CRU Provisions Found Non-Compliant with Insurers’ (Property) Rights Under Human Rights Act

Opening Comment

Samuel Irving sets out below in some detail a decision of potentially great significance on Compensation Recovery Unit (“CRU”) payments made by insurers.

A long standing complaint of insurers in personal injury and clinical negligence claims has been their liability for 100% of CRU notwithstanding, for a number of reasons, there being no like-for-like set-off against damages awarded. This running sore, that has particular resonance with disease cases, resulted in Aviva and Swiss Re seeking declarations for the infringement of their property Human Rights.

The court found in favour of the insurers in a number of significant and important respects stating “To the extent that it requires payments to the State which (in summary) do not correspond to the insured’s real contribution to the injury, it fails to strike a fair balance between the rights of the State and those of the Claimants and is incompatible with [Article 1 of the First Protocol to the Convention for the Protection of Human Rights]”. The full details of the declarations to be made and importantly, the point in time from which the declarations will apply, are to be addressed at a further hearing.

This case will run all the way to the Supreme Court as it not only potentially affects historic disease cases, but is likely to be (arguably) read-across to every personal injury and clinical negligence claim where the inequity arises of the insurer having to pay 100% of CRU with no like-for-like set off. Whether insurers get traction with a reading-across will have to be seen. I let Samuel set-out the issues, and the outcome in more detail. John Meredith-Hardy practises in insurance law at Farrar’s Building.

R (on the application of Aviva Insurance Limited) v Secretary of State for Work and Pensions [2020] EWHC 3118 (Admin)

Judgment in the High Court case of R (on the application of Aviva Insurance Limited) v Secretary of State for Work and Pensions [2020] EWHC 3118 (Admin) was handed down on 20^th November 2020, having been heard by Henshaw J on 8^th and 9^th July 2020.

Background

A prominent insurer of employers affected by asbestos related litigation (Aviva) and their re-insurer (“Swiss Re”) complain that changes to the common law since the introduction of the Social Security (Recovery of Benefits) Act 1997 (“the 1997 Act”) render provisions of that Act incompatible with their human (property) rights under Article 1 Protocol 1 (“A1P1”) of the Convention (per Human Rights Act 1998 (HRA)).

The 1997 Act changed the rules relating to the repayment of benefits to the State (via their recovery arm, the Compensation Recovery Unit (CRU)) such that, inter alia, defendant insurers would be required to pay back 100% of the benefits paid to a claimant as a result of their tortious injury, even where this did not correlate with the amount which the defendant was entitled to deduct from the claimant’s recovery.

This was followed by developments in the common law significantly expanding the scope of tortfeasors’ (and therefore insurers’) liabilities. The claim therefore arises out of complaints about the following scenarios:

1. Defendant insurer pays 100% of the recoverable benefit (RB) where the claimant is contributorily negligent;
2. Defendant insurer pays 100% RB where the claimant’s injury is ‘divisible’, as in Carder v University of Exeter [2016] EWCA Civ 790 (the claimant recovered 2.3% of damages for asbestosis, being the percentage exposure to asbestos attributable to the defendant);
3. Defendant insurer pays 100% RB where the defendant  is one of several employers who exposed the claimant to asbestos, in circumstances where the claimant has suffered an ‘indivisible’ injury –  for which the defendant  is 100% liable per section 3 Compensation Act 2006 (e.g. Mesothelioma) – and the other employers/insurers cannot be traced;
4. Defendant insurer is liable to repay benefits not corresponding to a head of loss successfully recovered  by the claimant (e.g. Universal Credit – including housing benefit, which was not previously recoverable – recoverable for a  loss of earnings claim);
5. Defendant insurer pays 100% RB where the claim is compromised, regardless of the extent of the compromise and even where there is no admission of liability.

The claimants were suggesting that the first four of these scenarios could be remedied by a ‘reading down’ of the 1997 Act (pursuant to section 3 HRA) to cure their alleged incompatibility, and the fifth and final example was to be considered a factor in the balancing involved in rights-based judgements (they accepted it was not amenable to any ready remedy).

