Reinsurance: spiking of mesothelioma claims versus the duty of good faith (the application of Fairchild to reinsurance)

The Court of Appeal has confirmed the rules set out in Fairchild and resultant law regarding mesothelioma claims and the exceptional rules of causation in such cases and their application to insurance law. Whilst an employer insured is permitted to ‘spike’ its claim for indemnity under its employers liability cover to a particular policy year, an EL insurer is not permitted to subsequently 'spike’ its claim under its reinsurance policy to a particular policy year. The Court found that this would be contrary to the implied principles of good faith in the reinsurance contract and was not necessary for the protection of mesothelioma victims.

Background

The Court of Appeal was asked to consider the decision of a judge-arbitrator in a reinsurance dispute between an EL insurer and its reinsurer. The underlying indemnity claim related to insured employers who faced many claims by employees exposed to asbestos and who contracted mesothelioma. As set out in Fairchild v Glenhaven Funeral Services Ltd (2002), there exists a special rule of tortious causation in such cases which allows a claimant employee suffering from mesothelioma as a result of asbestos exposure to recover damages, even where it was not possible to prove on the balance of probabilities which of two or more employers was responsible for the critical exposure. This was later codified in the Compensation Act 2006 which made each employer jointly and severally liable for the whole of the damage caused by the disease and there is no requirement for the employee to prove which employer caused the critical exposure, or to identify the year in which the critical exposure occurred (if employed across more than one year). Such law is anomalous in the context of established legal principles and is referred to as the ‘Fairchild enclave’.

The repercussions of the Fairchild enclave on insurance law (as first considered in Durham v BAI (Run Off) Ltd (2012) and in International Energy Group Ltd v Zurich Insurance Plc UK (2015)) are equally exceptional, and mean that any EL insurer of a liable insured employer during the relevant period of employment is liable to indemnify that insured in full, regardless of the period for which it has provided insurance and received premium. This essentially permits an insured to ‘spike' an insurance claim to the policy year of its choice – contrary to fundamental principles of insurance law, but that the 'spiked’ insurer would have rights of contribution from any other insurers and recoupment from the insured.

The question which the Court of Appeal was asked to consider, was whether an insurer, which settles a claim for liability for mesothelioma arising under EL policies which span several years, can claim an indemnity for its full loss under whichever annual reinsurance policy it chooses, or whether it is limited to claiming under each annual reinsurance policy on a pro rata basis.

The judge-arbitrator at first instance found that the insurer was contractually entitled to present its reinsurance claim to any given year of reinsurance on the basis that that year was 100% liable in the same way as the insurance on that year which it was reinsuring. The reinsurer appealed that decision.

Parties’ positions

The reinsurer's position on appeal was that the nuanced jurisprudence created by the courts in Fairchild and the subsequent case law did not apply at the reinsurance level and that, where it was possible to revert to the established principles of common law and insurance law, the court was under an obligation to do so (as it had created the anomaly in the first place). The reinsurer put forward three ways the court could do this:-

(1) Deemed allocation/implied term – the insurer must be deemed to have settled the claims on a ‘time on risk’ basis such that the settlement should be implicitly allocated in pro rata shares across all triggered policies as this was the ‘real basis’ of the underlying settlements;

(2) Duty of good faith – reinsurance claims should be presented on a pro rata basis unless there was a rational basis for an alternative presentation, because permitting an insurer to select the policy of reinsurance to which a loss should attach is contrary to elementary principles of liability insurance; and

(3) Contribution and recoupment – a reinsurer's rights of contribution and recoupment should be calculated in each year on a ground up basis, as if a proportionate part of the claim has been presented under each reinsurance policy.

Conversely, the EL insurer’s position was that spiking to a single year of cover is permitted at the insurance level, despite the anomalies created, and there is no principled basis on which to distinguish insurance and reinsurance in this respect. The insurer argued that any distinction would be artificial, unprincipled and liable to make the situation worse. The insurer sought to argue that there was no scope to argue that the 'real basis’ of the underlying settlements was anything other than each triggered policy being liable in full.

Decision

The Court of Appeal agreed with the reinsurer on the basis that the anomalies created by the Fairchild enclave had extended into insurance law in unintended and unexpected ways – it was unnecessary to perpetuate the anomalies at a reinsurance level. The Court went on to say that it is desirable, where possible, to revert to principles of common law whereby liability should be apportioned by reference to contribution to the risk.

The Court of Appeal did not agree with the reinsurer that the ‘real basis’ of the underlying settlement was a pro rata one (point (1) above) – the insurer had a contractual right to present its reinsurance claims to the policy year of its choice, and it did so. The Court did, however, agree that a duty of good faith could be implied into the reinsurance contracts in these circumstances and that this doctrine required the reinsurance claim to be presented to reinsurers on a pro rata basis (point (2) above). By virtue of the Fairchild enclave, the EL insurer had been presented with an opportunity to make a choice as to which year a claim should be presented. Such choice was inconsistent with fundamental principles of insurance, was entirely fortuitous and had not been contemplated by the parties at the time of contracting or when setting premiums. The Court therefore held that a duty of good faith, when exercising this choice, should be implied, and that there was no conflict between the existence of such duty and the application of the rights of contribution and recoupment. No such duty was implied at the insurance level as the Court held that this would put at risk the provision of full compensation to mesothelioma victims.

Comment

At first glance, this decision may seem to create an imbalance as between the insurance and reinsurance level, as it makes recovery a much more onerous task for insurers under their reinsurance policies, than for employer insureds under their insurance policies. However, this was justified by the Court of Appeal on the basis that the nuanced rules created under the Fairchild enclave are the exception, developed in contradiction to established principles in order to protect victims of mesothelioma. No such protection is required at the reinsurance level and therefore the courts should revert back to established principles of good faith wherever possible.

Further Reading

Equitas Insurance Ltd v Municipal Mutual Insurance Ltd [2019] EWCA Civ 718.

Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22.

Durham v BAI (Run Off) Ltd [2012] UKSC 14.

International Energy Group Ltd v Zurich Insurance Plc UK [2015] UKSC 33.