Graham Taylor and Sarah Naylor review the Supreme Court’s long-awaited decision in this case considering rights of recovery between insurers and uninsured employers liable for damages in mesothelioma claims.
International Energy Group Limited (IEG) is a solvent Guernsey company. It is the successor in title to Guernsey Gas Light Co Limited (GGLCL), which employed Mr Carré for over 27 years from 13 November 1961 to 21 December 1988. Mr Carré subsequently contracted and died of mesothelioma. It was agreed that Mr Carré was negligently exposed to asbestos by GGLCL with the same degree of frequency and intensity throughout the 27 year period.
Mr Carré issued proceedings against IEG in September 2008. IEG settled the claim in December 2009 for £250,000 damages and interest plus £15,300 towards Mr Carré’s costs. IEG also incurred defence costs of £13,151.60.
IEG subsequently looked to GGLCL’s liability insurers under policies in force during the period of exposure. It identified two insurers: Excess Insurance Co Limited (Excess), which provided employers’ liability (EL) cover for two years from 31 December 1978 to 30 December 1980, and Midland Assurance Limited (Midland), to whose liabilities Zurich International Plc (Zurich) had succeeded, which provided EL cover for six years from 31 December 1982 to 21 December 1988. Therefore, GGLCL had insurance for a total of eight of the 27 years of negligent exposure.
Each of the Midland policies issued for the six years it was on risk provided cover for GGLCL in respect of employees’ bodily injury or disease caused during the period of insurance. Midland was required to indemnify GGLCL against ‘all sums for which the Insured shall be liable in respect of any claim for damages for such injury or disease settled or defended with the consent of the Company.' Midland was also liable to pay claimants’ costs and expenses and defence costs incurred with its consent.
IEG notified a claim for its total loss (£278,451.60) to Zurich, which offered to meet only 72/326ths (six out of 27 years) of both the damages and interest paid to Mr Carré and the defence costs incurred. IEG maintained it was entitled to its full loss, and issued proceedings against Zurich.
At first instance, Cooke J accepted Zurich’s case on compensation, but not its case on the defence costs. He ordered Zurich to pay its proportion (22.08%) of the compensation plus 100% of the defence costs. The Court of Appeal allowed IEG’s appeal, rejected Zurich’s cross appeal relating to defence costs and ordered Zurich to pay 100% of the compensation paid and defence costs incurred by IEG. Zurich appealed. The consequences of the Court of Appeal’s decision, if upheld, would have been that an insured could select any of its insurers to pay a claim in full without having any recourse to its other insurers or making any contribution for uninsured periods – a possibility which was raised as long ago as 2003 following the decision in Philips -v- Gunner but which had not been accepted by the insurance industry and had remained untested until IEG’s claim.
It is worth recapping briefly on the relevant case law and legislation. In Fairchild, the House of Lords held that a person contracting mesothelioma, after being exposed to significant quantities of asbestos dust originating from different sources, could sue any person who was negligently responsible for any such source of exposure, even if they could not show which exposure in probability actually led or contributed to the disease. This decision was recognised as a fundamental departure from the common law test for causation because it allowed a claimant to establish liability without proving that any particular employer had on the balance of probabilities caused his disease applying the conventional ‘but for’ test. It was sufficient to show that any exposure had simply materially increased the risk of the claimant contracting mesothelioma. Although this radical departure was restricted to mesothelioma, it has caused significant unanticipated problems leading Lord Neuberger to comment in his judgment that it had led to ‘a sort of juridical version of chaos theory’.
In Barker, the House of Lords held that any person responsible was not liable for the whole of the damages attributable to mesothelioma, but only in proportion to his own contribution to the risk by reference to the claimant’s overall exposure (generally measured by the duration and intensity of the exposure for which he was responsible). However, within a matter of months, the decision in Barker was reversed by section 3 of the Compensation Act 2006 (‘the 2006 Act’), which made each person responsible liable in full, with rights of contribution amongst themselves.
In Durham -v- BAI (Run-Off) Ltd (Trigger) the Supreme Court held that an EL insurer must indemnify an insured employer against liability incurred under the Fairchild principle. This was on the basis that variously worded indemnity provisions would all be interpreted so as to provide cover in respect of the disease when it was ‘caused’ i.e. at the time of exposure to asbestos. Moreover, the relaxed rule on causation which applied as between employer and employee would also apply to insurance contracts so that the insurer would have to indemnify an employer who materially contributed to the risk in the period of insurance, even if on the balance of probabilities it was not established that he had actually caused the disease. SoFairchild not only applied in the field of tort, but also contractually as between insured and insurer.
