Successful insurers’ A1P1 claim concerning benefits reimbursement in asbestos claims

25 November 2020 by David Hart KC

R (o.t.a of Aviva & Swiss Re) v. Secretary of State for Work and Pensions [2020] EWHC 3118 (Admin)

At first sight, a rather abstruse dispute, but the 63 page judgment of Henshaw J gives rise to a host of important and difficult human rights points. But his central conclusion is that a statute which was not challengeable at the time of its enactment became so, because of the subsequent evolution of the law, principally common law, to the detriment of insurers.

Sounds mildly counter-intuitive? Not, I think, so, when the story has unfolded.

The statute is the Social Security (Recovery of Benefits) Act 1997. The benefits in question are those paid by the state to injured claimants. In litigation against, say, a negligent employer, the claimant’s damages are reduced by the amount of specified benefits received. The tortfeasor employer then has to reimburse the state in respect of those benefits. The state here is the Compensation Recovery Unit or CRU, which is itself part of the Department of Work and Pensions (DWP). And it was the DWP who was the defendant in this challenge.

The claimants in this judicial review are insurers and their re-insurers. Their particular complaint related to obligations under the 1997 Act arising out of employers liability policies covering asbestos-related diseases. These liabilities are so-called long-tail ones; asbestos-related diseases may not manifest themselves for decades, often well after the claimant employees have retired, but the insurance liability attaches to the insurer in place when the exposure to asbestos occurred. Take one example of the length of the tail: Mr Carder, in his mid-80s at trial in 2015 (Carder v. University of Exeter), whose asbestosis came on as a result of exposure in various employments between the 1950s and 1980s.

The insurers did not complain about the reimbursement system as a whole, just the obligation to reimburse benefits arising in respect of asbestos-related diseases because of the following factors.

First, insurers identified some key changes in the underlying law of tort which have occurred since the 1997 Act was passed: [10] of the judgment. These have been generally favourable to victims and therefore detrimental to insurers’ interests.

On causation, Fairchild had decided that in mesothelioma cases a claimant only had to show that a defendant had materially increased the risk of contracting the disease – not that it had caused it in “but for” terms. Later cases have applied that ruling to asbestos-related lung cancer cases.

In addition, any tortfeasor was now liable for 100% of damages for mesothelioma even if they were only responsible for a small fraction of the exposure to asbestos; this arose out of the passing of the Compensation Act 2006 reversing the common law decision of Barker.

Contrast asbestosis itself, Mr Carder’s disease, in which he succeeded against one employer responsible for only some 2.3% of his total career exposure to asbestos: good result for him. But he then only recovered 2.3% of the value of his claim. This is because asbestosis is regarded as a divisible disease (every year of exposure worsens the lung fibrosis) whereas mesothelioma (a condition which may be caused by only one asbestos fibre) the law regards as indivisible.

Insurers then identified anomalies in the benefits reimbursement rules when measured up against the law of tort: [11]. Hang on to your hat, as these instances recur throughout the judgment, and hence this post.

11 (i) An insurer had to repay 100% of the benefits paid, to the DWP even if the employee was contributorily negligent, and therefore only recovered, say, 50% of his damages;

11 (ii) 100% ditto, even if the employee, like Mr Carder and his 2.3%, only recovered a tiny proportion of his full claim (£1,552 from £67,500);

11 (iii) An insurer had to pay the 100% even if there were other defendants who would have been liable but they and their insurers could not be traced;

11 (iv) An insurer had to repay benefits even if those benefits did not relate to any recognised head of loss; for example, those benefits may be earnings-related even though the particular claimant brought no loss of earnings claim against the tortfeasor, say, because he had retired before his illness came on;

11 (v) An insurer had to repay 100% of the benefits even if the employee’s claim had been compromised at a discount on liability.

So, the nub of the complaint on the facts was that insurers were obliged to pay for benefits which corresponded to losses not caused by their insured, or for which there had been no claim (as per 11(iv) above).

In law, they said that the 1997 Act was being applied disproportionately and this amounted to an interference to their Article 1 Protocol 1 rights. The 1997 Act was retroactive, in that it applied to liabilities pre-dating its coming into force. The Act, as applied, did not strike a fair balance between insurers and the rights of the community. They also complained that the DWP had not made regulations under the 1997 Act which could have mitigated these undue burdens.

It was common ground that rights and obligations under an insurance policy were “possessions” for the purposes of A1P1.

The DWP countered: [20]

(i) the challenge was to the 1997 Act, primary legislation passed 23 years ago;

(ii) the challenge was not justiciable, because it related to conduct before the Human Rights Act came into force in 2000;

(iii) the challenge was out of time under the HRA;

(iv) neither insurers nor re-insurers were “victims”;

(v) one cannot challenge a failure to make regulations via an HRA claim;

(vi) there was no interference with insurers’ A1P1 rights, and even if there was this could be justified.

The judgment: whistlestop

In short, the judge held the anomalies at 11(i) to (iii) (contrib, divisibility, and untraceable defendants) were incompatible with insurers/re-insurers’ rights. By contrast, the reimbursement provisions applicable to 11(iv) (benefits not corresponding to heads of loss) and 11(v) (compromise) were compatible.

He also found that an HRA claim could be brought by way of a challenge to the DWP’s failure to make corrective regulations, with the same substantive outcome.

So A1P1 breaches to that extent.

