Zurich Insurance plc v International Energy Group Ltd [2015] UKSC 33

A Guernsey gas employer exposed an employee to asbestos over 27 years but was insured with Zurich for only six. The Supreme Court held that, under Barker, the employer’s and insurer’s liability for damages was proportionate to insured exposure, but defence costs were fully recoverable.

Facts

International Energy Group Ltd (IEG), successor to Guernsey Gas Light Co Ltd (GGLCL), employed Mr Carré for over 27 years (1961-1988), during which he was negligently exposed to asbestos. He later developed fatal mesothelioma. It was agreed that exposure was of the same frequency and intensity throughout and materially increased the risk of mesothelioma, constituting breaches of duty by GGLCL.

Mr Carré sued IEG in Guernsey and settled his claim for £250,000 in damages and interest plus £15,300 towards his costs; IEG also incurred £13,151.60 in defence costs. During the 27-year exposure period, GGLCL had employers’ liability insurance for only eight years: two years with Excess Insurance Co Ltd (1978-1980) and six years with Midland Assurance Ltd (1982-1988). Zurich Insurance plc had assumed Midland’s liabilities.

Under the Midland policies, Zurich insured liability where an employee sustained “bodily injury or disease caused during any period of insurance and arising out of and in the course of his employment” and agreed to indemnify for “all sums” for which the insured was liable in respect of such injury or disease, and to meet defence costs incurred with its consent.

Zurich offered to indemnify on a time-on-risk basis: 72/326ths (22.08%) of the compensation and interest (reflecting six insured years over approximately 27 years and one month) but 100% of defence costs. Cooke J accepted this apportionment for damages but held Zurich liable for all defence costs. The Court of Appeal reversed as to damages, holding Zurich liable for 100% of both damages and defence costs.

The obligations between Mr Carré and IEG were governed by Guernsey law. Guernsey has no equivalent of the UK Compensation Act 2006, but the parties agreed that Guernsey common law should mirror English common law for this appeal.

Issues

1. Status of Barker and measure of employer’s liability in Guernsey

Whether the House of Lords decision in Barker v Corus UK Ltd, which limited each tortfeasor’s liability to its proportionate contribution to the risk of mesothelioma, remained good common law where the Compensation Act 2006 did not apply (i.e. in Guernsey), or whether Barker had effectively been overtaken by that Act and by the Supreme Court’s reasoning in the Trigger litigation (Durham v BAI (Run-Off) Ltd).

If Barker remained good common law, IEG’s liability to Mr Carré would be only a proportionate share of his loss (22.08%), and Zurich’s indemnity obligation would be limited to that share. If Barker had been superseded, IEG would be liable in full and Zurich would prima facie be liable to indemnify in full.

2. Construction of the Midland policies where only part of exposure is insured

On the assumption that an employer is liable in full for mesothelioma damages because exposure occurred during the insured period (as in the UK post-Compensation Act 2006), the court considered:

• Whether an insurer on risk for only part of the exposure period must indemnify the employer for the whole of the mesothelioma loss (the “all sums” argument), or only a proportionate part corresponding to time on risk.
• Whether, if liable for the whole, the insurer has rights to recoup a proportionate share from other insurers and/or the employer as a “self-insurer” for uninsured periods.

3. Defence costs

Whether Zurich’s liability for defence costs should also be prorated by time on risk, or whether the Midland policy required Zurich to pay all defence costs incurred (with its consent) in defending Mr Carré’s claim embracing the whole 27-year exposure.

4. Third party rights against insurers (obiter)

How any insurer’s right to contribution or recoupment would interact, in principle, with claims brought directly by mesothelioma victims under the Third Parties (Rights against Insurers) Act 1930 (and the not-yet-commenced 2010 Act).

Judgment

1. Barker remains part of the common law outside the Compensation Act 2006

The court (unanimously) held that section 3 of the Compensation Act 2006 overrode Barker only to the extent expressly provided and only within the UK statutory regime; it did not alter the underlying common law principles more generally or in other jurisdictions.

Lord Mance rejected the argument that section 3 declared what the common law had “always been”, noting that it was enacted to reverse Barker’s proportionate liability rule, not to codify existing law. He observed that Parliament’s reaction “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.”

The Supreme Court in Trigger had scrutinised Barker and proceeded on the basis that it remained authoritative. There had been no challenge to its correctness in Trigger. The majority in Trigger adopted a “weak” or “broad” notion of causation for mesothelioma, but that did not undermine Barker’s conclusion that liability, when founded only on increased risk, is proportionate to the share of exposure.

