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Victory for Reinsurers in Court of Appeal “Spiking” Case

Victory for Reinsurers in Court of Appeal “Spiking” Case

18.04.2019

Kiran Soar

Kiran Soar Global Head of Insurance, Partner

Equitas Insurance Limited v Municipal Mutual Insurance Limited [2019] EWCA Civ 718

The Court of Appeal has handed down its judgment on an appeal by reinsurers concerning the question of allocation of liability to annual reinsurances by Employers Liability (EL) insurers which have settled claims for mesothelioma arising under EL policies which span several years. This decision will provide welcome certainty and clarification for reinsurers of EL policies as the Court of Appeal allowed reinsurers’ appeal, holding that insurers were obliged to present their claims to reinsurers on a pro-rata “time on risk” basis.

It is useful to quickly summarise the background leading up to this case. In Fairchild it was held that where a mesothelioma victim was tortiously exposed to asbestos by two or more employers but the victim could not prove on the balance of probabilities which of them caused the mesothelioma, both/all employers were jointly and severally liable for the loss. Reversing the decision in Barker, the Compensation Act 2006 provided that where an employer was liable to a mesothelioma victim, he would be liable in respect of the whole of the damage irrespective of whether there were other additional exposures. There could then be an apportionment of liability according to each employer’s contribution to the risk.

The case dealing with allocation of liability under EL policies was Zurich Insurance v International Energy Group, which established that the insurer of any one EL policy year during the exposure period may be liable for the whole of the claim. This ensured full compensation to victims of mesothelioma.

The problem arising in the Equitas v MMI case was a direct result of the decision in International Energy Group; whether an insurer who has paid out on a mesothelioma claim in accordance with International Energy Group (that is, without allocating their loss to a particular policy year) could then select to which reinsurance policy year it wished to allocate the loss (which is described as “spiking”). The alternative would be that the insurer is obliged to allocate the loss  on a pro rata “time on risk” basis across the full period of exposure.

The Court of Appeal considered two possible bases for the allocation of the loss on a pro rata basis: firstly, whether such an allocation was an implied term of the reinsurance contracts, or secondly, whether the doctrine of good faith required the insurer to present the claim to the reinsurer on that basis.

The first of these two arguments was rejected on the basis that the court had already determined, in International Energy Group, that spiking was permissible at the insurance level. It could therefore not be said at the reinsurance level that a term must be implied into the contracts to avoid that same situation.

However, the second of the two arguments was accepted by the Court of Appeal. In view of the case law regarding the manner in which contractual powers should be exercised, the court concluded that the insurer must present its reinsurance claims in a manner which is not “arbitrary, irrational or capricious”. This leads to the result that the insurer should present the claim with reference to each year’s contribution to the risk, as “spiking” would be inconsistent with the intentions and reasonable expectations of the parties at the time of making the contract.

Article authors:

Kiran Soar

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