No spiking allowed - appeals court hands reinsurers’ victory

Equitas v MMI and Allocating Claims for Mesothelioma 2019 EWCA Civ 718. 17.4.2019

In 2002 Fairchild v Glenhaven overturned accepted notions of causation to provide compensation to victims of mesothelioma. The House of Lords held that contribution to the risk of disease was enough to prove causation. Appeal Courts have been grappling with the knock on effects ever since. They have considered the position between victims and their employers. They then looked at the effect on employers and their insurers. The Court of Appeal has now ruled on what it means as between insurers and their reinsurers.

MMI pay a number of claims for mesothelioma, often involving asbestos exposure over multiple policy years. Claims against their reinsurers used to be made on a pro rata basis, allocating the loss as between separate policy periods. This engaged the retention for each policy year. MMI then changed their approach. They argued that Fairchild meant that the mesothelioma was caused during any given policy year and claims could be spiked into a year of their choosing – so engaging only one retention.  

Equitas’ approach used three separate arguments:-

1. There should be an implied term that the loss should be presented equally across each policy year. The Court of Appeal rejected this argument, uncomfortable with the idea of incorporating a term which did not exist and mindful of the potential consequences for entirely different contractual circumstances. The Fairchild anomaly, they said, should not be met by another anomaly.
2. A duty of Good Faith existed so as to compel MMI to present the loss across all relevant policy years. The Court of Appeal liked this more. The primary insurer, they said, had a “duty to present losses in a manner which is not arbitrary, irrational or capricious”. They added that “…rationality requires that they be presented by reference to each year’s contribution to the risk”.
3. Finally the law should recognise a right of recoupment and reallocation, allowing Equitas themselves to recoup against other policy years – effectively analogous to Zurich’s analysis in IEG v Zurich. The Court of Appeal also accepted this argument, adding that it was not incompatible with the duty of good faith.

Underlying all of this was the Court of Appeal’s view that what was fair to ensure full compensation for a victim was not necessarily fair to govern relationships between others. The exceptional route taken by Fairchild should be tempered by more orthodox approaches once the primary purpose of full compensation to victims was realised.

What does this mean?

As it stands this is not all bad news for primary layer insurers. The answer to the question might well be different in post 1984 reinsurance treaties where the ACOD B allocation clause is likely to be used – a clause drafted in early recognition of the complexities of occupational disease claims.

Also in those (admittedly unusual) cases where there is a history of policyholder deductibles the same rationale applies. The policyholder may not spike into a year of its choice but must spread across all the engaged policy years, and so engage each and every deductible. After all, that’s only fair.