Baroness Hale’s reasoning in Barker, extensively quoted by Lord Mance, emphasised the distinction between indivisible harm (mesothelioma) and divisible contributions to risk. She noted that in the Fairchild situation defendants are held liable although they may not have caused any harm at all, and that fairness and policy justified limiting each defendant’s liability to its proportionate contribution to risk.

Accordingly, Barker continues to represent the common law of England, and by agreement the common law of Guernsey. IEG’s liability to Mr Carré was therefore limited to 22.08% of the full mesothelioma loss, reflecting the period of exposure for which it was insured by Midland relative to the total 27-year exposure.

2. Construction of the Midland policies and the “all sums” argument

On the facts, because Barker applied, IEG’s liability to Mr Carré was already proportionate, and Zurich’s indemnity was correspondingly limited to 22.08% of the damages and interest paid. The court therefore did not need to decide as a matter of construction whether, in a full-liability scenario under the 2006 Act, an insurer on risk for only part of the exposure period must indemnify in full or only pro rata.

The Court of Appeal had relied on the “all sums” wording to conclude Zurich owed a full indemnity. Lord Mance held that this did not justify granting IEG more than a true indemnity; the fundamental principle is that an insured cannot recover more than the loss it has actually suffered vis-à-vis the risk insured. IEG did not, in fact, advance any argument that Zurich should indemnify for periods of exposure outside the Midland policy years if Barker applied.

Lord Sumption, in a powerful dissent on this point (with which Lord Neuberger and Lord Reed agreed), would have construed policies such as Midland’s as covering only a time-proportionate part of the total mesothelioma loss, even where the employer is fully liable under the 2006 Act. He stressed the fundamental nature of the insurance period and the need to avoid commercially absurd outcomes where an insurer on risk for a short period would otherwise bear the cost of decades of exposure.

However, Zurich had accepted that, if the common law no longer followed Barker and the employer was liable for the whole loss simply because of exposure during the insured period, the Midland policy wording on its face would require Zurich to respond in full. The majority judgment proceeded on the basis of that concession and left the broader construction issue for such statutory situations to be addressed through principles of contribution and recoupment (discussed obiter).

3. Defence costs

On defence costs, Zurich argued that its liability should be prorated by time on risk, as with damages. The Supreme Court unanimously rejected this.

The Midland policy expressly provided that Zurich would be “responsible for all costs and expenses incurred with the consent of the Company in defending any such claim for damages”. The defence costs were incurred in defending a claim for mesothelioma damages arising from exposure which included periods covered by the Midland policies. There was nothing to suggest the defence costs would have been any less had the claim been limited to the six insured years. Crucially, the right to recover defence costs was not founded on the special Fairchild/Barker causation rule but on a conventional causative basis: IEG had in fact incurred defence costs in defending a claim of a kind covered by the policies, with Zurich’s consent.

Lord Mance distinguished this from the exceptional mesothelioma causation rule: liability for defence costs arose “directly from the policy wording, as it would always have been understood” and had at most been only indirectly affected by the special rule. Applying the Privy Council’s approach in New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd, there was no basis for reducing contractually covered defence costs merely because they also benefited uninsured periods or parties.

The court therefore held that Zurich was liable to indemnify IEG for 100% of the defence costs incurred in Mr Carré’s claim.

4. Co-insurance, self-insurance and hypothetical rights of contribution (obiter)

Lord Mance devoted substantial analysis to the wider implications of Fairchild, Barker and Trigger for relationships between responsible employers and their insurers where the Compensation Act 2006 applies (which it did not in Guernsey). He noted that, under Trigger, exposure during any policy period was treated as a sufficient “weak” causal link to trigger liability, so each insurer on risk during any exposure period could in principle be liable for the full mesothelioma loss.

This created serious anomalies if an insured had insured for only part of the exposure period: an employer could select any insured year and shift the whole loss to that insurer, regardless of uninsured years or periods covered by other insurers, undermining the temporal allocation of risk and the link between premium and exposure.

Rejecting Lord Sumption’s proposal to limit each insurer’s liability by construction to a time-based proportion (on the ground that it was inconsistent with Trigger), Lord Mance invoked equitable principles of contribution and the concept of self-insurance. He reasoned that, in a scenario governed by the 2006 Act where an insurer is liable in full under a causation-based policy, fairness and established contribution doctrine justified:

• Extending contribution between insurers so that co-insurers covering other periods of culpable exposure contribute pro rata by reference to their periods on risk.
• Treating the employer as a “self-insurer” for periods where no effective insurance was in place or where no insurer could be traced, and recognising an equitable obligation on the employer to contribute proportionately to the insurer that had satisfied the full mesothelioma liability.

