This post was written by Spencer Turner. A link to the judgment can be found here.
In Equitas Insurance Limited v. MMI Limited  EWCA 718, the Court of Appeal (Lord Justice Patten, Lord Justice Leggatt and Lord Justice Males) has addressed fundamental issues relating to the presentation of Fairchildmesothelioma claims by insurers to their reinsurance programme.
The Court distinguished the majority’s reasoning in IEG v Zurich UKSC 33 and held that the liability of a reinsurer to an insurer should be determined in accordance with orthodox common law principles and should therefore be apportioned in accordance with Barker v Corus UKHL20. The primary basis for the decision is that the policy behind the Fairchild jurisprudence and s.3 of the 2006 Act – which is to ensure that mesothelioma victims are fully compensated – is not engaged at the reinsurance level.
This means that where an EL insurer has settled a mesothelioma claim arising out of exposure which spans multiple policies without apportioning the loss between them (because pursuant to IEG v Zuricheach policy renders the insurer liable for the whole of the loss) it cannot present a subsequent reinsurance claim for the whole of the loss to any policy year of its choice. This is a practice which is known as “spiking” which insurers have developed to maximise the benefit of their reinsurance in mesothelioma claims, for example by avoiding a year with an insolvent reinsurer.
Instead, reinsurance claims will have to be pro-rated between the relevant years of reinsurance, usually on a time on risk basis.
InEquitas, MMI initially presented claims to Equitas under its reinsurances on the basis of a time on risk allocation, so that each loss was divided pro rata between the years of reinsurance in which the employee claimant was exposed to asbestos. MMI then changed its method or presentation so that it presented the whole claim to one year of reinsurance. MMI did so on the basis that its inwards claims had settled without reference to particular years or policies and that, because each insurance policy was liable in fully, so too each reinsurance policy was liable in full and it was entitled to present its reinsurance claim to any policy year of its choice in which the underlying claimant had been exposed by its insured to asbestos. This became known as ‘spiking’. It is MMI’s revised method of presenting claims which gave rise to the parties’ dispute.
Flaux LJ, sitting as a judge-arbitrator, stated that the issues for determination in Equitas were:
Question 1: Was MMI to be treated as having settled the inwards claims on the basis that each EL policy on risk was contributing a pro rata share of the loss being paid by MMI?
Question 2: If not, was the basis on which MMI was presenting its reinsurance claims contrary to the duty of utmost good faith or an implied contractual duty requiring MMI to present its reinsurance claims in good faith?
Question 3:If issues (1) and (2) were determined in favour of MMI, on the proper construction of the reinsurance contracts, were MMI contractually entitled to recover the full amount it has paid in respect of each inwards claim from any reinsurance contracts of its choice which provided cover for any part of the exposure period for which it was on risk, subject to the limits and retentions for those reinsurance contracts and subject to the paying reinsurers’ rights of contribution and recoupment?
Question 4: If so, what rights of contribution and recoupment do the reinsurers which are called upon to pay the claim acquire against any other reinsurers who were also on risk for the claim, and against MMI in respect of any deemed “self-reinsurance”, and how do those rights fall to be calculated? In particular, should they be calculated using:
- The “from the ground up” pro rata method of apportionment, taking into account the first layer retention in every year of reinsurance exposure, as Equitas contended (‘the Equitas method’); or
- The “independent liability” method as MMI contended (‘the MMI method’)?
- Flaux LJ deiceded all of these issues in favour of MMI. Following Flaux LJ’s decision, Equitas sought leave to appeal to the Court of Appeal which was granted under section 69 of the Arbitration Act 1996.
Court of Appeal Decision
The appeal was heard by three Court of Appeal justices comprising Lord Justice Patten, Lord Justice Leggatt and Lord Justice Males. The issues for the court to consider were as follows:
In the event of an insured employee being tortuously exposed to asbestos in multiple years of EL insurance, and the EL insurer settling the employer’s claim without allocation the loss to any particular year of exposure, is the EL insurer obliged (in the absence of specific provision for this situation in the corresponding reinsurance) to present any outwards claim in respect of that loss on a pro rata, time on risk basis for the purpose of calculating reinsurance recoveries, either because:
- The contribution to the settlement of each engaged policy must by necessary implication be treated as having been on that basis (“question 1”); or
- The doctrine of good faith requires the claim to be presented on that basis (“question 2”)?
- If the EL insurer is not so obliged, and may present a claim to a single year of his choice, how are the rights of recoupment and contribution acquired by the reinsurers of that year to be calculated (“question 3”)?
In answer to question 1, Males LJ said the answer was no. His Lordship agreed with Flaux LJ that MMI had a contractual right to present its reinsurance claims to the policy year of its choice, but his Lordship did not describe this as an “absolute” contractual right.
The answer to question 2 was yes, unless there was some other rational basis for ascertaining the contribution to the risk in each triggered policy year [see:114-115].
His Lordship went on to say [at 116] that in an area of law in which considerations of fairness and policy had explicitly loomed larger than usual, and bearing in mind the willingness of the Supreme Court to strike new ground if necessary to achieve a fair balance of all the interests concerned, a term of good faith ought to be implied.
Males LJ said that the need to answer question 3 did not arise unless the answer to question 2 was held to be wrong. In which case the Equitas method should be applied [see: 123].
Leggatt LJ, in agreeing with the judgment of Males LJ, added further reasons to explain why the doctrine of good faith requires the reinsurance claims at issue in this case to be presented on a basis which apportions the insurer’s ultimate net loss between each policy year in respect of which the insurer was liable to indemnify the insured employer for the damage caused to a victim by mesothelioma [See:162]
His Lordship went on to distinguish the majority’s reasoning in IEG[see: 163-170] and concluded that [at 172]:
The short of the matter is that the courts need not and should not impose a complicated, burdensome and, to put it charitably, unconventional solution [i.e. that in Fairchild and IEG] on the reinsurance market when a simple, principled and orthodox solution [i.e. Baker] is at hand.
This decision now gives judicial guidance to the reinsurance industry as to how EL mesothelioma claims (where there has been exposure over a number of policy years) should be presented to reinsurers. This means that where an EL insurer has settled a mesothelioma claim arising out of exposure which spans multiple policies without apportioning the loss between them it cannot present a subsequent reinsurance claim for the whole of the loss to any policy year of its choice.