Zurich Insurance PLC UK Branch v International Energy Group Limited

At common law, liability for mesothelioma under the Fairchild rule remains proportionate to each wrongdoer’s contribution to the overall risk. Section 3 of the Compensation Act 2006 supersedes that rule only within its statutory scope.

Where the section applies, an insurer covering any part of an employer’s period of wrongful exposure must initially indemnify the whole liability. The insurer may obtain proportionate contribution from insurers covering other periods and from the employer for uninsured periods. These exceptional rights are confined to the Fairchild enclave.

Defence costs reasonably incurred under a distinct costs clause remain recoverable in full where the same costs would have been incurred to defend the insured part of the claim.

An employee was wrongfully exposed to asbestos throughout 27 years of employment in Guernsey and later contracted mesothelioma. His employer’s successor settled his claim and sought indemnity from Zurich, whose predecessor had provided employers’ liability insurance for six of those years.

Cooke J held Zurich liable for 22.08% of the compensation and all defence costs: [2012] EWHC 69 (Comm). The Court of Appeal awarded the employer the whole compensation and defence costs: [2013] EWCA Civ 39.

The Supreme Court considered whether Barker’s proportionate-liability rule remained part of Guernsey common law, the extent of an insurer’s liability where it covered only part of the exposure period, and whether defence costs should be apportioned.

1. Appeal allowed in part. The Court unanimously held that Barker remained part of the common law. Section 3 of the Compensation Act 2006 changed the result only in cases within its statutory scope. It did not declare or alter the common law generally. The employer’s liability under Guernsey law was therefore limited to 22.08% of the compensation, corresponding to the six insured years within the overall exposure period. Cooke J’s order was restored on that issue.

2. Lord Mance, with whom Lord Clarke, Lord Carnwath and Lord Hodge agreed, held that the weak or broad causal link recognised in the Trigger litigation means that exposure during any insured period causes the mesothelioma for the purposes of a causation-based liability policy. Where section 3 applies, an insurer covering part of an employer’s exposure period must therefore answer initially for the whole liability.

3. The majority held that the exceptional Fairchild rule also required an exceptional equitable solution. An insurer paying the whole liability may obtain proportionate contribution from insurers covering other exposure periods. It may also recover from the employer, treated as a self-insurer, for periods for which the employer cannot establish responsive insurance. Allocation should ordinarily reflect the duration of insured and uninsured exposure.

4. Lord Sumption, Lord Neuberger and Lord Reed disagreed on this point. They would have construed each annual policy as covering only the proportion of liability corresponding to its time on risk. They considered equitable recoupment from the insured inconsistent with the contractual allocation of risk.

5. The Court unanimously held Zurich liable for all defence costs. Those costs fell under a separate policy promise and arose on a conventional causative basis. They would not have been reduced had the underlying claim been confined to the insured period, so neither apportionment nor equitable contribution was justified.

6. Lord Mance further considered that, where an insolvent insured’s rights pass to a mesothelioma victim under the Third Parties (Rights against Insurers) Act 1930, the insurer should provide the full policy indemnity without setting off its later contribution claim against the victim. That issue was not finally determined.

1. United Kingdom Supreme Court: The appeal from [2013] EWCA Civ 39 was allowed as to compensation but dismissed as to defence costs. Cooke J’s proportionate compensation award and full defence-cost award were restored.
2. Court of Appeal: In [2013] EWCA Civ 39, the court allowed IEG’s appeal, dismissed Zurich’s cross-appeal and awarded 100% of both compensation and defence costs.
3. High Court, Commercial Court: In [2012] EWHC 69 (Comm), Cooke J awarded 22.08% of the compensation and 100% of the defence costs.