Lord Mance drew on historic authorities on contribution (including Godin v London Assurance Co, Dering v Earl of Winchelsea, Australian authorities such as Albion Insurance, and academic analysis) to support a flexible, equity-based extension of contribution principles to meet the unique anomalies of the Fairchild enclave.

However, he declined to recognise any such right of contribution in respect of defence costs, because those costs were recoverable on a conventional causative basis and their amount was not increased by the additional uninsured years of exposure.

These contribution and self-insurance analyses were expressly hypothetical and concerned only the statutory full-liability regime under the Compensation Act 2006, not the actual Guernsey position, where Barker’s proportionate liability ruled.

5. Third party rights against insurers (obiter)

Lord Mance considered, obiter, the interaction between any insurer’s right of contribution/recoupment and claims brought by mesothelioma victims under the Third Parties (Rights against Insurers) Act 1930 (and the 2010 Act).

He analysed possible defences based on legal or equitable set-off, circuity of action and contribution, and the wording of section 1 of the 1930 Act (transferring to the victim the insured’s rights “under the contract in respect of” liability). He concluded that there was a strongly arguable case that, in a claim by a victim under the 1930 Act, the insurer must provide the full policy indemnity without setting off any contribution claim against the insured, leaving contribution to be pursued separately.

Implications

For Guernsey and other non-statutory jurisdictions
For mesothelioma claims governed by common law without a Compensation Act analogue (such as Guernsey), Barker remains authoritative. Employers who have wrongfully exposed employees to asbestos over multiple periods are only severally liable for a proportionate share of mesothelioma damages, typically measured by duration and intensity of culpable exposure. Liability insurers are correspondingly liable only to indemnify that proportion.

For English law where the Compensation Act 2006 applies (obiter guidance)
The majority confirm that the Act did not change the underlying common law principles of causation recognised in Fairchild and Barker; it simply imposes joint and several full liability on each “responsible person” in mesothelioma cases within its scope. In such statutory cases, the majority’s obiter suggests:

• Policies on a causation basis, as interpreted in Trigger, respond in full where there has been significant exposure during the policy period.
• To counteract anomalies where only part of the exposure period is insured, an insurer paying in full may have equitable rights of contribution against other insurers and the employer (as self-insurer) for uninsured periods. However, these rights do not reduce defence cost indemnity.

By contrast, the minority (Lord Sumption, with whom Lord Neuberger and Lord Reed agreed) would avoid such anomalies by construing occurrence-based liability policies to provide only time-proportionate indemnity, even under the Act, and would reject any equitable recoupment against the insured as inconsistent with the contractual allocation of risk.

For defence costs under employers’ liability policies
The decision firmly establishes that, where defence costs are expressly covered and incurred with the insurer’s consent in defending an insured claim, they are recoverable in full, even if the underlying liability is temporally divisible or only partially insured. Insurers cannot insist on time-on-risk apportionment of such costs under wording like that in the Midland policies.

For contribution and insurance market practice
Although the contribution analysis is obiter in this case, it provides a structured framework for resolving allocation issues between insurers and between insurers and insureds in the Fairchild enclave, complementing industry guidelines and statutory schemes (FSCS and the Mesothelioma Act 2014). It also signals judicial willingness (at least in the majority) to adapt contribution principles to address the unintended consequences of the special mesothelioma causation rule.

Overall significance
The decision clarifies that Barker’s proportionate liability rule persists as common law outside the statutory mesothelioma regime, significantly affecting employers’ and insurers’ exposure in non-UK jurisdictions and in non-statutory contexts. It also resolves an important point on defence costs and offers competing, carefully reasoned models for handling mesothelioma insurance allocation issues in jurisdictions operating under the Compensation Act 2006.

Verdict: The Supreme Court allowed Zurich’s appeal on the measure of indemnity for damages, holding that under Barker and Guernsey common law IEG’s and thus Zurich’s liability for mesothelioma damages was limited to 22.08% of the total compensation; however, Zurich remained liable to indemnify IEG for 100% of the defence costs.

Source: Zurich Insurance plc v International Energy Group Ltd [2015] UKSC 33