Funds of last resort

Earlier this month the Treasury, in conjunction with the FSA, published a document on mesothelioma compensation and proposed changes to the Financial Services Compensation Scheme. If taken up the changes will have a marked effect on some insurers.

Mesothelioma is usually caused by exposure to asbestos. There are now over 1,800 cases a year, and the rate is rising. The effect of the recent House of Lords' decision in Barker v Corus [2006] was to force the mesothelioma-suffering claimant to trace all relevant defendants before liability in his claim can be apportioned, or to issue multiple claims and recover piecemeal damages.

In practical terms, this would mean lengthier claims, with difficult and time-consuming issues for claimants who were already ill and stressed. And, of course, there would be increased costs.

The Compensation Act 2006 reverses the effects of Barker, and allows the claimant to receive full compensation from any liable party, and that party could seek a contribution from other negligent persons.

The Act makes "responsible persons" jointly and severally liable to meet the full amount of any claim arising from negligently exposing the claimant to asbestos leading to development of mesothelioma.

Proposed changes
The Financial Services Compensation Scheme (FSCS) provides a fund of last resort for insurers' customers, including those affected by the default of such firms, such as if a firm has ceased trading, or is in insolvency. But the key point to remember is that it is a fund of last resort.

The FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it. Currently, it cannot make a payment to a responsible person seeking a contribution from a defaulting insurer in cases where the victim of mesothelioma has had his claim settled in full by that responsible person.

In a typical claim, a claimant will be seeking compensation from only one responsible person. The claimant will choose a medium to large employer, usually one that has appropriate insurance cover.

Once liability has been established, that responsible person, and of course his insurers, will be liable to pay 100% of the compensation.

The responsible person or his insurer can seek a contribution from other responsible persons. The FSCS, however, cannot make a contribution on behalf of a defaulting insurer of another responsible person where the victim has been compensated in full. This clearly puts responsible persons and their insurers seeking contribution at a distinct disadvantage.

The changes proposed to the FSCS would allow a responsible person and his insurer which has settled a claim, to recover a contribution from the FSCS where the claimant has developed mesothelioma and could recover compensation from the FSCS.

Therefore, the contribution from the FSCS will only arise in circumstance where the FSCS would be called upon to contribute by the claimant directly, namely where an insurer of a liable employer is, for example, insolvent.

In the absence of these proposed changes, there is no mechanism for a responsible

person liable to the claimant for 100% of his claim (by virtue of joint and several liability under Section 3 of the Compensation Act 2006) or his insurer to recover a contribution funded by the FSCS.

Swift payments
How do these proposed changes affect the current situation?

First, the Compensation Act should make it easier and quicker for mesothelioma sufferers and their families to receive compensation.

Second, the proposed changes to the FSCS should help insurers that pay compensation to a claimant and will then be able, in the specified circumstances, to claim a contribution from the FSCS.

The changes will allow them subsequently to recover appropriate contributions from other responsible persons or their insurers, including the FSCS if the insurer is insolvent.

This should ensure no delay in paying compensation to the claimant while the FSCS' liability is investigated.

At the same time, insurers/responsible persons are only paying out similar compensation as they would have done prior to the Barker judgment.

Finally, other insurers may also be affected through changes in the timing of levy payments they are required to make to fund the FSCS. If claims are paid more quickly by the FSCS, then the cost to levy payers will also arise more quickly as a result.

The consultation document suggests, therefore, that the cost impact may be felt more heavily by the insurance industry in the next few years. IT

' Sonja Dale is a solicitor at law firm DLA Piper UK