Since at least 2003, when the judgment in Lowther v Chatwin  EWCA Civ 729 was handed down, the Courts have been alive to a limited set of circumstances in which the Social Security (Recovery of Benefits) Act 1997 (“the 1997 Act”) imposed an (arguably) unfair burden on liability insurers: see, for exp.,  in Lowther. In particular, compensators occasionally found themselves in a situation where their liability to compensate the State for recoverable benefits received by an injured party was greater than the amount recoverable from the injured party’s damages. In some cases, this liability to the state bore no relation to the type, or extent, of damage caused by the insured. This phenomenon was particularly prominent in respect of liabilities for long-tail asbestos-related disease. In R (Aviva Insurance Ltd and Swiss Reinsurance Co Ltd) v Secretary of State for Work and Pensions  EWHC 3118 (Admin), the High Court was asked to consider whether the 1997 Act applied in a manner that was incompatible with the Claimants’ (and others in their position) rights under Article 1 of the First Protocol (“A1P1”) to the Convention for the Protection of Human Rights and Fundamental Freedoms (“the Convention”), as incorporated by the HRA 1998.
In an important decision for liability insurers it was held that three features of the 1997 Act (each of which arose from post-1997 legal developments relating to asbestos-type claims and were limited to that context) were incompatible with the Claimants’ A1P1 rights. Those are:
- The requirement to repay 100% of the recoverable benefits even where the employee is found to be contributorily negligent;
- The requirement to repay 100% of the recoverable benefits even where the employee’s “divisible” disease is in part unconnected with the insured’s tort; and
- The requirement to repay 100% of the recoverable benefits even where other employers would normally be liable for an indivisible disease but they or their insurer cannot be traced.
The judgment is both long and dense; accordingly this article seeks to identify the backbone of Henshaw J’s reasoning.
- The legislative regime
It is necessary to start by considering the purpose and mechanics of the 1997 Act. As Hale LJ explained at  in Lowther v Chatwin  EWCA Civ 729:
“The scheme of the 1997 Act serves two objectives. The first is to ensure that a defendant who is liable to compensate a claimant for an accident, Injury or disease reimburses the state for certain benefits paid to the claimant in respect of that accident, injury or disease. The second is to ensure that the benefits recouped from the defendant are offset against the sums received by the claimant so that the claimant does not obtain a double recovery.” (my emphasis).
In R (Aviva & Swiss Re) v SSWP, Henshaw J explained the mechanics of the legislative regime, and its history, in detail: see -. The five key aspects of the regime are as follows:
- Applicability. The 1997 Act applies where a) a payment is made to another person in consequence of any accident, injury or disease suffered by the other (section 1(1)(a)) and b) where any listed benefits have been, or are likely to be, paid to or for the other during the relevant period in respect of the accident, injury or disease (section 1(1)(b)). The relevant period (a maximum of five years total) is defined at section 3 of the 1997 Act and the listed benefits are specified at Schedule 2. It must be shown that there is a sufficient link between the tortiously caused injury or disease and the receipt of the benefit in question.
- The compensator’s liability to the SSWP. Pursuant to sections 4 and 5, the compensator must apply to the SSWP for a certificate of recoverable benefits before it makes any payment to a claimant. Section 6(1) provides that “a person who makes a compensation payment in any case is liable to pay to the Secretary of State an amount equal to the total amount of the recoverable benefits”. This liability arises immediately before the compensation payment is made (section 6(2)). Section 6 constituted a major change in the law in that it renders the compensator liable to pay the whole of the amount deemed recoverable on the CRU certificate. In some circumstance, that liability can (for a variety of reasons) be greater than the amount that can be deducted from the damages awarded to the claimant by the court.
- The compensator’s right of deduction. The compensator’s corresponding right of deduction against the claimant’s damages is provided for at section 8. Section 8 applies in a case where, in relation to any head of compensation listed in column 1 of Schedule 2, a compensation payment is attributable to that head and a recoverable benefit is shown against that head in column 2 of the Schedule (section 8(1)(a)-(b)). The calculation in section 8 is effectively the gross amount of compensation for any of the three heads (see col.1 Sch. 2) less the sum of the deductible benefit reductions made under section 8(3) (the amount may be nil).
- The interaction between sections 6 and 8. Importantly, under section 8, a compensator will not be able to deduct any recoverable benefits received as a result of the injury if the corresponding head of compensation has not been sought by the claimant. In other words, “although all of the listed benefits may in principle be deductible, they cannot in practice be deducted if the relevant head of claim stipulated in Schedule 2 is not made (or is insufficient in amount).” However, “the effect of section 6…is that the benefit remains payable to the [SSWP] by the compensator” (). It will thus be apparent that there are circumstances in which the operation of the Act means that the relevant defendant will have to pay more than the court has awarded in damages: see, for exp., Hale LJ at  in Lowther for an early exposition of these issues.
