Equitas Insurance Limited v Municipal Mutual Insurance Limited was a decision of the Court of Appeal in which Lady Justice Gloster and Sir Jack Beatson considered the application by Equitas for permission to appeal against an arbitration award of Flaux LJ (sitting as a judge-arbitrator). The application was made under s.69 of the Arbitration Act 1996 which allows a party to appeal an arbitration award on a question of law providing, amongst other things, it is possible to show that the question is one of general importance and the decision is at least open to serious doubt.

The hurdles set down by s.69 are difficult to satisfy. A good indication of just how hard it is to obtain permission to appeal under this provision can be seen in the Commercial Court statistics (the latest of which have just been published). In 2016, there were 46 applications to the Commercial Court for permission to appeal and none were granted. In 2017, 56 applications were made and only 10 were granted and then only 1 of those 10 was successful.

The dispute between the parties raised questions concerning the treatment of mesothelioma claims for the purposes of certain contracts of employers’ excess of loss liability reinsurance. This is an issue of some controversy in the reinsurance market and, as yet, there has been no authority on it. The issue arises in summary because mesothelioma is an (indivisable disease). An underlying employer is liable in full for any material exposure of the employee to asbestos and its insurer is in turn liable in full (pursuant to the Compensation Act 2006 and IEG v Zurich) in each year of exposure – leaving the insurer with rights of contribution as against other insurers or recoupment as against the insured in respect of uninsured years.

The particular issues in the appeal were (1) whether MMI was entitled to present each outwards reinsurance claim to any single triggered reinsurance contract of its choice (referred to as “spiking”); and (2) if so, how the resultant rights of recoupment and contribution, arising from the Supreme Court decision in International Energy Group Ltd v. Zurich Insurance Plc UK Branch [2016] AC 509, in particular, as to annual reinsurance retentions, were to be calculated.

In the arbitration award, as reported in the Court of Appeal’s decision, MMI appeared to win on all of the key issues. Flaux LJ found that MMI was entitled to spike each reinsurance claim to any applicable year of reinsurance cover of its choice (as per the approach at the underlying level). He found that there was no good faith restriction on this and if there was then MMI was not in breach of it. He also found that the rights of recoupment and contribution acquired by the reinsurers to whom a claim was spiked should be calculated using MMI’s methodology, namely, the ‘independent liability’ method. The independent liability method involves apportioning the loss for which the spiked reinsurance contracts were liable between the retentions and the various layers of reinsurance in each of the applicable years of reinsurance cover, in proportion to: (a) the amounts that would have been borne by each such layer or retention if the whole of the claim had been presented to each relevant year, and (b) the relative amount of exposure which occurred in each relevant year. The net effect seems to be what the market would refer to as “pro rata/pro rata” or the ACOD/B approach (the latter being in reference to a standard term included from the 1980s onwards). This involves pro-ration of both limits and retentions across the years of exposure to produce the ultimate financial position between the market. It is assumed this would occur also for any reinsured period through recoupment.

Having carefully considered the award of Flaux LJ, Gloster LJ, who gave the leading judgment, found that notwithstanding the high threshold, the decisions on the three key issues as to the ability to pick and choose which reinsurance cover to spike, whether the duty of good faith applies, and then what recoupment and contribution rights are open to the reinsurer who has been spiked, were open to serious doubt. Interestingly she seemed to accept Equitas’ arguments that there was a case for treating the insurance and reinsurance positions differently and/or if the reinsured can pick and choose then there could be some basis for a duty of good faith in order to restrain the manner of the exercise of the freedom of choice by the reinsured. As regards recoupment she said that she saw 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.

She also found, perhaps less surprisingly, that the issues being determined were something that was of general public importance. She specifically said in her judgment 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”. Consequently, permission to appeal was granted.

The point is obvious but simply because permission to appeal has been granted does not mean that any subsequent appeal by Equitas will be successful. However, it is noteworthy that permission to appeal was granted and the subsequent decision is something that the market will, no doubt, watch closely.