News / 18-04-2019 / Victory for Reinsurers in Court of Appeal Spiking Case

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 basisIt 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, bothall 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 riskThe 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 mesotheliomaThe 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 nbspon a pro rata time on risk basis across the full period of exposureThe 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