Zurich Insurance Plc v International Energy Group Ltd  UKSC 33
International Energy Group Ltd (‘IEG’) was the successor in title of Guernsey Gas Light Co Ltd (‘GGLCL’), which had employed an individual named Mr Carré for 27 years from 1961 to 1988. Over the course of that employment, Mr Carré was exposed to asbestos dust. Mr Carré subsequently contracted and died of mesothelioma. It was accepted by both parties for the purposes of the claim that he had been exposed with the same degree of frequency and intensity throughout the 27-year period, that such exposure had materially increased the risk of his contracting mesothelioma and that such exposure constituted a breach of duty by GGLCL towards him.
Prior to his death, Mr Carré had brought proceedings for personal injury against IEG in the Royal Court of Guernsey. IEG eventually opted to settle his claim with a compensation payment for damages of £250,000 plus the legal costs Mr Carré had incurred. By this stage IEG itself had also incurred significant costs in defending the claim.
IEG then sought an indemnity in respect of Mr Carré’s claim from Zurich Insurance Plc (‘Zurich’). Zurich was the successor to the liabilities of one of two liability insurers providing policies to GGLCL during Mr Carré’s period of exposure. The first policy had been with Excess Insurance Co Ltd, which provided insurance for two years from 1978 to 1980; the second was with Midland Assurance Ltd – Zurich’s predecessor – which provided insurance for six years from 1982 to 1988.
There were three issues:
(i) In England section 3 of the Compensation Act 2006 provided that each employer was liable in full for the whole of the damages awarded to a mesothelioma victim. However, in Guernsey no equivalent of the Compensation Act had been passed. It had been agreed for the instant case that the common law in Guernsey mirrored that in England. The first issue was therefore whether the proportionate recovery rule established in Barker v Corus still existed at common law or whether it had been supplanted by the passage of the Compensation Act.
(ii) The second issue was whether any such proportionate recovery rule applied in respect of IEG’s defence costs, which were also claimed from Zurich under the terms of the Midland insurance policy.
(iii) If Barker no longer represented the common law, the final issue was whether an insurer which had covered only part of the whole period of exposure bore the whole liability in the first instance and whether there was any right of recourse for such an insurer.
At first instance Cooke J had held that Barker was still correct at common law, with the result that the insurer was liable only for a rateable proportion of the settlement figure reflecting its time on risk. The alternative claim for a contribution in the event of ‘100% liability’ therefore did not arise – although if it had arisen, Cooke J would have rejected it. The Court of Appeal reversed Cooke J on the first point, holding that Barker had been consigned to history following the passage of the Compensation Act; it was consequently also no part of the common law of Guernsey. The Court of Appeal therefore found that Zurich was liable for the entire loss.
Issue 1: The Law under Barker
The seven sitting members of the Supreme Court were unanimous in their finding that Barker still represented the current state of the common law. Lord Mance (with whom Lord Clarke, Lord Carnwath and Lord Hodge agreed) gave short shrift to IEG’s submission that the proportionate recovery rule had been undermined:
The passage of the Compensation Act had clearly been intended by Parliament to effect a change in position from the common law rule established in Barker, but that in itself ‘does not alter the common law position apart from statute, or have any necessary effect in jurisdictions where the common law position has not been statutorily modified.’
Nor had the recent Trigger litigation resulted in a judicial departure from Barker. Lord Mance first noted that ‘there was in Trigger no issue about or challenge to the correctness of Barker.’ Crucially, however, the rule in Barker had been considered in Trigger as stemming from the same ‘weak or broad’ test of causation that was subsequently considered as applying to the insurance contracts at issue in the latter case. Given the common basis of the two decisions, Lord Mance concluded that Trigger ‘cannot therefore be said to affect or undermine the reasoning or decision in Barker.’
The result was that the appeal was successful as regards the compensation paid by IEG to Mr Carré. Barker continued to represent the common law position applicable in Guernsey with the result that Zurich was only liable for a rateable proportion of the settlement figure reflecting its time on risk (i.e. 22.08% of the total paid).
Issue 2: Defence Costs
The Supreme Court was also unanimous in its finding that the proportionate recovery rule did not apply to the defence costs. Lord Mance noted that 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 policy. More importantly, IEG’s right to recover defence costs was covered by its policy of insurance and as a matter of construction there was no ground on which to construe the wording as incorporating the special proportionate recovery rule rather than operating on a conventional basis.
