Intended (and unintended) consequences

On 15 and 16 July 2014, the Supreme Court heard the appeal in IEG v Zurich.

The case concerns whether the full amount of a mesothelioma claim can be recovered under Employers’ Liability insurance for any single year, even if the exposure to asbestos occurred over a number of years.

There will be a strong policy preference to allow recovery under a single year, so as to ensure full recovery for mesothelioma victims. One aspect which may not feature as strongly in the mind of the Supreme Court justices, however, is the potential relevance of their reasoning to the reinsurance treatment of mesothelioma losses.

If it is possible to recover in full under a single year of insurance, the issue is whether the same will be possible at a reinsurance level. If so, this could allow significant reinsurance recoveries because the deductibles for an individual reinsurance period might well be breached by high value mesothelioma claims. This would not necessarily be the case if the loss was to be spread over numerous years of underlying exposure to asbestos.

The approach of seeking to recover the full level of loss under a single year of reinsurance cover, notwithstanding a longer period of underlying exposure, is sometimes referred to as “spiking”. This graphically describes the way in which losses that might otherwise be taken to have occurred over a number of years are “spiked” into a single year for the purposes of recovering under reinsurance. Whether or not spiking of reinsurance claims is possible could have significant financial consequences given the number and high value of mesothelioma claims.

The legal background to this issue has been dominated by two factors: first, the difficulty of applying accepted legal principles of causation to the scientific evidence on the development of mesothelioma; and secondly, the importance from a policy perspective of ensuring that mesothelioma victims have the maximum chance of being able to recover. This has led to inconsistency in legal reasoning at the highest judicial level (Barker v Corus1, compared with Durham v BAI2) as well as parliamentary intervention (Section 3 of the Compensation Act 2006).

The Supreme Court is likely to have enough on its plate worrying about reconciling the previous conflicting decisions and ensuring a result which is acceptable from a policy perspective. However, it will be important to see what impact the justices’ reasoning will have on the mechanics of making reinsurance recoveries for mesothelioma claims, and the viability of spiking.

Judgment is likely to be handed down by the Supreme Court later in the year (most likely in the Autumn). We will report on the judgment as soon as it is available.