- The basis of the claim
The First Claimant (“Aviva”) had a substantial book of long-tail employers’ liability insurance and the Second Claimant (“Swiss Re”) was a reinsurer with contractual responsibilities in respect of this and other long-tail books (together, “the Claimants”). The particular complaint related to the onerous manner in which the 1997 Act was applying to employers’ liability insurance policies covering asbestos -related diseases. The Claimants submitted the reason the 1997 Act applied in this manner was due to the modern liberalisation of the legal framework governing asbestos-related claims. These changes are summarised at  and were said to include:
- The relaxation of the proof of causation in mesothelioma claims (Fairchild v Glenhaven Funeral Services Ltd  UKHL 22);
- The statutory imposition of full liability on a tortfeasor responsible for only part of the asbestos exposure (section 3 of the Compensation Act 2006);
- The finding in International Energy Group Ltd v Zurich Insurance Plc UK  UKSC 33 that the decision in Barker v Corus UK Ltd  UKHL 20 (which was reversed by section 3 of the Compensation Act 2006) applied in cases not covered by the Compensation Act 2006;
- Favourable interpretations of EL insurance policies in mesothelioma cases (Durham v BAI (Run off) Ltd (in scheme of arrangement) & conjoined appeals  UKSC 14);
- The extension of the Fairchild exception to asbestos-related lung cancer cases (Heneghan v Manchester Dry Docks  EWCA Civ 86); and
- The finding in Carder v University of Exeter  EWCA Civ 790 that a claimant who suffered from asbestosis (a “divisible” injury) was entitled to damages (albeit only 2.3% of the total value of the claim) from a former employer who had been responsible for only 2.3% of his total exposure to asbestos dust because it materially contributed to the Claimant’s condition.
These statutory and common law changes, combined with the application of the 1997 Act, were said to create the following five anomalies (“the Anomalies”):
- The requirement to repay 100% of the recoverable benefit even where the employee’s own negligence also contributed to the damage sustained ((i)). (“Anomaly 1”).
- The requirement to repay 100% of the recoverable benefit even where the employee’s “divisible” disease is in part unconnected with the insured’s tort ((ii)). (“Anomaly 2”).
- Liability insurers would be fully liable for an indivisible disease if other contributors to the disease cannot be traced, with the result being that there would be a further liability for 100% of the recoverable benefits in that case, despite the insured only being partially responsible for the disease. “The legal and public policy underpinning these developments was designed to ensure full recovery for the victims of torts but, the Claimants say, can provide no justification for the State being allowed, parasitically, to recover 100% of its outlay on benefits connected with that injury” ((iii)). (“Anomaly 3”).
- The requirement to repay certain benefits that do not correspond to a recognised head of loss. In particular, the Claimants highlighted the fact income-related benefits would have to be repaid if linked to the injury or disease even where (as was common due to the average age of mesothelioma sufferers) no loss of earnings claim was brought ((iv)). (“Anomaly 4”).
- The requirement to repay 100% of the recoverable benefit despite the element of compromise (including claims that are settled without admission of liability) that is present in most settled claims ((v)]. (“Anomaly 5”).
Combined, the Anomalies above amounted to a situation “where those in the position of the Claimants are required to pay the State amounts equal to State benefits that do not correspond in any real way to any injury caused by their respective insureds.” () (my emphasis).
As for the legal claim, it was agreed between the parties that the Claimants’ rights and obligations under their policies of liability insurance constituted “possessions” for the purposes of A1P1 to the Convention, and the Claimants sought to argue the obligations imposed by the 1997 Act disproportionately interfered with those possessions (see (i)-(iii) for particularised versions of the allegations). In terms of remedies, the Claimants sought declarations as to the correct interpretation of such provisions as required by HRA section 3, or alternatively a declaration of incompatibility under section 4(2) of the HRA; a declaration as to a failure to introduce regulations to remove the incompatibility as required under section 6(6) of the HRA; a quashing order in relation to a specimen CRU certificate; and an inquiry into damages.
Henshaw J was required to address a number of sub-issues before arriving at his final conclusion. In summary, it was found that Anomalies 1, 2 and 3 were incompatible with the insurers’ rights under the A1P1 and that, in the alternative, the claim could have been framed as a failure to make regulations to address the incompatibility under section 6(6) of the HRA 1998. In the interests of brevity, the analysis below focuses solely on the core points.
