Court of Appeal gives permission to appeal an award which dealt with the issue of "spiking" of mesothelioma reinsurance claims

The Compensation Act 2006 provided, broadly, that where an employee has been exposed to asbestos whilst working for various employers, and as a result has contracted mesothelioma, each employer can be sued in full by the employee. In Zurich v International Energy Group, the majority of the Supreme Court (although not required to decide the point) opined that, where an insurer has insured an employer for only part of the period of exposure, that insurer must meet the whole of the employer's liability to the employee (although that insurer would also have a right to seek proportionate contributions from other insurers, or the employer (if the employer had not taken out insurance for a part of the period of exposure)).

The issue involved in this case is whether an insurer which has been on cover for the whole period can seek full reimbursement from a reinsurer who was on cover for only part of the period (ie whether it is possible to "spike" at the reinsurance level).

That issue was decided by an arbitral tribunal (Flaux LJ sitting as a judge-arbitrator), in favour of spiking, and in this case, the Court of Appeal gave permission to appeal the award on a question of law. The Court of Appeal was satisfied that the test set out in section 69 of the Arbitration Act 1996 had been met. In so doing, Gloster LJ explained why she thought the following issues decided by the tribunal were at least open to serious doubt:

(1) Implied allocation issue: Flaux LJ had held that, just as an insurer on risk for only part of the period of exposure can be required to pay in full (and then seek equitable contribution and recoupment), so the position is the same for a reinsurer in the same position. However, Gloster LJ said that she was persuaded that there is a serious arguable case for treating the insurance and reinsurance positions differently.

(2) Good faith issue: Flaux LJ had also held that the reinsured had an absolute contractual right to present the whole of its ultimate net loss to any reinsurance policy it chooses. In so doing, he determined that the duty of utmost good faith, in a claims context, is limited to only a duty not to act dishonestly in connection with the making of a claim and there was no room for implying an obligation of good faith in the context of this case. Again, Gloster LJ held that there was serious doubt that the reinsured could allocate its losses entirely as it wished and that in this specific context there could be a good faith basis for restraining the reinsured's freedom of choice.

(3) Recoupment and contribution issue: Flaux LJ had held that if the reinsured is allowed to "spike", the correct approach was to adopt the "independent liability" method used in double insurance situations (ie the ratio between the independent amounts which each insurer would have been liable to pay, regardless of the existence of another insurer, determines the allocation between the insurers). The judge also rejected a "from the ground up" method of apportionment which takes into account the first layer of retention in every year of reinsured exposure. However, Gloster LJ considered that a different position might apply to mesothelioma (re)insurance claims (and other claims falling within the so-called Fairchild enclave – ie those cases where there is an exception to the normal common law rule that a claimant must show, on the balance of probabilities, that the defendant's tort caused his injury) and she said "I see considerable force in the submission that the higher layers of reinsurance in subsequent years should be made good first in any contribution and recoupment process, on the basis that they should always be furthest from the risk".

In deciding to give permission to appeal, the Court of Appeal acknowledged that "The question as to how mesothelioma losses should be allocated for reinsurance purposes does appear to be a significant open question for many participants in this market. Clarity at the appellate level would have implications for the approach to be adopted market-wide and will be important insofar as the correct legal approach is held to involve principles of contribution". However, the Court of Appeal stressed that it had not reached any final views on the issues involved in this case.