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Employers’ liability insurance and the equitable right of recoupment

Following the recent Supreme Court judgment in Zurich v International Energy Group Limited DWF’s Derek Adamson has been interviewed by Kate Beaumont of Lexis Nexis on the key issues and implications of the decision. Below is a copy of that interview.

Personal Injury analysis: The recent Supreme Court ruling in Zurich v IEG has been hailed as a victory for insurers. Derek Adamson, partner and national head of occupational health and casualty at DWF LLP, says there is no doubt that in a field of landmark decisions, none comes any higher than this.

Original news

Zurich Insurance plc UK Branch v International Energy Group Ltd [2015] UKSC 33, [2015] All ER (D) 170 (May)

The Court of Appeal, Civil Division, held that the appellant insurer was liable for 100% of the compensation paid by the respondent Guernsey company to a victim of mesothelioma and for its defence costs. The insurer appealed. The Supreme Court, in allowing the appeal in part, held that Barker v Corus (UK) Ltd; Murray v British Shipbuilders (Hydrodynamics) Ltd; Patterson v Smiths Dock Ltd and others [2006] UKHL 20, [2006] 3 All ER 785 remained as part of the common law of England and applied in Guernsey where it had not been superseded by the Compensation Act 2006 (ComA 2006). However, the insurer remained liable for 100% of the defence costs.

1. What were the key issues raised in the appeal?

- Does the Barker v Corus 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 periods of exposure--apply in Guernsey or, as IEG contended, did the Trigger decision (Durham v BAI (Run Off) Ltd (in scheme of arrangement) [2012] UKSC 14, [2012] 3 All ER 1161) consign Barker to history for all purposes?

- If Barker does not apply and the position in Guernsey is the same as in the UK where ComA 2006, s 3 makes each employer liable in full, does an insurer for part of the period of exposure have to pay the claim 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 to contribution from any other insurer of that employer and/or from the employer in respect of any periods not covered by the insurer?

- There were parallel issues in relation to an insurer's responsibility for defence costs incurred in meeting the victim's claim.

2. To what extent is the Supreme Court decision helpful in clarifying the law in this area? Are there any grey areas or unresolved issues remaining?

It confirms that the Trigger judgment was founded on the principles in Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22, [2002] 3 All ER 305 and Barker, and did not establish that, in a mesothelioma claim, a claimant can satisfy the conventional causation test. The weak or broad causation in Trigger is a confirmation that causation for purposes of the policy is a reflection of the basis of causation between the claimant and the employer. Barker remains good law and, therefore, in jurisdictions like Guernsey where ComA 2006 has not been enacted, it remains the common law. Thus, the policy responds only to the extent of the contribution to risk during the policy period.

Barker also remains the common law in the UK save that, by reason of ComA 2006, it has no application to mesothelioma claims.

Since the finding on Barker meant that Zurich won the case, the comments on equitable contribution were obiter though they will define the way in which claims will be handled in the UK. 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 has established new equitable rights of recoupment or contribution--a huge legal development. While the ABI guidelines have to date, on a voluntary basis, largely achieved this, IEG called into question the legal basis for securing such contributions.

The court, by a majority of 4-3, established a framework for the handling of all similar claims in the future. Having regard to the public policy that victims must recover damages in full, Zurich's solution to this, as accepted by the majority, was to accept that the contractual obligation under the policy was to meet the claim 100% but that there should be a claim over in equity for contribution from a fellow insurer in respect of different periods of cover/exposure and the insured in respect of uninsured periods of exposure. IEG had contended that this was an affront to established contract law principles but the court felt the balance of fairness demanded such an approach in this unique situation.

The minority held that the contractual obligation was only to contribute on a time on risk basis. Zurich were concerned that this ultimately could lead to victims being under-compensated although Lord Sumption took the view that that would not be the case as they could secure a contribution under the Mesothelioma Act 2014 scheme. In the event, that will not arise. The majority view which prevailed will guide the manner in which claims will be handled in the future.

While the equitable right to contribution arises in respect of the liability to the claimant's damages and costs--the same pro rata approach does not apply to defence costs which have to be met by the insurer in full. There is no claim over in equity in respect of those. That said, there could be double insurance of the defence costs which will lead to sharing between insurers.

In terms of mesothelioma claims, it is not thought there are any unresolved issues although the application of Fairchild and Barker to asbestos related lung cancer cases remains to be determined and will be considered by the Court of Appeal in Heneghan v Manchester Dry Docks (on appeal from [2014] EWHC 4190).

