Case Comment: Zurich Insurance plc UK Branch v International Energy Group Ltd  UKSC 33
02 Thursday Jul 2015
This appeal adds to a growing body of case law which governs the legal principles of liability, causation and compensation applying in cases where a victim contracts mesothelioma due to the negligence of several former employers. The full background to the case can be found elsewhere, but for present purposes the key facts are as follows.
Mr Alan Carré worked for Guernsey Gas Light Co Ltd (whose successor in title was International Energy Group Ltd) in Guernsey for 27 years, from 1961 to 1988, after which he worked for another employer until his retirement in April 2008. In July 2008 Mr Carré was diagnosed with mesothelioma and sadly died from the illness a year later. Throughout his employment, Mr Carré was exposed to asbestos dust and fibres without adequate protective equipment.
It was accepted that the mesothelioma was caused in part by IEG’s negligence and a settlement was reached with Mr Carré’s estate at £250,000 plus interest towards his costs. IEG then sought to claim indemnity for the settlement sum (together with its own defence costs of £13,151.60) under its employers’ liability insurance policy. During the 27 year period which Mr Carré was employed, IEG was only insured for eight years: Excess Insurance Co Ltd (for two years from 1978 to 1980) and Midland Assurance Ltd (for six years from 1982 to 1988). Midland was succeeded by Zurich.
In Fairchild v Glenhaven  UKHL 22, the House of Lords held that all former employers are jointly and severally liable in negligence to victims who contract mesothelioma (i.e. they each ‘caused’ the harm), provided that it can be shown each of those employers materially increased the risk of harm. Later, in Barker v Corus  UKHL 20, the House of Lords decided that each employer was only liable pro rata in respect of the period of time the employee was exposed to asbestos under their employment. Parliament reacted quickly to Barker passing the Compensation Act 2006, which made each employer liable to the victim in full, with ‘rights of contribution’ effective amongst each employer in respect of the relative periods of exposure. More recently, the Supreme Court decision in Trigger  UKSC 14 (a Case Comment for which can be found here), also established that insurers must indemnify the employer company against exposure-based liability on the Fairchild principle.
The 2006 Act does not have an equivalent in Guernsey, and it was therefore necessary to look to the common law (which the parties agreed mirrored that in England) to decide the basis on which Zurich was liable to indemnify IEG. Zurich argued, relying on Barker, that it was only liable for 22.08% of the amount claimed by IEG, on the basis that Midland only insured IEG for 6/27ths of the 27 year period.
At first instance in the High Court, Mr Justice Cooke held that Zurich was only liable to IEG pro rata for the proportion of time it had been on risk (applying Barker without the benefit of the decision in Trigger, which was not handed down until two months later), although it was liable for 100% of its own defence costs.
The Court of Appeal overturned this judgment on the basis of the newly decided Trigger, holding that Zurich was in fact liable for the entire amount claimed by IEG (and 100% of its defence costs) notwithstanding that it was only on risk for a proportion of the overall relevant period. Zurich appealed to the Supreme Court on both points.
Supreme Court Decision
The appeal was heard by a panel of seven Supreme Court justices comprising Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption, Lord Reed, Lord Carnwath and Lord Hodge. The issues for the court to consider were as follows:
(i) Whether or not Barker still applies in Guernsey so that Zurich would only be liable pro rata in respect of the compensation and whether or not a parallel rule applies to Zurich’s defence costs;
(ii) If Barker does not apply, and the Guernsey position now mirrors that in the UK under the 2006 Act, whether Zurich is liable in the first instance for the whole of IEG’s compensation liability to Mr Carré’s estate; and
(iii) If so, and Zurich has to pay the full amount of the compensation, whether Zurich has subsequent equitable rights of contribution exercisable pro rata against any other insurers (i.e. Excess Insurance Co, who insured IEG for two years) and/or IEG itself (in respect of any uninsured periods).
In the absence of the 2006 Act, which has no equivalent in Guernsey, the court unanimously agreed that the common law framework of proportionate recovery established in Barker remains good law in Guernsey and allowed Zurich’s appeal on this issue. Therefore, Zurich (as the insurer) was liable to IEG (as the insured) for its losses only in proportion to the period for which it was on risk. Lord Mance pointed out that “neither the 2006 Act nor Trigger is inconsistent with or undermines the decision in Barker”.
