July 19, 2016

In two judgments given in Cape Distribution Limited v Cape Intermediate Holdings plc; Cape Intermediate Holdings plc v Aviva plc [2016] EWHC 1119 (QB) and [2016] EWHC 1786 (QB) Mr Justice Picken dealt with further insurance issues arising from asbestos related illness claims where an insurer sought to bring a subrogated claim in the name of a wholly owned subsidiary against its parent company. The Court’s decision is considered by Miles Harris and Marie-Claire O’Kane of 4 New Square


The Claimant (“CDL”) manufactured asbestos. It faces claims brought by former employees, many of which have already been settled with the assistance of an employer’s liability policy underwritten by Aviva (“the Policy”). CDL was a wholly owned subsidiary of the Defendant (“CIH”).

By an agreement dated 1 January 1964 (“the Sale Agreement”), CDL transferred to CIH its whole undertaking, property and assets in return for, among other things, an indemnity from CIH. This transfer was later supplemented by a Trust Deed in favour of CIH. Thereafter, CDL carried on manufacturing asbestos and employing the same workers as agent for CIH.

The Policy was taken out in the name of CDL alone and renewed on an annual basis between 31 December 1956 and 31 December 1966. However by an Endorsement dated 25 November 1964 “all interest” in the Policy was vested in CIH.

In Chandler v Cape plc [2012] EWCA 525 it was held that CIH owed an independent common law duty of care to a former employee of CDL, making it directly liable to that employee in tort for his asbestos-related illness. Consequently Aviva, sought to bring a subrogated claim in the name of CDL for an indemnity alternatively contribution from CIH under:

  • the Civil Liability (Contribution) Act 1978; and
  • the Sale Agreement.

CIH defended the claim in reliance on:

  • its interpretation of the terms in the Sale Agreement, which it contended did not entitle CDL to an indemnity in respect of liability for asbestos related injuries caused by CDL’s negligence, or at least not insofar as such liability was insured; and
  • the terms of the Endorsement, which CIH claimed entitled it to an indemnity from Aviva in respect of the same claims advanced against it.

Analysis of Picken J’s first judgment ([2016] EWHC 1119 (QB))

In relation to the Sale Agreement, Picken J held that CDL was entitled to a contractual indemnity from CIH in respect of:

  • claims by former employees relating to periods of employment with CDL before the Sale Agreement, even though no actionable injury would have been suffered by the employees until a later date, meaning that at the time of the Sale Agreement the liability to such employees was contingent rather than actual;
  • claims by former employees before and after the Sale Agreement in 1964, despite CDL acting as CIH’s agent. Further, he held that CIH could not meet a claim for an indemnity by a counterclaim against CDL for breach of its duties, and that the indemnity was not limited to sums CDL could not recover from its insurers.

Picken J’s conclusion was founded on the absence of an express provision in the Sale Agreement that the indemnity should be net of insurance monies, the absence of an obligation to insure on the part of CDL and the absence of an obligation on CIH to pay for such insurance.

Given his construction of the Sale Agreement, Picken J had to go on to consider whether the Policy and the Endorsement precluded Aviva from recovering an indemnity by way of subrogation despite CDL’s rights under the Sale Agreement.

CIH maintained:

  • the Policy was a single contract under which, as a result of the Endorsement, it was a co-insured for the whole relevant period meaning that Aviva was prevented from bringing a subrogated claim against it;
  • Alternatively, relying on Mark Rowlands Limited v Berni Inns Ltd [1986] 1 QB 211, that even if CIH was not a co-insured Aviva could not maintain a subrogated claim because the Policy was intended to enure for CIH’s benefit.

The Endorsement stated:

“… all interest in this Policy is now vested in…[CIH] as Proprietors of… [CDL]… who shall be deemed henceforth to be “the Insured” referred to herein.”

CIH argued this made it an insured under the Policy. In contrast, CDL argued that the Endorsement merely noted that CIH had an interest in the Policy. Further, relying on the wording of the insuring clause, CDL argued that CIH’s case impermissibly attempted to extend the range of the Policy from provision of employers’ liability cover to liability on the part of a non-employer parent company to a subsidiary’s employees. Picken J held CIH was made an additional “Insured” alongside CDL. He stated that the fact CIH was not an employer was unimportant; what mattered was that there was liability on the part of CDL, the employer, because that was the liability the Policy covered.

Nevertheless, Picken J held that the words “shall be deemed henceforth to be “the Insured”” meant that the Endorsement only had prospective effect and that CIH was not to be deemed an insured prior to the Endorsement. He also rejected CIH’s argument that there was a single contract of insurance from 1956 until 1966, holding that each renewal of the Policy gave rise to a separate contract. Consequently, being made the “Insured” under the Policy though the Endorsement, did not entitle CIH to the benefit of the Policy for the whole period from 1956, only for the period after the Endorsement or, at most, from the start of the policy year in which the Endorsement was made.