Preliminary observations regarding the five anomalies
The 1997 Act was aimed at addressing two key mischiefs that had emerged under the 1989/1992 scheme: 1) a “small payment limit” of £2,500, below which benefits were not deducted or payable to the state, had created a perverse incentive for parties to settle claims at just below the threshold, to the disadvantage of injured persons; and 2) under the previous schemes, the compensator’s deduction was made against all damages payable to the injured person, including PSLA damages, which was regarded as grossly unfair given benefits were not payable in relation to PSLA (). Henshaw J considered that, in response to these issues, Parliament plainly made a policy decision to shift the cost of the benefits onto compensators and their insurers, but that the policy aims were limited to the particular mischiefs being addressed. : “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 relationship to the degree of injury or risk that those compensators had inflicted on the injured person.” It was inconceivable, Henshaw J reasoned, that Parliament in 1997 could have foreseen the major common and statutory developments described at  (). These findings are arguably the key thread underlying the entirety of the judgment.
In order to show that the 1997 Act disproportionately infringed their rights under the A1P1, the Claimants were required to address the following criteria: (i) whether its objective is sufficiently important to justify the limitation of a fundamental right; (ii) whether it is rationally connected to the objective; (iii) whether a less intrusive measure could have been used; (iv) whether, having regard to these matters and to the severity of the consequences, a fair balance has been struck between the rights of the individual and the interests of the community. (per Lord Sumption in Bank Mellat v HM Treasury (No.2)  AC 700 at ). The following conclusions were arrived at:
- Interference. The Defendant accepted that the rights and obligations under a policy of liability insurance constitute “possessions” for A1P1 purposes, and that a liability imposed by the State that reduced the value of an existing contract can amount to interference with that possession (). The Claimants’ essential complaint was that in the five situations specified at  the obligation to pay for benefits under the 1997 Act did not correspond to the damage caused by their insured, and that their repayment of benefits to the State was not matched or not fully matched by a credit given by the employee (). This issue was compounded by the fact these liabilities would apply to policy of liability insurance issued before 19 March 1997 (ibid), and that insurers would not have priced these developments into those policies when these contracts were formulated.
- Legitimate aim. The objectives of the 1997 Act were to a) meet the costs that are attributable to tortious wrongdoing and b) increase the amount of public resources generally and thereby further the community interest (). The Claimant accepted those were legitimate aims, but it was argued that the statutory and common law developments since 1997 meant that the scheme went well beyond those objectives (). The Defendant attempted to construe the scheme’s objectives more widely, but those submissions were rejected: see -. Henshaw J emphasised that the 1997 Act predated the statutory and common law developments listed at  and that Parliament could not have foreseen these changes at the time of enactment (-). The aim of the 1997 Act, therefore, could not have extended to the recoverability of benefit amounts from insurers in respect injuries of injuries caused by others such as non-traceable employers/insurers. Moreover, the legal and statutory developments relating to asbestos-related claims were aimed at ameliorating the position of the victims of long-tail diseases, not at the position as between the State and traceable employers/insurers with regard to state benefits (). Although the 1997 Act in principle had legitimate aims, it was in practice applying in a manner that went far beyond those aims.
- Rational connection to aims. The Claimants accepted that, to the extent that the Defendant’s aim was to “increase the amount of public resources available generally”, the scheme as it currently applied would be rationally connected to that aim (). It was another matter entirely whether that aim alone could justify the individual and excessive burden imposed on the Claimants (ibid). As for the second aim (“to meet the costs that are attributable to tortious wrongdoing”), the Claimants submitted that the five Anomalies identified at  were examples of costs that were not attributable to tortious wrongdoing, as they did not correspond with damage caused by the Claimants’ insureds. Henshaw J looked at each of the five Anomalies (see above) individually:
- In respect of Anomaly 1 (contributory negligence), it was held that there was a rational connection, albeit a tenuous one, between this feature of the 1997 Act and the aim of recovering full compensation from tortfeasors for the loss they have caused. In particular, there was evidence that during the formulation and passage of the 1997 Act, the issue of contributory negligence was considered and it was decided (due to its complexity and associated practical difficulties) to leave it out of account. At : “…a measure which omits on practical grounds to carve out benefits ultimately attributable to the victim’s own contributory negligence could nonetheless still be regarded as rationally connected to an aim of recovering from tortfeasors costs attributable to their wrongdoing.” The potential practical difficulties, therefore, provided the rational connection between this feature and a scheme which fails to take account of contributory negligence.
- In respect of Anomalies 2 and 3 (100% liability for benefits despite only partial responsibility), it was held that these features of the scheme (100% liability for benefits despite only partial responsibility) were not rationally connected to the aim of meeting the costs that are attributable to tortious wrongdoing. It was clear that the Anomalies applied so that the State could recover all benefits paid in respect of a tortiously caused injury without regard to the extent of the insureds’ wrongdoing. Accordingly, these two features could only be justified, if at all, on the basis of being rationally connected to the objective of increasing state resources (considered below) ().
