Equitas Insurance Ltd v Municipal Mutual Insurance Ltd  EWCA Civ 718
The Court of Appeal has found that the practice of "spiking" (whereby insurers were entitled to present their reinsurance claims to any policy year of their choice) of mesothelioma claims settled under employers' liability insurance policies should not extend to a reinsurance context. Accordingly an insurer/reinsured which has settled without allocating the loss to any particular year of exposure must present claims to its reinsurer(s) on a pro rata, time on risk, basis.
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 (this reversed the position established by the House of Lords in Barker v Corus that each employer was liable only for his proportion of the loss).
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 was on cover for multiple years can put the whole of its payment to a reinsurer who was on cover for only part of the period (i.e. whether it is possible to "spike" at the reinsurance level).
That issue was put to Flaux LJ (sitting as a judge-arbitrator), in favour of spiking. The Court of Appeal gave permission to appeal the award on a question of law pursuant to section 69 of the Arbitration Act 1996. When giving that permission, Gloster LJ had explained that certain issues decided by the tribunal were at least open to serious doubt.
Court of Appeal
The Court of Appeal has now unanimously allowed the appeal against the award and held that an insurer/reinsured which has settled without allocating the loss to any particular year of exposure must present claims to its reinsurer(s) on a pro rata, time on risk, basis.
The Court of Appeal held that the exceptions created by the courts to deal with the particular problem of mesothelioma (as outlined above) were intended to ensure that victims are compensated. However, once that objective is achieved, the law should return to the fundamental principles of the common law: "Put shortly, once unorthodoxy has served its purpose, we should revert to orthodoxy". In relation to the specific arguments raised, it was held as follows:
- 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 from others), so the position is the same for a reinsurer in the same position. The Court of Appeal agreed with that stance in principle: "If, as the majority of the Supreme Court has held in IEG, spiking is permissible at the insurance level, there is simply no room for a principle of deemed allocation to avoid spiking at the reinsurance level". However, as demonstrated below, there was no "absolute" contractual right to spike.
- Good faith issue: Flaux LJ had held that the duty of utmost good faith, in a claims context, is limited to a duty not to act dishonestly in connection with the making of a claim and that there was no room for implying an obligation of good faith in the context of this case. The Court of Appeal agreed that the post-contractual duty of good faith played no part in this context. However, it relied on a line of non-insurance cases which have imposed constraints on the exercise of contractual choices in order to find an implied term in the reinsurance contract in this case: "there are powerful reasons to support the implication of a term in the very specific reinsurance context existing within the Fairchild enclave that the insurer's right to present its reinsurance claims must be exercised in a manner which is not arbitrary, irrational or capricious, and that in that context rationality requires that they be presented by reference to each year's contribution to the risk, which will normally be measured by reference to time on risk unless in the particular circumstances there is a good reason (such as differing intensity of exposure) for some other basis of presentation. That is because spiking is inconsistent with the presumed intentions and reasonable expectations of the parties at the time when the contracts were concluded". Put another way, the reinsurance contracts were justifiably expected to operate in such a way as to require the reinsured to allocate its ultimate net loss evenly across the period of exposure. On that basis, spiking at the reinsurance level had not been permissible.
- Recoupment and contribution issue: The reinsured had sought to argue that there is no scope for any duty of good faith when principles of contribution and allocation are available instead. However, the Court of Appeal held that the reinsurer was correct in arguing that rights of contribution should be calculated in each year from the ground up, applying the approach set out in Barker v Corus (i.e. by reference to time on risk), just as if a proportionate part of the claim had been presented under each reinsurance policy. Accordingly, there was no conflict with the duty of good faith.
What can we learn?
- The Court of Appeal has held that the policy reasons which led to the decision in IEG did not apply at the reinsurance context, where other considerations took priority.
- Flaux LJ's award envisaged a two stage process. First the reinsured would "spike" its entire loss to a reinsurance contract year of its choosing. Then the reinsurers in question would be entitled to pro rata contributions from the reinsured itself and reinsurers on other exposed years. The net result was that the reinsurance retention, the limit and the net amount payable for each of the years would be scaled down proportionately. The outcome would be similar to that under the ACOD B clauses (created following meetings of the Occupational Disease sub-group of the Accident Circle) that were incorporated in some reinsurance contracts. But a significant difference was that if reinsurers on other years had become insolvent, the "spiked" reinsurer (rather than the reinsured) would be left out of pocket for those reinsurers' unpaid contributions.
- The Court of Appeal's ruling does away with spiking, and also does away with pro-rating of retentions and limits. The result is less favourable for reinsureds. First and foremost, the full amount of each year's reinsurance retention applies to the portion of the loss that is allocated to it. Also, the reinsured bears the full risk of reinsurer insolvencies.
- The focus on general contractual principles to limit a reinsured's ability to present its claims however it wishes is likely to be of interest in cases extending beyond the Fairchild enclave (although even in the context of the Fairchild enclave, other considerations may come into play: see, for example, the reference to "differing intensity of exposure", the precise meaning of which is not made clear in the judgment).
- It is likely, though, that the case will be appealed further to the Supreme Court. Municipal Mutual has until April 30 to seek permission to appeal to the Supreme Court.