The Supreme Court’s decision
Zurich’s appeal concerned some issues which are only relevant in Guernsey, which has not passed any equivalent of the 2006 Act, but other issues in the appeal are of wide relevance and of extreme importance to UK insurers and employers facing mesothelioma claims.
Does the proportionate recovery rule from Barker still exist at common law in Guernsey?
Guernsey has not passed any equivalent of the 2006 Act. It was therefore held that Barker still applies in Guernsey, and IEG’s liability in respect of the six years of Midland cover was and is 22.08% of the full compensation IEG in fact paid. It followed that IEG would not be able to recover more than 22.08% of the compensation paid from Zurich.
The suggestion by the Court of Appeal that, even if Barker did apply, Zurich could still be responsible for IEG’s total outlay because the Midland policies provided cover for ‘all sums’ for which GGLCL was liable, was unanimously dismissed by the Supreme Court.
What happens with defence costs?
The Supreme Court unanimously dismissed Zurich’s submission that defence costs should be prorated on the same 22.08% basis as compensation and interest. There was nothing to suggest that the defence costs would have been any less had the claim against IEG been confined to the six year period covered by the Midland polices and, more significantly, they were incurred with the consent of the Company in defending any such claim for damages within the meaning of the Midland policy. IEG was therefore entitled to recover the entirety of the defence costs incurred. The Supreme Court commented that there would be no reduction just because the defence costs also benefitted some other uninsured defendant.
Is an insurer which provided cover for only part of the whole exposure period, liable for the insured’s entire expense/liability and, if so, is that insurer entitled to recoup proportionately from other insurers and/or the insured?
In light of the Supreme Court’s finding that Barker remains good common law, this issue did not fall for direct consideration. However, given its general importance, it was considered at length in the judgments.
Zurich conceded that it was contractually liable for IEG’s full loss (subject to recoupment), despite the Supreme Court effectively asking it to reconsider its concession at a further hearing. By a majority of 4:3 the Supreme Court held that, had the 2006 Act applied to Guernsey, then Zurich would have been liable to meet IEG’s liability in full. It would, however, have had an equitable prorated right of contribution against both Excess and IEG in respect of the 21 years not covered by the Midland policies. The minority considered the reasons given by the majority to be contrary to a number of basic principles of the law of contract and to be productive of uncertainty and injustice. In their view, on a proper construction of the Midland policies, Zurich was only liable to IEG for 22.08% of IEG’s compensation payment, and therefore a new equitable right of contribution was not necessary. It is significant that this went beyond what Zurich had sought. One of the reasons which attracted the majority to endorse Zurich’s solution was that it was far closer to that which the London insurance market had already worked out in practice.
The Supreme Court recognised the anomalies arising from an insurer carrying the whole liability, despite having been on risk for only part of the period of exposure. Those anomalies include the fact that there would be no incentive for an insured to take out or maintain continuous insurance; it would be sufficient to take out cover only for a matter of weeks or even days. The majority felt that the principles recognised and applied in Fairchild and Trigger required a broad equitable approach to be taken to contribution, to meet the unique anomalies to which they gave rise. A sensible overall result could only be achieved if an insurer held liable under a policy like the Midland policy could have recourse for an appropriate proportion of its liability to any co-insurers and to the insured as a self-insurer in respect of periods of exposure for which the insurer did not cover the insured.
What does the decision mean for insurers and employers?
By this long awaited decision, both the majority and the minority in the Supreme Court sought to avoid unfairness to insurers, with the majority favouring the more radical approach of allowing an insurer to seek equitable contributions from both other insurers and insureds in respect of periods when they were not on cover. In practical terms, there will be little impact on the way in which insurers already handle mesothelioma claims (at least up until the Court of Appeal decision in IEG), as set out in the ABI Guidelines. The decision will, however, still be welcomed by insurers and is particularly unhelpful to those solvent employers who have prolonged periods of uninsured exposure. Those employers may, however, take some comfort from the Supreme Court’s decision that Zurich had to meet all the defence costs.
The Supreme Court did also mention, but did not deal with, the potential impact of its decision in the context of the Third Parties (Rights against Insurers) Act 1930 (the 1930 Act). It was noted that, the question of whether an insurer’s right to contribution against an insured constitutes a full or partial answer to a victim’s policy claim based on the transfer of rights from the insolvent employer, is a complex one, and one on which it was not necessary to give a final answer. For his part, Lord Mance considered that, in respect of any claim by a victim under the 1930 Act, an insurer would be obliged to provide the full policy indemnity, without being able to set off against the victim any consequential right to contribution which it may have against the insured. It remains to be seen whether this point will be reconsidered by the Supreme Court in the future.