Issue 3: The Law under the Compensation Act 2006
Having already decided the appeal under the first two headings, Lord Mance went on to consider what the situation would have been had the common law developed to reflect the provisions of the Compensation Act 2006. He started by noting that in Trigger the court had equated the concept of causation in an insurance context with the weaker or broader meaning which the courts had already given it in tort through Fairchild. The reasoning in Trigger, he said, bound the Supreme Court in the instant case to hold that Mr Carré’s mesothelioma had been caused in each and every period of the overall period of exposure: this was because ‘exposure connotes causation, in both tort and tort liability insurance law.’ The result was that an insurer, whether for the whole or part of the period for which the insured employer had negligently exposed the victim to asbestos, was liable for the victim’s full loss.
The analysis could not stop there, however – if the insurer had no right of recourse against other parties for a contribution then:
a) The risks undertaken by insurers would be unpredictable since an insured could select the policy to which the loss attached.
b) An insurer’s policy would potentially cover risks extending over a much longer period than that in respect of which a premium had been paid.
c) An insured would be able to ignore long periods in respect of which he had chosen not to insure.
d) An insured would have no incentive to take out or maintain continuous insurance cover since it would only be necessary to cover a brief part of any overall exposure period in order for the insurer to be 100% liable.
A sensible overall result could only be achieved if the insurer held liable under a policy like the Midland policy was able to have recourse either in equity or under the Civil Liability (Contribution) Act 1978 for an appropriate proportion of its liability to any co-insurers in respect of periods of exposure of the victim by the insured for which the insurer had not covered the insured. For the purpose of this exercise, GGLCL would be treated as a self-insurer – and therefore subject to claims for a contribution from the insurer held liable – in respect of that part of the 27-year exposure period for which it could show no insurance capable of affording contribution.
Lord Hodge gave a short concurring judgment setting out a number of reasons for preferring Lord Mance’s approach, noting in particular that it appeared to reflect settled practice in the insurance industry and indeed that it had not been objected to by insurers over the course of the appeal.
Lord Sumption (with whom Lord Neuberger and Lord Reed agreed) gave a strongly-worded judgment on behalf of the minority in relation to the third issue. His view was that it was in fact consistent with Trigger to say that an insurer, who only covered part of the total period for which the insured exposed the victim, was only liable for a corresponding part of the insured’s liability to the victim. The proposition that an insurer who was on risk for only part of the period of exposure, however brief, could be liable as if he had been on risk for the entire period, was contrary to the express terms of the contract of insurance and to the nature of annual insurance: it was, in fact, ‘commercially absurd’. His conclusion was that the decision reached by the majority was ‘both unprincipled and unjust.’
He noted further that the employee-victim was already entitled to recover a proportionate amount in relation to an insolvent insurer under section 213 of the Financial Services and Markets Act 2000 and, in the event that there had been no insurance at all, also under the Mesothelioma Act 2014 – the effect of the majority view was therefore simply to transfer risk from the statutory compensation schemes to an arbitrarily selected solvent insurer who had not agreed to bear it in exchange for a premium.
Lord Neuberger and Lord Reed gave a short joint judgment in which they acknowledged that it was ‘arguable whether Lord Sumption’s solution is consistent with the reasoning of this court in the Trigger litigation’, however, the undesirability of the disconnect between premium and risk resulting from the majority decision convinced them that it was the preferable option.
Thus far no further?
Over a decade after Fairchild was decided, Zurich is the most recent in the steadily growing line of cases seeking to untangle its legacy. The waning in judicial appetite for further development of the ‘Fairchild enclave’ is notable: contrast Lord Mance’s view that what is required is a grim determination to see the job through – ‘having, for wholly understandable reasons, gone down the Fairchild route, the common law must, in my view, face up to the consequences, if necessary by further innovation’ – with Lord Hodge’s clear reluctance to side with the majority – ‘having dug a hole, the courts should not keep digging.’ The minority’s preference for steering back towards normalcy in spite of the apparent conflict this would cause with Trigger emphasises further the disillusionment with the path set in Fairchild. In this respect, the final paragraph of Lord Neuberger’s and Lord Reed’s judgment is particularly frank:
‘In the case of mesothelioma claims, there can be no real doubt but if Fairchild had been decided the other way, in accordance with normal common law principles, Parliament would have intervened very promptly. That may very well have been a better solution, but it can fairly be said that that observation is made with the wisdom of hindsight.’