Claimants’ case

Henshaw J quote from the claimant’s Claim Form at [74]:

“     …the Claimants seek to challenge the legality of three decisions:

1.  “Failure to read and give effect to provisions of the 1997 Act so as to ensure its compatibility with the Convention rights of liability insurers as required by section 3 of the Human Rights Act” (“Decision 1”);
2. “Failure to make Regulations under section 22(4) of the said Act so as to ensure such compatibility in relation to insurance policies issued before its commencement” (“Decision 2”); and
3. “Certificate of recoverable benefit issued by the Compensation Recovery Unit ref JXR-123” (“Decision 3”).                                                                                   ”

Specifically, the claimants were seeking section 3 declarations that the 1997 Act be ‘read down’ in the scenarios above, or alternatively a section 4 declaration of incompatibility. They also sought damages and a quashing order of the certificate in ‘Decision 3’.

Judgment

The defendant raised a number of legal objections to the application of the HRA in this context. Henshaw J considered the following questions:

1. Were the changes to the common law outwith the consideration of Parliament when it passed the 1997 Act?
2. Was the claim justiciable, given that the 1997 Act was passed before the HRA?
3. Was the claim for damages time/statute-barred under HRA section 6?
4. Were the claimants ‘victims’ for the purposes of the HRA?
5. Could a failure to make regulations in this context be challenged via a claim under the HRA?

He determined each of those issues as follows:

1.Having considered the development of the law prior to the 1997 Act, Henshaw J concluded that the chief problem at which it was addressed was the ‘small payments limit’ which removed the need for deduction and repayment of any benefits where the total claim value was below £2,500. The Government’s analysis at the time was that the likely increase in average claim value where settlement below this figure was no longer attractive far outweighed the increase from expanding the scope of insurer’s obligations to repay. This indicated that Parliament did not contemplate either the significant expansion in liability which followed, or the concomitant shift in impact on defendant insures which the above scenarios illustrate.

2.The wording of section 22(1) of the 1997 Act is such that a ‘deemed contractual liability’ arises whenever a compensation payment is made following an insured employer incurring tort liability, and as such the claimants’ rights are interfered with on an ongoing basis.

3.The answer to this question was effectively reserved. Henshaw J indicated that his decision above in respect of ongoing interferences meant that some damages claims would be prima facie available. The defendant accepted the claimants’ approach of reserving the question pending this judgement, and the claimants reserved  the right to apply for inter alia an extension of time in respect of older claims, either under HRA section 6(6) or the Limitation Act section 32(1)(c).

4.Henshaw J proceeded on the basis that the claimants had to demonstrate that they ‘are at least persons who could be adversely affected by the matters of which they complain’ [100]. In respect of each claimant he concluded:

a) Aviva is primarily liable notwithstanding its re-insurance of the liabilities (which is not unlimited) and in any event they will have paid more to reinsure as a result of the increased liabilities resultant from changes to the common law;

b) Swiss Re, though they may benefit from higher reinsurance premiums and consequently have limited loss, are nevertheless subject to the effects of ‘excessive’ liability under the 1997 Act. Since they have reinsured the liabilities in general, the same objections to the (allegedly HRA non-compliant) increases to those liabilities hold.

5.Although accepting that the point was the subject of only brief submissions, Henshaw J took the view that section 6(6) HRA does not exclude secondary legislation which has the status of legislation once made (notwithstanding the possibility of annulment) from consideration of whether the State has ‘failed to act’, in contravention of a claimant’s Convention rights.

Henshaw J then moved on to considering the central question: whether the 1997 Act infringes the claimants’ rights. He began by noting at [72]: 

“     It is common ground in the present case that:

1.  rights and obligations under a policy of liability insurance constitute ‘possessions’ for the purposes of A1P1;
2.  a liability imposed by the State that reduces the value of an existing contract can amount to an interference with possessions;
3.  the obligation imposed by the 1997 Act upon liability insurers to repay to the State relevant benefits engages A1P1 as it establishes an obligation to make “contribution akin to taxation”;
4.  the question whether A1P1 rights are unlawfully interfered with or whether such interference is justified requires the court to be satisfied both that the measures adopted pursue a legitimate aim by a legitimate means and that the impact on the Claimants satisfies the test of proportionality; and
5. where the impact has retrospective effect “special justification” is required  .”