In the light of this conclusion, Picken J held that in accordance with usual principles, because CIH was a co-insured of CDL for the period following the Endorsement, Aviva was not entitled to bring a subrogated claim against CIH insofar as such claims concerned this period of co-insurance. Relying on a line of authorities from Petrofina (UK) Ltd v Magnaload Ltd [1984] 1 QB 127 to Rathbone Brothers PLC v Novae Corporate Underwriting Ltd [2015] Lloyd’s Rep IR 95, CDL argued that the mere fact CIH and CDL were co-insureds was insufficient to prevent a subrogated claim and that because the Policy covered the risk of incurring financial liabilities to an employee who suffered bodily injury or disease the only entity that had an insurable interest was CDL as the employer. Nevertheless, Picken J held that the interests of CDL and CIH under the Policy were coterminous; the Policy responded to bodily injury suffered during the course of employment and the fact the claimants were employed by CDL not CIH was immaterial.

However, Picken J rejected CIH’s argument that a subrogated claim was barred even when CIH was not a co-insured (prior to the Endorsement). CIH contended that the underlying rationale of Berni Inns was that if a policy of insurance was supposed to enure for the benefit of party then it was to be treated as having a sufficient insurable interest and could not be the subject of subrogated claim in the name of the insured. While there was no contract obliging CDL to insure or an agreement that CIH should bear the cost of the insurance, CIH relied on the fact that CDL was a wholly owned subsidiary, it had insured against a specific risk and that CIH was held to have undertaken a direct liability for that risk. In these circumstances, CIH argued, it was appropriate to treat the situation as falling within the Berni Inns principle. Picken J concluded that Berni Inns concerned very different facts and specific arrangements between landlord and tenant and that the position of CDL and CIH was a considerable distance from that in Rathbone Brothers where the obvious purpose of the insurance was to transfer the risk outside a group of companies.

Analysis of Picken J’s second judgment ([2016] EWHC 1786 (QB))

In his second judgment, Picken J had to deal with a number of consequential matters flowing from his first judgment.

Most interesting was the impact of CIH being a co-insured for some of the period covered by the Policy upon claims by former employees of CDL exposed to asbestos before and after CIH became a co-insured (“the straddlers”) who alleged this exposure had caused them mesothelioma. Picken J accepted CIH’s argument that:

  • The combined effect of Fairchild v Glenhaven Funeral Services Limited [2002] UKHL 22, the Compensation Act 2006, Trigger [2012] UKSC 14 and IEGL v Zurich [2015] UKSC 33 was that both CDL and CIH were liable for the entirety of the straddlers’ claims not just a proportion reflecting the period of exposure after the Endorsement;
  • Therefore, CIH had co-insurance for the whole of any claims brought by straddlers and so was insured for precisely the same loss as CDL;
  • Consequently, Aviva was completely barred from bringing any claim against CIH arising from claims for mesothelioma by straddlers.

CDL submitted that this outcome undermined the conclusion that the Endorsement did not have retrospective effect and had the absurd result of providing CIH with a complete indemnity and immunity from a subrogated claim although it was only a co-insured for a short period. However, the judge regarded the outcome as simply reflecting the impact of the law in relation to mesothelioma claims at an insurance level. Relying on IEGL the judge also rejected suggestions that:

  • Aviva might be able to frame a claim for a contractual indemnity against CIH that was limited to liabilities incurred prior to the Endorsement to remove the argument that CIH was insured against them;
  • CDL/Aviva could recoup a proportion of their liability from CIH reflecting the pre-Endorsement period. The judge reasoned that the position was different to that in IEGL where the insured had chosen not to obtain insurance for a proportion of the relevant time and the insurer had only received premiums relating to some of the relevant period. CIH should not be treated as if it had chosen not to insure and Aviva had received premiums for each of the relevant policy years.

As to straddlers who alleged they had been caused divisible disease or lung cancer as a result of their employment (not mesothelioma), given a defendant tortfeasor to such claims is only liable for its contribution to a claimant’s total exposure the parties agreed that CDL could bring a subrogated claim in respect of the pre-Endorsement period but not after the Endorsement.

However, Picken J accepted CIH’s contention that, in the light of the decisions in New Zealand Forest Productions Ltd v New Zealand Insurance Co Ltd [1997] 1 WLR 1237, Thornton Springer v NEW Ins Co Ltd [2000] Lloyd’s Rep IR 590 and IEGL, Aviva was precluded from bringing a subrogated claim in respect of defence costs irrespective of the disease the straddler alleged and that such defence costs were to be treated as indivisible.


Picken J’s conclusion that CDL was entitled to a contractual indemnity from CIH under the Sale Agreement without regard to insurance recoveries produces a commercially surprising outcome given the corporate relationship between CDL and CIH. Permission to appeal this point is being sought by CIH and if the appeal succeeds then many if not all the complexities of the insurance position may fall away. However, viewed in the light of his construction of the Sale Agreement, the judge’s conclusions on the insurance implications appear sound and offer further valuable guidance on the impact of asbestos related illness at an insurance level.

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