Gentler guided-tour

The judge considered at some length the genesis of the 1997 Act which built on and amended previous benefits legislation. There had been two previous anomalies. The first was that there was a threshold (£2,500) below which there was no duty to reimburse. This led to a lot of claims settling at just under £2,500 – DWP predecessor out of pocket. The second was that the deduction affecting claimants applied to all damages payable, including those for pain, suffering and loss of amenity (PSLA), in respect of which no benefits were paid. So a modest claim consisting solely of PSLA might be eroded or eclipsed by the benefit deduction. Claimant out of pocket.

These were the mischiefs at which the 1997 Act was aimed, he found. In a key conclusion ([64]), he added

“What Parliament did not have in contemplation was that, as a result of future developments in the law as between compensators and victims, compensators or their insurers would become liable for the cost of State benefits having no real relationship to the degree of injury or risk that those compensators had inflicted on the injured person.“

He explained this further at [65]

“However, the major statutory and common law developments referred to in § 10 above, hugely extending compensators’ liabilities vis-à-vis injured persons, still lay in the future.  There is no evidence or reason to believe that in 1989, 1992 or 1997 Parliament could or did have in contemplation the imposition on compensators and insurers of commensurately vastly extended liabilities to the State, based on such future developments of the law in favour of victims. “

These conclusions are the springboard for his rulings on the law.

Rejecting the argument that the complaint could only be limited to the pre-HRA coming into force of the 1997 Act, he ruled that the claim was justiciable. The interference arose on an ongoing basis each time an insurer incurred a specific liability under the Act in respect of a specific claim: [85]

The ordinary limitation period for an HRA claim is one year. The DWP’s reliance on this failed for similar reasons. The relevant sections of the 1997 Act interfered with insurers’ possession on an ongoing basis: [91]

The judge explained that it was only because of subsequent developments that the Act began to infringe insurers’ right although “it would be difficult to define precisely when that moment occurred”: [94]. See also [181] to which I turn to later under the head of Remedies.

At [95] onwards, the judge addressed the “not HRA victims” argument. The DWP pointed out that Aviva had reinsured the relevant risks to Swiss Re in 2015, and Swiss Re had insured them in the full knowledge of the circumstances which gave rise to the alleged infringements – and therefore could have factored this into the premia payable.

At [102], the judge dismisses this argument for three reasons:

(1) Aviva remained primarily liable to its policyholders, despite the reinsurance, as it was contingently exposed in the event that Swiss Re refused or was unable to meet its reinsurance obligations.

(2) The reinsurance was not unlimited and contains exclusions.

(3) Aviva would have paid more by way of premia to Swiss Re because of the risks arising from the Act.

The A1P1 substantive arguments

18 pages (from [111] onwards] set out the judge’s conclusion on interference, legitimate aim, rational connection, no more than is necessary, and fair balance – the necessary structure of any A1P1 argument.

(1) There was an interference because the benefits to be repaid did not match the credit given by the employee.

(2) There was no legitimate aim in such ill-matched recovery.

(3) There was a rational aim in the impact on contributory negligence cases, the mismatched heads of loss cases, and the compromise cases, but not in the Carder-type case or the indivisible mesothelioma-type case.

(4) No more than necessary: an alternative scheme could not sensibly be found for the heads of loss problem or the compromise problem, but it could for the Carder case and mesothelioma case. But interestingly the judge, despite having found a rational aim in the contrib. instance, thought that this “no less intrusive means ” test may operate more strictly, and that an alternative scheme could have been devised in respect of the contrib. problem ([137(i)].

(5) A fair balance had not been struck in respect of contrib, Carder cases, and mesothelioma-type cases. As he put it at [142],

“They have the effect of imposing substantial liabilities to the State pursuant to historic insurance policies, upon insurers who could not have priced any such risks into the premiums obtained at the time, in respect of State benefits bearing no proportionate relationship to the wrongdoing by the relevant insureds.  The social policy objectives which, exceptionally, have led the courts and Parliament to take a novel and particularly generous approach to causation vis-à-vis the victims of asbestos-related diseases do not reasonably justify imposing on the insurers additional liabilities to the State.”

Elsewhere at [164], the judge describes these developments in the law of tort as “highly significant and unpredictable”.

Nor was there justification for the retroactive nature of the 1997 Act, applying to all claims in the pipeline at the time of enactment: [151].

There was a fair balance in respect of heads of loss cases.

As I have indicated above, the judge also found that the DWP had failed to remedy matters by making regulations to address these anomalies. For brevity’s sake, I direct aficionados of s.6(6) HRA and its ramifications to [173]-[174] of the judgment for the far from straightforward question as to why the claim did not fall foul of this provision.

Remedies

The judicial review was not the trial of the insurers’ claims for damages, though its conclusions obviously pave the way for such claims. Indeed the precise nature of the declaratory remedies to be granted by this judge were also to be the subject of further argument. The judge however was inclined to the view [181] that the contrib. cases were non-compliant from the coming into force of the HRA in 2000, the Carder cases only became non-compliant from the decision in Carder, and the indivisible mesothelioma cases became non-compliant from the enactment of the Compensation Act 2006. Such issues will significantly affect the extent of recoverability in damages from the DWP, as damages will only run from the date of the specific interferences.

Conclusion

A Commercial Court judge, attuned to the realities of the insurance market, sitting in the Administrative Court, considered that, by the drift or shift of the common law since 1997, a scheme which was not A1P1 unfair at the start, had become so by some years down the track. I hope you can now see why.

It is a perfect example of an entirely justifiable claim which may disappear if the HRA is tampered with or repealed. There is no comparable remedy in general public law – even assuming that is not tampered with itself.