May 8, 2018

In Equitas Insurance Limited v MMI Limited [2018] EWCA Civ 991, the Court of Appeal (Lady Justice Gloster and Sir Jack Beatson) granted permission to Equitas to appeal from an arbitration award of Flaux LJ sitting as a judge arbitrator. The substantive appeal will address fundamental issues relating to the presentation of Fairchild mesothelioma claims by insurers to their reinsurance programme.

The Court of Appeal’s decision, and its potential implications, are considered by Jamie Smith QC of 4 New Square.


Ever since the House of Lords in Fairchild dispensed with the ‘but for’ causation test and substituted a ‘material contribution to the injury’ test for mesothelioma victims, the Courts (and Parliament) have been struggling to work out the consequences.

Following the radicalism of Fairchild came the no less ground breaking decision of the House in Barker v Corus, by which the mesothelioma victim’s damages were apportioned by reference to exposure: if there were 10 defendants each responsible for one year’s exposure of constant intensity, the claimant was entitled to recover 10% from each; and if there was one defendant responsible for 10 years’ exposure, each year ‘carried’ 10% of the claimant’s total claim for damages.

Self-evidently, Barker proration fed through each defendant’s insurance layers, and insurers’ reinsurance layers, in a simple and logical way. Each year (corresponding to any given policy year) had readily identifiable financial consequences.

Parliament, however, intervened in double quick time and section 3 of the Compensation Act 2006 was enacted so that, in England, Wales, Scotland and Northern Ireland, any and every period of material exposure (be it 1 day, 1 week or 1 month) is taken to have caused the mesothelioma. As such, any defendant culpably responsible for any period of material exposure (however short) must pay 100% of the damages to the victim.

How then did this global liability fall to be shared between insurers and (for years where there was no insurance) insureds? In IEGL v Zurich [2016] AC 509 the Supreme Court gave the answer that there should be a prorated sharing, much like Barker but in respect of the insurance programme – the so-called “Fairchild recoupment and contribution rights”.


Inevitably the debate has now moved to the reinsurance arena.

In Equitas v MMI Flaux LJ, sitting as a judge-arbitrator, was called upon to answer two questions, namely:

Question 1: Was MMI (the reinsured) entitled to present each outwards reinsurance claim to any single triggered reinsurance contract of its choice? That is to say, could MMI ‘spike’ the claims.

Question 2: If MMI could ‘spike’ the claims, how did the Fairchild recoupment and contribution rights fall to be calculated? Was it:

  • ‘from the ground up’, taking into account the first layer of retention in every year of reinsured exposure (as Equitas, the reinsurer, contended); or,
  • on an ‘independent liability’ basis. This method involved 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: (i) the amounts that would have been borne by each such layer or retention if the whole claim had been presented to each relevant year, and (ii) the relative amount of exposure which occurred in each relevant year.

By his Award, which is not yet publicly available, Flaux LJ answered the questions as follows:

Question 1: Yes, MMI was entitled to ‘spike’ the claims.

Question 2: The ‘independent liability’ basis of apportionment applied.

The three issues addressed by Flaux LJ

It is apparent from the Court of Appeal’s judgment that, in reaching those conclusions, Flaux LJ addressed three issues, as follows.

The implied allocation issue: Was MMI to be treated as having settled inwards claims (from culpable exposers) on the basis that each EL policy on risk was contributing a pro rata share of the loss being paid by MMI?

The good faith issue: If the answer to the implied allocation issue was ‘no’, was MMI’s presentation of its reinsurance claim contrary to its duty of utmost good faith or an implied contractual duty of good faith when presenting claims to reinsurers?

The recoupment and contribution issue: As per Question 2 above.

Flaux LJ’s reasoning in respect of the three issues was:

  • The implied allocation issue: There was no reason to treat allocation at the reinsurance level any differently to allocation at the insurance level: Barker did not apply.
  • The good faith issue: The duty of good faith was limited, in a claims context, to a duty not to act dishonestly in connection with the making of a claim. Given that Equitas was alleging no subjective bad faith on MMI’s part, there was no breach.
  • The recoupment and contribution issue: The ‘independent liability’ approach accorded with fundamental fairness (and it was the approach that had recommended itself to the market at least in relation to policy years after 1984, by reason of the standard Accident Circle Occupational Disease clause).

Equitas’ appeal

Equitas applied to the Court of Appeal for permission to appeal. It thus had to surmount the stringent requirements prescribed by section 69 of the Arbitration Act 1996.

Permission to appeal granted by the Court of Appeal

Lady Justice Gloster and Sir Jack Beatson were satisfied that the section 69 test was satisfied. Unsurprisingly, the Court considered that the issues raised were matters of general public importance. The Court went on to conclude that Flaux LJ’s answers to the Questions and his treatment of the three issues was “at least open to serious doubt”, thereby satisfying the balance of the test for the grant of permission to appeal.

Gloster LJ’s concerns with Flaux LJ’s analysis were expressed as follows:

  • The implied allocation issue: Gloster LJ considered that “there is a seriously arguable case” for treating the insurance and reinsurance positions differently. So, whilst Barker did not apply at the insurance level, it might well apply under the reinsurance programme.
  • The good faith issue: Gloster LJ suggested that, given “this unique reinsurance context”, it was well arguable that there was “some basis for a duty of good faith [upon insurers when presenting claims to their reinsurers] in order to restrain the manner of exercise of the freedom of choice” otherwise arising by reason of Fairchild and IEGL.
  • The recoupment and contribution issue: Gloster LJ referred to three potential problems with Flaux LJ’s determination on this issue. First, there is nothing in the existing authorities and specifically in IEGL, which assists on the issue of retentions. Second, when it comes to recoupment and contribution in insurance and reinsurance, “the position … is different within the Fairchild enclave”. Third, there is considerable force in Equitas’ 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.


It is noteworthy that the Court of Appeal in Equitas v MMI invoked the uniqueness of the situation arising “within the Fairchild enclave” to justify the grant of permission. Similar sentiments may be found in all the cases in which the courts have struggled to rationalise the consequences arising from Fairchild, including Barker and IEGL.

It will be fascinating to see whether, as Gloster LJ mooted, overarching principles of fairness rather than entrenched principles of orthodox insurance law will come to Equitas’ aid and lead to a successful appeal.

Only time will tell!

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