He also set out the ‘four-stage test’ he had to consider in his assessment [67]:

“          …(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; and (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.” (Bank Mellat v HM Treasury (No.2) [2014] AC 700 § 20 per Lord Sumption)                                 ”

Legitimate aim

The claimants accepted that the basic objectives of ‘recovering costs attributable to tortious wrongdoing’ and ‘increasing public resources generally’ are legitimate aims. The defendants sought to argue for a wider scope of aim, namely for the State to recover specifically for benefits attributable to injuries caused by untraceable employers. For similar reasons to question 1 above, Henshaw J concluded that such could not be said to be part of Parliament’s contemplation when passing the 1997 Act.

Rational connection to aim

Here Henshaw J analysed each of the scenarios described above, in relation to the two aims above:

1.Scenario 1 (contributory negligence): Notwithstanding the exclusion of contributory negligence from the 1997 Act on practical grounds, it was found still to be rationally connected to the aim of recovering from tortfeasors costs attributable to their wrongdoing.

2.Scenarios 2 and 3 (100% liability for benefits despite only partial responsibility): In contrast, the lack of practical considerations meant that these could only be justified under the more general aim of increasing State resources; recovery for costs attributable to tortfeasors would only be rationally connected if recovery was proportionate.

3.Scenario 4 (benefits not corresponding to heads of loss): Since the tortfeasor’s wrongdoing still, for practical purposes, ‘causes’ the State’s costs, it is rationally connected to the aim of recovering that cost even where the same is not recoverable from the injured claimant.

4.Scenario 5 (compromised claims): As above, the claimants accepted this would not be possible to address in any easily identifiable way and as such this was accepted principally for practical reasons.

No more than is necessary

Here Henshaw J considered whether there were ‘no less intrusive means’ of achieving the aims which he found were legitimate in respect of each of the scenarios, as follows:

1.Scenario 1 (contributory negligence): Contrary to the above, Henshaw J determined that the relative ease of applying proportionate wrongdoing as between insurers and the State (based on the injured party’s wrongdoing) was sufficient to constitute a less intrusive means of achieving the same aim. As such, this too could now only be justified on the grounds of generally increasing State resources.

2.Scenarios 2 and 3 (100% liability for benefits despite only partial responsibility): As above, since costs could be limited to the proportion of wrongdoing, even if these scenarios are rationally connected to the aim of recovery of costs (contra above) they nevertheless fail to be the least intrusive means of achieving such. Therefore, they can only be justified under the aim of increasing State resources.

3.Scenario 4 (benefits not corresponding to heads of loss): No less intrusive means for recovery of costs not directly linked to a recoverable head of loss.

4.Scenario 5 (compromised claims): As above, there is no practical alternative.

Fair balance

As considered in answer to question 1 above, Parliament could not be said to have considered the potential impact of future common law development on the provisions of the 1997 Act. As such, the Court had to form its own view of the balance as it stood now.

Henshaw J concluded in respect of Scenarios 1-3 that there was not a fair balance, even if there was had not been the need for special justification.

He dismissed a number of the defendant’s arguments including finding that the claimants could not easily mitigate any loss by increasing premia and that they could not have previously prepared sufficiently given the retroactive effect of the legislation. Reference was also made to the Supreme Court’s obiter,remarks, though made in response to full argument in the Welsh Bill case ([2015] UKSC 3) that there are no compelling social interests in favour of retrospective imposition of these liabilities, as they developed after the 1997 Act and were not contemplated at the time.

Henshaw J also considered Scenario 4, concluding that, assuming the issues in the first three scenarios were ‘corrected’ so that insurer’s liability was proportionate with the tortfeasor’s wrongdoing, the inclusion of irrecoverable losses did strike a fair balance.

Remedies

Henshaw J invited further submissions on the subject of remedies, but gave the following ‘inclinations’:

1. Scenario 1 was non-compliant from the date the HRA came into force.
2. Scenario 2 was non-compliant from the date of the decision in Carder.
3. Scenario 3 was non-compliant from the date the Compensation Act 2006 came into force.

Conclusion

It remains to be seen precisely what the claimants will be awarded, particularly the extent of any damages claim and the success (or otherwise) of arguments around limitation of the same. Nevertheless, this decision is clear in its findings that the 1997 Act can no longer be considered a fair balance between the property rights of insurers and the wider social benefits of the State recovering monies from tortfeasors. Perhaps this is an issue Parliament should turn its attention to, now that the Court has indicated its views and its intention to proceed to make declarations and/or damages awards against it.

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