On the issue of IEG’s defence costs, which Zurich claimed it should only have to pay out proportionately to its own period on risk, the court dismissed Zurich’s appeal. It was held that Zurich would be liable for the full amount of IEG’s defence costs for two reasons. Firstly, 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 policies” (per Lord Mance at paragraph 38). In other words, Zurich would have incurred similar defence costs irrespective of the length of the period for which it had insured IEG. Secondly, IEG’s defence costs were explicitly covered by the wording of the Midland insurance policy which stated that if any employee “shall sustain any bodily injury or disease caused during any period of insurance…the Company will indemnify the Insured against all sums in respect of any claim for damages… and be responsible for all costs and expenses incurred with the consent of the Company in defending any such claim for damages” (emphasis added).
Applying Fairchild, the court held that mesothelioma is “caused” in any period during which the employee’s exposure to asbestos ‘materially contributed to the risk’ of contracting the disease. Therefore, the defence costs (which Zurich had consented to incurring) were covered by the wording of the insurance policy and thus fell to be met solely by Zurich.
The court went on to consider what the situation would have been if there had been an equivalent to the 2006 Act in Guernsey. In that case, IEG would have been liable to Mr Carré for the full loss, but it would surely be anomalous if Zurich should have to answer for 100% of this loss given that it was only on risk for 6 of the 27 years of exposure. By a majority of 4-3, the court held that, in these circumstances, Zurich must in the first instance pay IEG the full amount of the compensation, but that Zurich would then have equitable rights of contribution, on a pro rata basis, from (a) any other insurers who were on risk during the exposure period; and (b) from IEG itself in respect of any periods where IEG was not insured. Per Lord Mance at paragraph 77:
“The concomitant of insurance liability in this situation must be a recognition that the law can and should redress the unjust and wholly anomalous burden which would otherwise fall on any particular insurer with whom insurance was only taken out for part of the total period of exposure by the insured, by recognising an obligation on the part of the insured to contribute pro tanto to such liability as a self-insurer.”
In the minority on this issue, Lord Sumption (with whom Lord Neuberger and Lord Reed agreed) gave a dissenting judgment in which he stated that Zurich should only be liable to IEG in the first instance for 22.08% of the full loss. According to Lord Sumption (at paragraph 155):
“The consequences are both commercially absurd and entirely inconsistent with the nature of annual insurance. The longer an employee is exposed to asbestos, the greater the risk of his contracting mesothelioma at some stage in his life. The result of IEG’s argument is that under the contract the financial consequences for the insurer of writing the contract for a single year are the same as the financial consequences of writing the risk for the full 30 years, although he only receives a single year’s premium in the former case and 30 years’ premium in the latter.”
Later, at paragraph 157:
“The result is that each employer is contributing to the risk all the time, and is therefore incurring liability all the time. This makes some sense as between successive employers who are guilty of a continuous tort. However, the same logic cannot be applied as between successive insurers. Insurers are not wrongdoers. They have not contributed to any tortiously inflicted damage. The principles on which they are liable to indemnify their insured are not affected by the Compensation Act. Their liability depends not on common law or statutory concepts of culpability but on the liability that they have agreed to assume by contract.”
Lord Mance’s leading judgment also took the opportunity to consider the outcome in the hypothetical situation of IEG becoming insolvent and therefore being unable to meet the whole of Mr Carré’s loss. Under the Third Parties (Rights against Insurers) Act 1930, in the event that the insured company becomes insolvent, the company’s rights under the insurance contract are transferred to the mesothelioma victim. It is worth noting that the 1930 Act is soon to be replaced by the 2010 Act, under which the same outcome would be achieved. In this situation, Lord Mance held that it is probable that Zurich would have to answer for 100% of Mr Carré’s loss. At paragraph 90: “…the considerations of policy and justice behind the rules developed in Fairchild and Trigger would probably mean that it was just (rather than “manifestly unjust”) for Zurich to have to fulfil its insurance policy obligations, before asserting against IEG any contribution claim based on circumstances outside the scope of the insurance to the prejudice of that victim”.
Although the court’s decision principally relates to the application of the law in Guernsey, the discussion as to the position of insurers’ liability under the 2006 Act will be of much interest to UK insurers. The court’s decision will no doubt be welcomed by UK insurers as it confirms that, whilst they might initially be fixed with 100% liability in respect of claims where they were only on risk for a proportion of the exposure period, they will have equitable rights to insist on pro rata contributions from other relevant insurers or, in respect of uninsured periods, from the company itself.