After a wait of almost 13 months, the CoA finally granted reinsurers leave to appeal the decision of Flaux LJ sitting as a judge-arbitrator in the case of Equitas v MMI leaving the issue of whether reinsureds have the right to “spike” asbestos related reinsurance claims in considerable doubt. This will be welcome news for reinsurers facing mesothelioma claims and once decided will be an important decision for the legacy reinsurance market.

Mesothelioma Claims : The Law to date in brief

In order to understand the background to Equitas v MMI, it is important to understand the cases that went before it.

Fairchild

The House of Lords held that any employer who had exposed a victim to asbestos was liable for mesothelioma.

Barker

The Court held that liability could be apportioned between employers according to the extent to which they had contributed to that risk.

The Compensation Act 2006 reversed Barker and provided that an employee who has contracted mesothelioma from any of a number of employments can claim compensation in full from any one employer. That employer can then claim a contribution from other liable employers (if they can be identified/located).

The Supreme Court in Zurich v. International Energy commented that insurers would be liable for the whole claim even when they were on risk for only part of the relevant exposure period and added that the insurer would then have the right to claim contributions from other insurers on risk/the employer itself.

Equitas v MMI

Flaux LJ was appointed to hear a dispute between Municipal Mutual Insurance (MMI) and Equitas, as a judge-arbitrator in a confidential arbitration related to MMI’s attempts to “spike” Equitas with its mesothemlioma claims i.e. to choose which reinsurance year to allocate losses.

Flaux LJ’s award allowed MMI (the reinsured) to “spike” each reinsurance claim to any applicable year of reinsurance cover of its own choosing. Equitas sought leave to appeal to the Court of Appeal.

Following an application for leave to Appeal lodged in April 2017 and a hearing on that application in December 2017, on 4 May 2018, the Court of Appeal gave permission to Equitas to appeal Flaux LJ’s decision on the basis of s 69 Arbitration Act 1996 (on a point of law).

The Court held (whilst specifically stating that it was NOT making a decision on those issues as this stage) that leave to appeal should be granted because it was arguable that Flaux LJ’s decision was open to serious doubt for the following reasons:

  1. Implied Allocation Issue

    As set out above, Flaux LJ had held that a reinsurer could be held liable for the whole loss even though it was only on risk for part of the period in the same way as insurers were (under Zurich).

    The Court of Appeal was persuaded when considering the application for leave to Appeal, that there was a “seriously arguable case for treating the insurance and reinsurance positions differently”.

  2. Good Faith Issue

    Flaux LJ held that the reinsured’s duty of good faith (in this context) was limited only to a duty not to act dishonestly in making the claim and did not affect the reinsured’s ability to “spike” its reinsurers.

    The Court of Appeal was persuaded that, if Flaux LJ’s decision is right in that the reinsured has a choice as to how it allocates its losses to reinsurers, there was “force in the submission” that this restrains the reinsured’s duty of good faith.

  3. Recoupment and Contribution Issue

    In terms of Equitas’ (the reinsurer’s) right to claim a contribution from other reinsurers and against MMI for any “self-reinsurance”, Flaux LJ held that contributions should be apportioned in accordance with the “independent liability” method ie in proportion to: (a) the amounts that would have been borne by each layer/retention if the whole claim had been presented to each relevant year; and (b) the relative amount of exposure which occurred in each relevant year.

    The Court of Appeal identified three “potential problems” with Flaux LJ’s determination of this issue:

    1. There is nothing in the existing authorities which assists with the determination made on retentions;
    2. There is a “strong argument” that the issue of contribution/recoupment in insurance/reinsurance is different from the Fairchild case of not needing to prove who caused the injury; and
    3. The Court could see “considerable force” in the argument 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.

The Court concluded that it was just and proper for the Court to determine this appeal despite the decision of the parties to resolve the matter by way of arbitration on the basis that the parties had not excluded the right of Appeal under s 69 Arbitration Act.

The Court of Appeal also considered the issue to be important for the insurance/reinsurance industry and recognised that the same issues were likely to come up in subsequent arbitrations and that therefore it was desirable for the Court of Appeal to make a determination of the issue.

Whilst the Court of Appeal decision on this will be eagerly awaited by both Reinsureds and Reinsurers with mesothelioma claims, it is of such importance to the parties involved that whatever decision is reached by the Court of Appeal, that decision is likely to be appealed to the Supreme Court so there may be some time yet before this issue is, finally determined.