- In respect of Anomaly 4 (benefits not corresponding to heads of loss), Henshaw J considered this anomaly had a fundamentally different nature in that the insured’s tortious wrongdoing could still have caused the need for benefits that do not correspond to heads of compensation. At : “The costs that can fairly be attributable to the insured’s wrongdoing include welfare benefit costs that arise by reason of that wrongdoing, even if they are not themselves recoverable as heads of loss.” Accordingly, Henshaw J held that there was a rational connection between this feature and the aim of recovering costs attributable to tortious wrongdoing. The Claimants took a further point that some benefits would fall to be payable for reasons that may be unrelated to the insured’s tort, but Henshaw J considered that the fact this may be the case in some confined instances “does not of itself remove the rational connection between the objective and the challenged measures” ().
- Finally, in respect of Anomaly 5 (taking into account elements of compromise), it was held that a rational connection between the measure and the objectives can be shown on the basis of practicalities. It would be exceedingly difficult to devise a scheme that took account of the element of compromise in settlements ().
- No less intrusive means. As a strict matter of logic, the Claimants accepted that a less intrusive scheme would be less effective at achieving the aim of “increasing the amount of public resources generally”. However, the key point was that it was not the aim of the 1997 Act to increase State recovery regardless of fault (). The present position was simply the product of modern legal developments that could not have been anticipated in 1997. Henshaw J then went to apply “no less intrusive means” test to the five Anomalies:
- In terms of Anomaly 1, it was noted that although the practical difficulties involved in taking account of contributory negligence was capable of establishing a rational connection between the measures and the aims, the “no less intrusive means” test “may operate more strictly” ((ii)). Drawing support from the fact a similar point was taken in respect of the Welsh and Scottish Bills, Henshaw J held that an alternative scheme could have been devised that would take into account contributory negligence and that such a scheme could still achieve the aim of recovering the costs attributable to the insureds’ tortious wrongdoing. It followed that the recovery of sums without regard to contributory negligence could only be justified, if at all, on the basis of a wider aim of increasing public resources. ((i)).
- In terms of Anomalies 2 and 3, even if there was a rational connection between these features and the aim of recovering costs fairly attributable to the insureds’ wrongdoing, Henshaw J noted that he would have found that other less intrusive measures could have been used to achieve that aim ([137(ii)]. It would, for example, be possible for the scheme to limit recovery in proportion to the insured’s contribution to the injured person’s overall exposure (ibid). Accordingly, these features could only be justified, if at all, on the basis of a wider aim of increasing public resources.
- In terms of Anomaly 4, “on the footing that the scheme legitimately aims to recover the costs of benefits arising out of the infliction of the insured’s torts, even though the benefits themselves are not tortious heads of loss and recoverable as such, I consider that no less intrusive means would be able to achieve that objective” ((iii)].
- In terms of Anomaly 5, the Claimants accepted that it would not be practicable to operate a scheme that drew a distinction between settlements with an element of compromise, so it followed there were no less intrusive means available ((iv)).
- Fair balance. In short, it was held that Anomalies 1 to 3 did not strike a fair balance between the rights of the Claimants and the interests of the community. At : “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.” It was also not possible to justify the Anomalies on the sole basis that they increase the level of recovery for the public purpose – imposing such a burden on a specific group could not be regarded as fair (). An analogy was also drawn with Re Recovery of Medical Costs for Asbestos Diseases (Wales) Bill  UKSC 3 in that there were no compelling social interests militating in favour of retrospective imposition of the liabilities arising from Anomalies 1 to 3.
For all of the above reasons, it was held that Anomalies 1, 2 and 3 were incompatible with the Claimants’ A1P1 rights.
- Remaining issues
At - the court considered the issue of whether there had been a failure to introduce regulations to remove the incompatibility pursuant to section 22(4) of the 1997 Act. Henshaw J ultimately found (though this was not strictly necessary) that the claim could if necessary be cast as a failure to make regulations under section 6(6) of the HRA 1998 and that the claim would succeed for the same reasons the primary claim succeeded.
As for remedies, given the complexity of the proceedings, Henshaw J gave both parties the opportunities to make further submissions on remedies at a later date. Watch this space.
Ultimately it was clear that modern legal developments relating to asbestos-related claims had combined with the 1997 Act to exact an unfair and unjustified burden on employers’ liability insurers. Naturally, this decision is of major importance to insurers with long-tail employers’ liability books, though it remains to be seen what form the remedies will take. Henshaw J’s chronological analysis of the development of the 1997 Act, and its practical application, will also be an extremely useful frame of reference for practitioners acting in this area.