Zurich Insurance PLC UK Branch v International Energy Group Limited

This appeal concerned how the special Fairchild rule for mesothelioma claims interacts with employers' liability insurance and the scope of insurers' indemnity where an employer was insured for only part of the period of toxic exposure. The court held (i) that the apportionment rule in Barker remains part of the common law where not displaced by statute (so Guernsey law continued to allow proportionate recovery), and (ii) that an insurer who is on risk only for part of an insured’s tortious exposure is not automatically liable for the whole compensatory loss attributable to exposures outside the policy period; instead the insured’s entitlement to indemnity should be treated consistently with the principle of indemnity. The court also decided that defence costs incurred with the insurer’s consent were recoverable in full under conventional policy wording and declined to recognise an equitable right to recoup or prorate defence costs.

Background and parties. The claimant in the underlying tort action, Mr Carré, alleged exposure to asbestos during employment by Guernsey Gas Light Co Ltd (GGLCL) over some 27 years and contracted mesothelioma. IEG (the successor to GGLCL) settled the claim and sought indemnity from its insurers. Zurich (successor to Midland Assurance) was on risk for six of the 27 years. Zurich paid a proportion of the settlement on its industry guideline basis; IEG contended for full indemnity.

Procedural posture. After trial (Cooke J) Zurich was held liable for its pro rata share of the compensation but for 100% of defence costs; the Court of Appeal allowed IEG’s appeal and ordered Zurich to pay 100% of compensation and defence costs ([2013] EWCA Civ 39). Zurich appealed to the Supreme Court.

Relief sought. Zurich sought to limit its liability under the policies to a rateable proportion of the compensatory damages attributable to exposures during the period it insured, and to be entitled to recoup or claim contribution in respect of any remainder. Zurich also sought to limit or apportion the defence costs it was called upon to meet.

Issues framed by the court. The principal issues were: (1) whether Barker v Corus remains part of common law in jurisdictions where the Compensation Act 2006 does not apply (here Guernsey); (2) whether an insurer on risk for part only of an employer’s period of tortious exposure must, under the policy or at common law/equity, discharge the whole of the insured’s liability and, if so, whether it has a right to contribution or recoupment from other insurers or the insured for uninsured years; and (3) whether defence costs can be prorated or must be borne in full by the insurer who consented to them.

Reasoning and conclusions. The majority (Lord Mance, Lords Hodge and others) concluded that Barker remains good common law where not displaced by statute and that, on the agreed facts, Zurich’s liability for compensation should be proportionate to the period it was on risk (restoring Cooke J on compensation). The court accepted the reasoning in the Trigger litigation that insurance policies on a causation/occurrence basis respond to exposure during the policy period, but held that this did not eliminate the principle of indemnity or require an insurer to insure exposure outside its chronological policy period without any right of contribution. The court declined to recognise a right of equitable recoupment in respect of defence costs and held that defence costs incurred with the insurer’s consent were recoverable in full under the policy wording.

Subsidiary findings and context. The judgment addressed industry guidelines, the Financial Services Compensation Scheme, and the Mesothelioma Act 2014 as background to the practical implications of the legal conclusions. The court emphasised different treatment of compensation (where apportionment and contribution rights were appropriate) and contractual defence costs (recoverable in full where within the policy wording).

Appeal allowed in part. The Supreme Court held that Barker remains good common law in jurisdictions where it has not been displaced by statute (so Zurich was entitled to a rateable share of compensation attributable to the policy period), restoring the first instance result on compensation; but the court rejected a right to recoup prorated defence costs and confirmed that defence costs incurred with the insurer’s consent are recoverable in full under conventional policy wording.

First instance: Cooke J, Commercial Court, [2012] EWHC 69 (Comm) (Zurich held to indemnify pro rata for compensation but for 100% of defence costs). Court of Appeal: [2013] EWCA Civ 39 (reversed on compensation and ordered insurer to pay 100% of compensation and costs). Supreme Court: [2015] UKSC 33 (appeal allowed in part).