3. What are the implications of the Supreme Court decision for employers’ liability (EL) insurers and claimants?

EL insurers now have a legal basis founded on the equitable right of recoupment/contribution for seeking a contribution from insurers of the employer for a different period and also from their insured in respect of uninsured periods. Clearly, if the insured is insolvent, the equitable right of recoupment would be of no benefit but where the insured is solvent, the contribution will be recoverable. Clearly, there will be an impact on the financial provision made by both insurers and their insureds set aside for future claims.

Since the recoupment right arises upon payment of the claim in full by the part insurer, in theory, the EL insurer will have to pay the claim and then seek contributions afterwards. In practice, in many cases, the insurance history will be established before settlement takes place and there should be no reason why contribution should not be made at the time of settlement rather than later.

Insurers will no doubt re-assess the ABI guidelines to see whether any alterations are necessary in the light of the defence costs' finding.

As for claimants, their position is protected and they really are in no different a position now. Under ComA 2006, they can focus their attention on one employer and its insurers if they feel confident they will establish liability against that employer.

4. What are the implications of the decisions for lawyers? What action should they be taking in light of this decision?

Some clients may have altered their reserves or provisions in the light of the Court of Appeal judgment in this case. Lawyers for such parties should ask them to re-address their position and satisfy themselves as to the nature of their potential future liabilities. Similarly, the lawyers should review with their insurance clients whether there remain outstanding any cases where contributions can be sought, not least in cases that were left in abeyance pending the outcome of this case.

5. How does this decision fit in with other developments in this area? Do you have any predictions for future developments or trends?

I have read one commentator describe this as a stunning victory for insurers. There is no doubt that in a field of landmark decisions, none comes any higher than this. It is very rare for new equitable rights to be established. Although it is accepted that the categories of equity are not closed, the courts are wary of introducing new equitable rights lest it should lead to uncertainty in the law.

Zurich contended that this was a unique situation with an employer held liable where, in fact, it may not have actually caused the disease and since that impacted on their insurers, it was vital the Supreme Court sought to achieve a framework that was fair to insurers, insureds and claimants. This solution achieves that because the public policy of ensuring that the victims are compensated is protected but, at the same time, an insurer is not asked to pay compensation arising from liabilities which, in part, arose during periods of employment/exposure for which they did not receive a premium. The court noted that insurers are not the wrongdoers. The wrongdoers are the negligent employers and, therefore, a balance had to be struck to ensure fairness between insurers and their insureds.

The decision fits perfectly with the existing mesothelioma jurisprudence. Victims are protected and insurers and insureds will, in the end, pay their fair shares.

One aspect of the case which concerned the Supreme Court was whether Zurich was correct in acknowledging or, as the court put it, conceding that the employer's liability to be indemnified by an EL policy in a mesothelioma case was the whole of the liability. Zurich and the majority in the Supreme Court took the view that that was the effect of ComA 2006, s 3. The minority did not agree. They held that the contractual obligation was simply to pay on a pro rata basis. A possible concern was that this concession would leave the way open to challenges later possibly in the reinsurance field but that now seems unlikely given the minority view that only a pro rata contribution was covered by the policy anyway.

The one unknown remains the question of the full extent of the Fairchild enclave of cases. Will this extend beyond mesothelioma to lung cancer as seemed to be the case in Heneghan or indeed bladder cancer?

6. Are there any further points of interests?

It remains to be seen whether the Channel Islands and the Isle of Man decide to enact an equivalent of ComA 2006, s 3. There is scope for victims in those jurisdictions to receive less than full compensation but, in practice, that was the position anyway given that ComA 2006 had not been enacted and this decision simply confirms that Barker remains good law in those jurisdictions for all purposes.

One other feature of the case was the question of whether the use of the words 'all sums' in the insuring 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 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.

In justifying the approach of the court overall, Lord Mance confirmed that the only solution he could find--which was the one put forward by Zurich--was one that involved insurers paying the victims 100% of their rightful compensation but avoiding the unfairness and injustice of those insurers bearing the whole financial burden arising from the wrongdoing of others. This solution was to create a new right of recoupment. He talked of this solution 'representing a fair balance of the interests of victims, insured and insurers'.

Derek Adamson has over 36 years' experience in insurance work. He acts as key account manager to some of DWF's larger insurance clients, taking responsibility for the provision of service. Derek is a specialist in insurance policy interpretation, development of insurance law particularly in connection with mesothelioma claims, legionnaires' disease, commercial product liability, fire and construction work. He led the successful team that acted for Zurich in the EL policy 'Trigger' litigation (2012), and represented the same client in Zurich v IEG.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Produced with kind permission of Reed Elsevier (UK) Limited trading as LexisNexis. Click for a free trial of Lexis®PSL

Read more in our recent case comment

For further information please contact Derek Adamson.

By Derek Adamson

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.