Introduction

This landmark decision described by one commentator as a stunning victory for insurers clarified the position as to payment of compensation to mesothelioma victims and contributions between Insurers and, in some cases, their Insureds, and effectively preserved the previously voluntary arrangements whereby Insurers and Insureds (with gaps in insurance) contributed to damages and costs paid to victims of asbestos-related mesothelioma.

The ruling created brand new equitable contribution rights and what we may call Fairchild Recoupment Rights between Insurers and their Insureds and delivered a better understanding of the Trigger Judgment (Durham v BAI (Run off) Ltd [2012]).  As a matter of principle, at common law, there was no altering of the Fairchild quantum rule (see Fairchild v Glenhaven Funeral Services [2002]) as developed in Barker v Corus (UK) Ltd [2006].  

IEGL: This complex case sets an important precedent in the fields of policy coverage and equitable rights.  By clarifying the way mesothelioma claims are settled and paid, it provided welcome certainty and fairness to claimants, insurers and policyholders.

The complexity of the case is evidenced by the fact that most unusually, after an initial two day hearing in the Supreme Court before five Justices, following provision of further submissions which were requested by the Justices, a further two day hearing took place with an increased number of Justices (seven) hearing the case.

Key Issues

-Does the Barker quantum rule – apportionment of liability according to an employer’s period of contribution to risk of developing mesothelioma by negligent exposure to asbestos compared to the overall appearance of exposure -  apply in Guernsey or as contented by the insured, IEGL, did Trigger consign Barker to history for all purposes?

-If Barker did not apply and the law in Guernsey was the same as in the UK, even though Section 3 Compensation Act 2006 (under which each employer responsible for only part of the period of exposure was liable in full) was not enacted in Guernsey, does an insurer for part of the period of exposure have to pay the claimant in full, or merely on a time on risk, or contribution to risk basis?   

-If the part Insurer does have to meet the whole of the liability to the Claimant, does that Insurer have pro rata rights of contribution towards that liability from any other part Insurer of that employer and/or from the employer in respect of any periods not covered by insurance?

-There were parallel issues in relation to an Insurer’s responsibility for Defence Costs incurred in meeting and dealing with the victim’s claim.

Resolution of the issues was inextricably bound up in the law of causation and the exception to the conventional approach to causation established in Fairchild.  The Supreme Court held in IEGL that Trigger was founded on the principles in Fairchild and Barker and did not establish that in a mesothelioma claim, a claimant can satisfy the conventional causation test i.e. the “but for test” or material contribution as per Wardlaw v Bonnington Castings [1956].  

The weak or broad causation test described in Trigger is a confirmation that causation for the purposes of the policy reflects exactly the basis of causation at common law between the claimant and employer.

Barker survives and remains good law.  In jurisdictions such as Guernsey, the other Channel Islands and the Isle of Man, where section 3 has not been enacted, Barker remains the common law. Accordingly, in IEGL, the policy responded only to the extent of the contribution to risk during the policy period.  Since Barker remains the common law, the implication is that it continues to apply to all conditions save for mesothelioma which is excluded by reason of section 3.

The finding on Barker determined the IEGL case itself although the equitable contribution issues still had to be considered in relation to the Defence Costs and moreover, the Court took the opportunity to define the way in which claims will be handled in the UK.  The outcome was that, in relation to a part Insurer seeking contributions from an insurer of a different period and/or from an Insured in respect of uninsured periods of exposure, the Court established new equitable rights of recoupment or contribution.  This was a huge legal development and had the effect of creating legal support for the voluntary arrangements previously carried out under the ABI Guidelines.

The Court, by a majority of 4 to 3, established a framework for the handling of all similar claims in the future.  The underlying obligation, based on public policy reasons, resulting from Fairchild as re-enacted in Section 3, is that victims must recover damages in full.  On behalf of Zurich, we contended that, whilst the contractual obligation under the EL policy was to meet the claim to the extent of 100%, having satisfied that obligation, the Insurer should have a claim over in equity for contributions from a fellow Insurer in respect of different periods of cover/exposure and the Insured in respect of uninsured periods of exposure.  IEGL’s case was that this effectively wielded an axe to established contract law principles and to the underlying insurance law principle that if a liability policy happens to cover a greater range of liabilities than was anticipated by the Insurer, that is the effect and Insurers have to meet those wider obligations. 

As with the decision in Fairchild itself, the Supreme Court accepted that mesothelioma was a special case and therefore Fairchild Recoupment Rights should be established.

The minority held that the contractual obligation itself was only to contribute on a time on risk basis. Zurich were concerned that this ultimately could lead to victims being under compensated and that remains my view.  However, Lord Sumption took the view that that would not be the case as the Claimant could secure a contribution under the Mesothelioma Act 2014 Scheme.  In the event, that principle will not be tested but, at first blush, it is not clear how the Scheme could be triggered in these circumstances.

Impact

-The Supreme Court by a majority agreed with Zurich’s approach to equitable recoupment, thus ensuring that, in accordance with the public policy evident in the 2006 Act, victims will recover full compensation.

-This clarification to the way mesothelioma claims are settled will provide welcome certainty which should benefit claimants, insurers and their policyholders alike.  

-The new law ensures that claimants receive full compensation but insurers and insureds share the liability – reducing the potential indemnity for Zurich and all insurers.

-The ruling means that under an EL policy, an Insurer paying a mesothelioma claim where the Insurer was in risk only for part of the exposure period would be able to recover from any other Insurer, or from the Insured if no such cover existed or could be traced, a contribution to the settlement paid to the former employee proportionate to the relative periods on risk.

-The judgment also introduces the concept that an insurer covering part of the period of exposure to asbestos, who by reason of the Compensation Act 2006 will meet the claim in full, has an equitable recoupment right to seek contribution from other Insurers in respect of their period of risk and also from the Insured in respect of uninsured periods.

-This new equitable right gives both effect and legal authority to the practice that has been adopted by the insurance market and policyholders under informal arrangements for many years.

Next stages  

It remains to be seen whether the Fairchild enclave of cases is widened.  Will this extend beyond mesothelioma to lung cancer as seems to be the case in Heneghan v Manchester Dry Docks (currently on appeal to the Court of Appeal)?  Could it be extended to bladder cancer?

It remains to be seen whether the Channel Islands and the Isle of Man decide to enact an equivalent of Section 3.  Currently, there is scope for victims in those jurisdictions to receive less than full compensation.

One feature of the case was whether the use of the words “all sums” in the insurance clause meant an Insurer was liable for full compensation even in a divisible disease case where the Insurer was not on risk for the entire period of exposure.  The Supreme Court made it clear that an insurer is only liable for injury or disease caused during any period of insurance.

To conclude, in the end the decision was about fairness.  Lord Mance took the view that whilst it was correct for insurers to pay victims 100% of their rightful compensation, to avoid the unfairness and injustice of those insurers bearing the entire financial burden arising from the wrongdoing of others, the answer was to create a new right of recoupment.  He said that this represented “a fair balance of the interest of victims, the insureds and the insurers”.

This article was written on 12 November 2015

Derek Adamson has 37 years’ experience in insurance work.  He acts as key account manager to some of DWF’s major insurance clients and insurance claims’ issues for major corporate clients, taking responsibility for provision of service.  He is a specialist in insurance policy interpretation, development of insurance law particularly in connection with mesothelioma and asbestos related cancer claims, Legionnaires disease, environmental (nuisance) claims, commercial product liability, fire and construction work.  He led the successful teams that acted for Zurich in both the Trigger Litigation (Supreme Court 2012) and Zurich v IEGL (Supreme Court 2015).