20th May 2019
On 17 April 2019, the Court of Appeal handed down its long-anticipated judgment in Equitas v MMI, the latest in a series of ground-breaking appellate judgments concerned with the treatment of mesothelioma claims against employers, employer’s liability (EL) insurers and (now) excess of loss reinsurers of those EL insurers. MMI was represented by Alistair Schaff QC and Timothy Kenefick, instructed by Cooley (UK) LLP. Equitas was represented by Colin Edelman QC and Keir Howie, instructed by Norton Rose Fulbright LLP.
In 2015, the Supreme Court held in IEG v Zurich  UKSC 33,  AC 509 that where an employer is liable for a mesothelioma claim as a result of having exposed the victim to asbestos over a period of time, the employer is contractually entitled to recover 100% of its loss from (or “spike” the whole of its claim to) any EL insurer which was on risk at any time during the exposure period. The “spiked” EL insurer then acquires equitable rights of contribution against any other EL insurers which were also on risk during the exposure period, and equitable rights of recoupment against the employer for any periods of deemed self-insurance.
The main issue in Equitas v MMI is whether an EL insurer is similarly entitled to “spike” each mesothelioma claim to a single year of its excess of loss reinsurance programme, subject to the “spiked” reinsurers acquiring equitable rights of contribution and recoupment, or whether the insurer is obliged to spread each reinsurance claim on a pro rata basis across all the applicable years of its reinsurance programme. And if “spiking” is permissible at the reinsurance level, how do the “spiked” reinsurers’ rights of contribution and recoupment fall to be calculated?
The dispute was referred to arbitration and 7KBW former head of Chambers, Lord Justice Flaux, was appointed as Judge-Arbitrator to decide a number of issues of principle. He found in MMI’s favour on all the issues, concluding that “spiking” is permissible at the reinsurance level and that the “spiked” reinsurers’ rights of contribution and recoupment fall to be calculated using MMI’s methodology, which produces the same ultimate result as the widely-used market clause ACOD(B).
On appeal, the Court of Appeal overturned Flaux LJ’s Award, holding that, even though an EL insurer is entitled as a matter of construction to “spike” each reinsurance claim to a single year of its choice, a novel duty of good faith falls to be implied into the reinsurance contracts requiring the insurer to spread each claim across all of the applicable years of its reinsurance programme by reference to each year’s contribution to the risk, which will normally require the claims to be presented on a time on risk basis.
As matters stand, therefore, an EL insurer must present separate claims to each applicable year of its reinsurance programme and bear a full deductible in each year, notwithstanding that at the insurance level, the employer is entitled to “spike” the whole of its claim to any single year of insurance of its choice.
The Court of Appeal’s decision has therefore created a fundamental disconnect between the way in which mesothelioma claims fall to be paid at the reinsurance level and the way in which they fall to be paid at the insurance level. It also involves a radical extension of the principle of good faith within the Fairchild enclave at the reinsurance level, far beyond the way in which implied duties of good faith have previously been applied in any previous insurance and reinsurance cases.
On 8 May 2019, the Court of Appeal granted MMI permission to appeal to the Supreme Court. It is anticipated that the case will be heard by the Supreme Court in the first half of next year.