liability of the employer to the victim was apportioned to the insurer according to the proportion of time of which it was on risk. Lord Sumption commented that:
“The theory that an insurer is liable in respect of any year of insurance when the employee was exposed to the risk of contracting mesothelioma is a perfectly satisfactory answer to the question whether the insurer is liable at all […] But it cannot be applied without modification when the question is how much of the loss is attributable to particular years”.6
In its decision, the Court highlighted some problems with the special rule in Fairchild and, indeed, with the Act. Namely that it is contrary to public policy to enable the insured to pick and choose when the insurer will be liable, regardless of when the policy term began. An insurer could thus be held liable to cover periods in which it had not received any premium. Consequently, in considering what would have been the case if the Act had applied, the Court by majority created a new equitable right of recoupment in line with the Fairchild principles, such that IEG could have called upon Zurich in full for the compensation (pursuant to the Act’s provisions), but Zurich could in turn have then called upon the other insurers, and the insured, for contribution for the periods when the insurer was not on risk. Whilst this is promising for insurers, the majority did note that were the responsible employer insolvent, then the insurer would be accountable for the entire compensation sum under the Third Party (Rights Against Insurers) Act 1930.
The Supreme Court unanimously held, however, that the rule relating to proportionate recovery did not apply to the defence costs, “unless there was some severable part of the defence costs that can be specifically related to a period when the insurer was not on risk”7. This means that whilst an insurer’s liability for compensation is limited to its contribution to the risk, it will generally be liable for all of the insured’s defence costs in dealing with the claim. The Court’s rationale for this was that there was nothing to suggest that the costs of defending the claim would have been any less if the claim had been confined to the six year period covered by the insurer’s policy. In any case, the costs were incurred by the employer, with the insurer’s consent, and were covered by the wording in the insurance policy.
Though the Supreme Court’s decision applies only under Guernsey law, the Court’s obiter comments about jurisdictions where the Act applies and the creation of the right of recoupment offers a way to address the inequity created by one insurer carrying the whole liability without recourse to other sources of exposure.