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Client Alert: IEG v Zurich – Judgment Handed Down

Client Alerts19/05/2015

Insurers’ Right of Recoupment Recognised in Mesothelioma

The Supreme Court has handed down its judgment in the partial cover mesothelioma case of International Energy Group Limited (IEGL).

Zurich have succeeded with a unanimous decision in their favour.

The Court was divided about how to achieve the result. The majority decided to agree with Zurich’s arguments and set up an equitable right of recoupment for insurers.

This means that in mesothelioma claims where insurance does not cover the whole period of asbestos exposure, insurers can seek a contribution from solvent policyholders.

Where the policyholder is insolvent, insurers will pay the whole claim. Claimants will always get full compensation.

The case

In the original case, the claimant, Mr Carré had worked for IEGL for 27 years. He was exposed to asbestos throughout that time. He developed mesothelioma from which he later died.

Zurich had covered IEGL for six of the 27 years. Another insurer covered for a further two years. IEGL settled Mr Carré’s claim and sought all their outlay from Zurich.

IEGL argued that since Fairchild, the legal test for causation of mesothelioma is a material contribution to the risk of disease. This undoubtedly occurred during Zurich’s cover, so they were entitled to a full indemnity.

Zurich offered IEGL a proportion of the loss based on their cover period. They agreed that in UK cases their cover had to answer the whole claim - because of section 3 of the Compensation Act 2006.

But, they said, the law of equity should recognise a right of recoupment to address the unfairness this caused. This formula also carried the benefit that in all cases mesothelioma victims would get full compensation.

If insurance cover answered for only part of a claim, claimants would face a compensation shortfall in the common situation where their employer had gone bust.

The IEGL case was further complicated by the fact that the underlying claim was from Guernsey. In those very particular circumstances, said Zurich, the case of Barker v Corus - which effectively made mesothelioma a divisible condition - remained good law as the Compensation Act was a UK statute and did not apply to Guernsey.

This in turn meant that Zurich’s cover did only answer for part of the claim. IEGL said that Barker had been rendered past history by decisions such as the EL Trigger.

The Court of Appeal agreed with IEGL. They found that Zurich were liable for the whole claim.

Zurich were supported in their Supreme Court appeal by the Association of British Insurers. The ABI explained the market and claims handling difficulties which would be caused by the Court of Appeal’s decision.

They explained the history of the industry’s claims handling process, including the ABI Guidelines. These would be disrupted causing disputes, delay and expense. There would also be significant scope for co-insurance and reinsurance disputes.

The decision

By a bare majority of one in a seven strong panel, and after two hearings, the Court decided to establish the right of recoupment sought by Zurich. They recognised that this was a bold leap. This was justified by the obvious unfairness of the situation.

More tellingly, it was a recognition of the unique difficulties created by the Courts’ decisions from Fairchild onwards. In the words of Lord Mance:

“by introducing an entirely novel form of causation…the courts have made it incumbent on themselves to reach a solution representing a fair balance of the interests of victims, insureds and insurers.”

The minority were scathing in their view of this - saying that it risked upsetting the fundamental law of contract. They thought that simple interpretation of the contract was enough to show that Zurich had never assumed the full risk.

Their liability was governed by the dates of the policy, “a fundamental feature” of an insurance policy. Zurich, they said, would only ever be liable for an equivalent share of IEGL’s liability.

The whole Court agreed that Barker remains good law except to the extent to which it is directly set aside by the 2006 Compensation Act.

The implications

This decision is very positive for insurers. There will be no hit on incurred, but not reported losses. Insurers can continue to seek contributions from solvent policyholders in mesothelioma claims.

There will be will minimal disruption to insurers’ existing claims handling practice - including the principle of pay and be paid. The Supreme Court has acknowledged insurers’ existing claims handling practice and given it a measure of judicial approval.

The preservation of claimant compensation heads off any need for Parliamentary intervention - which is always uncertain of outcome.

Insurers will also be buoyed by the Supreme Court’s apparent recognition of the difficulties they face in this area of litigation. In the words of Lord Sumption, “…insurers are as much entitled to justice as mesothelioma victims.”

Insurers are used to being at the wrong end of headlines and comment in relation to asbestos claims. Here we have a judgment which protects insurers’ financial interests, vindicates their practices and preserves full compensation for the sufferers of a dreadful disease. It must, then, be perfect? Nearly, but not quite.

As so often in asbestos litigation, one case departs the stage only for another to step from the wings. The decision in IEG means that the Court of Appeal will now list the asbestos lung cancer case of Heneghan.

Quite how the decision fits around the mixture of causation issues of asbestos lung cancer remains to be seen. Insurers might in the end come to prefer the minority decision in IEG. The story continues.

Keoghs were instructed on IEG in the Supreme Court by the Association of British Insurers.