Case Alert - [2016] EWHC 1786 (QB)

Whether subrogated claim relating to mesothelioma could be brought where party not a co-insured throughout period of exposure/allocation of defence costs

The judge's earlier decision on certain preliminary issues in this case was reported in Weekly update 18/16. The defendant parent company had (on the facts of the case) been found liable to the employees of its wholly-owned subsidiary ("the subsidiary") who had been exposed to asbestos as a result of working for the subsidiary. The subsidiary's employers' liability insurer sought to recover from the parent company.

In 1964, the subsidiary had sold all its assets to the parent, in return for an indemnity from the parent company. Some months later, an endorsement was added to the subsidiary's employers' liability policy which, it was held, precluded the subrogated claim for asbestos-related illnesses because the parent company had been added as an insured.

In this case, one of the issues was whether the insurer could bring a subrogated claim for mesothelioma where there had been exposure to asbestos both before and after the parent company had become an insured under the policy (the so-called "straddlers" issue). The insurer's argument was based on the principle that for mesothelioma claims, each defendant is liable for the whole of the damage (not just a proportion) where there has been any material exposure (as a result of the Compensation Act 2006), and so it could bring a subrogated claim (for the full amount) in respect of exposure before the parent company became a co-insured. The parent company countered that the subrogation claim was barred because it had been a co-insured for at least some of the relevant period. Picken J agreed with the parent company.

Nor could the subsidiary limit its claim to liabilities incurred before 1964 alone: that "would constitute an unfair selection of the period to which a loss is to attach". The judge cited an extract from Zurich v IEG (see Weekly Update 18/15) in which it was said (in a different context) that "it is contrary to principle for insurance to operate on a basis which allows an insured to select the period and policy to which a loss attaches. This is elementary. If insureds could select against insurers in this way, the risks undertaken by insurers would be entirely unpredictable". It was said to be impermissible for the subsidiary to frame its case so that the policy responded in full to the liabilities of one co-insured but not the other (especially where claims straddled the period before and after co-insurance).

Nor was apportionment permissible. The insurer had sought to rely on Zurich v IEG, but the judge distinguished that case on the basis that here the insurer had agreed to cover the parent company for the same period when the subsidiary was covered under the policy. The judge also rejected an argument that Lord Mance in Zurich had impliedly accepted a set-off argument in circumstances where the insured is solvent.

The above issues did not arise in relation to claims brought by employees for divisible diseases (such as diffuse pleural thickening), where a tortfeasor is only liable to the extent of its contribution to the total exposure. The parties agreed that no subrogation claim could be pursued in relation to the period where the parent company was a co-insured (but a subrogated claim could be brought when it was not a co-insured).

An issue also arose as to whether the insurer could recover any of its defence costs for the "straddler" claims from the parent company. Reliance was placed by the parent company on a textbook extract and prior caselaw which supported the submission that a policy should cover all costs incurred in the defence of a claim even if that might overlap with matters which are not covered under the policy. The judge agreed with those arguments and noted that the policy here required the insurer to pay "all costs and expenses" (as had also been the case in John Wyeth v Cigna [2001], where the Court of Appeal held that the insurers were liable for the full amount of the defence costs even some of those costs also related to claims which were uninsured). It made no difference that the issue here was not whether the subsidiary could recover its defence costs, and nor could it be said that there had been no co-insurance as regards defence costs. It made no difference which disease was in issue. The judge also noted that IEG had received its defence costs in full in the Zurich case (even though a proportionate recovery of damages was allowed in that case).

Limitation arguments also arose as to the time limit for the subsidiary's claim under the sale agreement with the parent company. The judge held that time started to run not from the date of an employee's claim against the subsidiary, but instead from the date when the subsidiary's liability to the employee was established (whether by a judgment, arbitral award or agreement). The parent company could not assert a time bar defence in this case because it had consented to the subsidiary amending its claim form after it was issued in order to bring the claims to which the time-bar case related.

COMMENT: The view in this case that the insured could not select the policy period under which it wishes to claim echoes the position adopted in Teal (see Weekly Update 29/13) where it was held that a freedom to adjust the order of payment of claims (for the same period) "cannot in the present context readily be reconciled with the basic philosophy that insurance covers risks lying outside an insured's own deliberate control". In other words, however the insured may choose to act when deciding how to claim, the courts still have a discretion to deal with the position between the other (potentially indemnifying) parties in a way they feel is just and equitable.