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Supreme Court judgment: Zurich Insurance plc UK Branch v International Energy Group Limited

Zurich Insurance plc UK Branch v International Energy Group Limited
Supreme Court
20 May 2015

This landmark ruling handed down by the Supreme Court, in which DWF represented Zurich in its successful appeal, will offer clarity to employers’ liability insurers and their insureds, as well as to claimants seeking compensation for claims involving mesothelioma.

Derek Adamson and Rob Edwards look at the approach taken by the Supreme Court in Fairchild type cases to an insurer’s right of recoupment both against successive insurers of the same company and against the company itself for periods where there was no insurance or insurers cannot now be traced. The case contains a helpful review of recent case law in this area and clarifies the status of Barker in relation to the common law.

The case finally:

  • brings clarity to the key question of apportionment of damages in mesothelioma claims

  • provides a new right of action enabling insurers to recover contributions from their insureds and/or successive insurers, and

  • puts an end to any attempt to apply a wider interpretation of the ‘all sums’ provision so as to make an insurer liable for all of the damages in a divisible disease claim rather than for the proportion of damage done during the period of insurance.

Facts

The insured, IEGL, formerly Guernsey Gas, employed the late Mr Carré between 1961 and 1988. Zurich provided employers’ liability cover for the six year period from 1982 – 1988. Throughout the whole of his employment Mr Carré was negligently exposed to asbestos as a result of which he developed mesothelioma. The claim was settled by his employers for £250,000 plus costs. The only matter in issue was the extent of the insurer’s liability to the employer in respect of Mr Carré’s claim. The insured maintained that it was entitled to a full indemnity. Zurich argued that it was only liable to contribute that proportion which the policy period bore to the whole period of exposure, 6 out of the 27 years (22.08%). One unusual feature of the case was that in Guernsey, unlike in England and Wales, the Compensation Act 2006 does not apply. This gave rise to an issue as to whether Barker v Corus (UK) PLC [2006] UKHL still represented the common law in Guernsey.

The issues

  1. What is the status of Barker? Were the Court of Appeal right to suggest that this has been consigned to history in its entirety by the Trigger decision?

  2. Does the unique approach to causation in Fairchild require a new wholly exceptional approach to the allocation of risk in mesothelioma cases – is there an equitable right of recoupment?

  3. What is the legal basis for contribution between successive insurers of a single culpable insured?

What is the liability of a solvent part insured company to contribute for periods of culpable exposure for which no insurers have been traced?

Findings

  • Barker - All seven Justices agreed that Barker remains good law, that is to say it remains part of the common law save that, by reason of Section 3 Compensation Act 2006, it does not apply to mesothelioma claims in jurisdictions where that legislation is in force. 

  • Indemnity apportioned on a time on risk basis - Since the Compensation Act 2006 is not in force in Guernsey, Barker remains part of the common law of Guernsey for all diseases including mesothelioma. Therefore, Zurich’s obligation to indemnify the insured in respect of the compensation paid to the claimant was limited to that proportion for which the insurer was on cover in relation to the total period of culpable exposure to asbestos with the company. That is to say, the indemnity would be apportioned on a time on risk basis namely 6 years out of a total exposure period of 27 years.

  • Defence costs – Zurich must give a full indemnity in respect of defence costs incurred in defending the claim even though the claim embraced a period longer than the insurance cover. Liability for defence costs is quite separate and distinct from the liability to pay damages. The insured was entitled to a full indemnity on the face of the policy wording once it was shown that those defence costs had been incurred on a conventional basis and with the consent of the insurer.

  • Apportionment - In jurisdictions where the 2006 Act applies, all seven Justices were agreed that it would be a serious anomaly if an insurer, which provided cover for a small proportion of the period of the employee’s exposure, were to carry the whole of the employer’s liability without any recourse against others in respect of the other periods of exposure.

  • The right of recoupment – The court identified two possible approaches to avoid the unfair and heavy burden which would otherwise be placed upon an insurer. By a majority of 4:3, the court created a new equitable right of recoupment for cases falling within the special rule.

  • An insurer who insured an employer for only part of the exposure period to asbestos giving rise to the mesothelioma must indemnify the liability of the employer to the claimant in full. However, there is a right of recoupment in equity to recover contributions on a pro-rata basis from successive insurers of the employer and from the employer itself in circumstances where the employer is solvent and chose not to insure or cannot trace relevant insurance cover.

  • The minority view - The three Justices in the minority would still prorate the claim but on the basis that the insurance contract should be construed such that the insurer’s liability for the loss is limited to that proportion of the policy years in which it provided cover relative to the whole period during which the employer wrongfully exposed the employee to asbestos fibres. As a matter of construction, the policy only provided cover in respect of the contribution to risk during the period of insurance.

Comments

The Court acknowledged the difficulties which have arisen from the departure of Fairchild from conventional principles. Notwithstanding this, the Court recognised the huge injustice to an insurer where it is required to carry the entirety of an employer’s liability when it was only on cover for a small proportion of the employee's exposure.

Faced with a stark choice between the approach proffered by Lord Mance (a new right of recoupment) and the more conservative approach of Lord Sumption (construction of the insurance contract) the Court favoured the radical approach of Lord Mance. This was the approach argued for by Zurich as representing the fairest (and correct) outcome for all concerned and in particular for the true victims, namely, those diagnosed with the dreadful disease of mesothelioma.

The Court recognised that in creating a special rule in Fairchild it had dug itself a hole. The minority, Neuberger, Reed and Sumption, considered it preferable to stop digging for fear of causing further violence to established legal principles.

In contrast, the majority led by Lord Mance, were clear that, taking account of the Compensation Act, the only solution that ensures the victims recover 100% of their rightful compensation but avoids the unfairness and injustice of insurers bearing the whole financial burden arising from the wrongdoing of others, was to create a new right of recoupment. Lord Mance stated:

…by introducing into tort and liability insurance law an entirely novel form of causation in Trigger, the courts have made it incumbent on themselves to reach a solution representing a fair balance of the interests of victims, insureds and insurers.’

It is also an endorsement of the practical approach long adopted by insurers in relation to these difficult claims.

Whilst the Court were at pains to stress this decision applies only to cases falling within the Fairchild enclave, they have clarified that Aikens LJ in the Court of Appeal was wrong in his interpretation of the ‘All sums’ provision in the insuring clause. This is important in the context of divisible disease. The Supreme Court made plain that an insurer is only liable for injury or disease caused during any period of insurance. ‘The insurance does not cover all sums for which the insured may be liable but only those which fall within the chronological limits of the risk which the insurer had assumed.’  In short, the policy only gives rise to liability on a time-on-risk basis.

Derek Adamson, Rob Edwards and Samantha Chambers acted for the insurer in Zurich v IEGL.

Contact

For further information please contact Derek Adamson, Partner, on +44 (0)121 200 0437.

By Derek Adamson and Rob Edwards

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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