Equitas Insurance Limited v MMI Limited [2018] EWCA Civ 991: ‘spiking’ and recoupment of liabilities for mesothelioma in the context of reinsurance.
In Equitas Insurance Limited v MMI Limited [2018] EWCA Civ 991, the…
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:
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.
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:
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.
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:
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!
Keywords: Employers’ liability insurance, Reinsurance
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