Reinsurance: scope of indemnity

The doctrine of good faith required the reinsurance claims to be presented on a basis which apportioned the respondent insurer’s ultimate net loss between each policy year in respect of which the insurer was liable to indemnify the insured employer for the damage caused to a victim by mesothelioma. Accordingly, the Court of Appeal, Civil Division, allowed the appellant reinsurer’s appeal against the arbitrator’s decision that an insurer which settled a claim for liability for mesothelioma arising under EL insurance policies which spanned several years of exposure to asbestos, could claim an indemnity for its full loss under whichever annual reinsurance within that period it chose in order to maximise its reinsurance recovery.

Background

The respondent insurer (MMI) provided employer’s liability (EL) policies that covered, among other things, cover in the event of the insured employer’s liability for an employee sustaining bodily injury or disease arising out of, or in the course of, his employment. MMI reinsured those policies with Lloyd’s syndicates. Subsequently, Lloyd’s syndicates transferred those liabilities to the appellant reinsurer (Equitas). Both the policies with the insured and the excess of loss policies with Equitas were annual. 

MMI’s employer insurers faced a large number of claims from employees who were exposed to asbestos during their periods of employment and who had contracted mesothelioma. Applying Fairchild v Glenhaven Funeral Services Ltd; Fox v Spousal (Midlands) Ltd; Matthews v Associated Portland Cement Manufacturers ((1978) Ltd [2002] 3 All ER 305)), that had held that an employer insured was liable in full no matter how short the period of exposure for which it was responsible, MML settled those claims without allocating the loss to any particular year of exposure. It then claimed from Equitas under each annual reinsurance policy a pro rata share of the settlement sum. However, in order to maximise recovery, MML subsequently changed its method of presentation. Under the new method of presentation, it sought to claim an indemnity for its full loss under whichever annual reinsurance within that period it chose (spiking). 

The revised method of presenting claims gave rise to the parties dispute, which was initially arbitrated. The judge-arbitrator found in favour of MMI. Equitas then appealed that award to the Court of Appeal, Civil Division, pursuant to s 69 of the Arbitration Act 1996 (AA 1996).

Appeal allowed.

Issues and decisions

(1) Whether an insurer which settled a claim for liability for mesothelioma arising under EL insurance policies which spanned several years of exposure to asbestos could claim an indemnity for its full loss under which ever annual reinsurance within that period it chose in order to maximise its reinsurance recovery, or whether it was limited to claiming under each annual reinsurance policy a pro rata share of the settlement sum.

The judge-arbitrator was right to hold that MMI had a contractual right to present its reinsurance claims to the policy years of its choice, but that was not an absolute contractual right (see [102] of the judgment).

There were powerful reasons to support the implication of a term in the very specific reinsurance context existing within the enclave of Fairchild, that the insurer’s right to present its reinsurance claims had to be exercised in a manner which was not arbitrary, irrational or capricious. Further, that in that context rationality required that they be presented by reference to each year’s contribution to the risk, which would normally be measured by reference to time on risk unless in the particular circumstances there was a good reason (such as differing intensity of exposure) for some other basis of presentation. That was because spiking was inconsistent with the presumed intentions and reasonable expectations of the parties at the time when the contracts were concluded. Spiking did not accord with common law notions of fairness and was contrary to the underlying statistical reality that in fact the critical exposure(s) of employees to asbestos would not all have occurred in the same year (see [114], [115] of the judgment).

In an area of the law in which considerations of fairness and policy had explicitly loomed larger than usual, and bearing in mind the willingness of the Supreme Court to strike new ground if necessary to achieve a fair balance of all the interests concerned, a term of good faith ought to be implied (see [116] of the judgment).

Before allowing the appeal, it remained to evaluate MMI’s submission that there was no scope for any duty of good faith when principles of contribution and recoupment were available (see [118] of the judgment).

Fairchild v Glenhaven Funeral Services Ltd; Fox v Spousal (Midlands) Ltd; Matthews v Associated Portland Cement Manufacturers (1978) Ltd [2002] 3 All ER 305 applied; Barker v Corus UK Ltd; Murray v British Shipbuilders (Hydrodynamics) Ltd; Patterson v Smiths Dock Ltd [2006] All ER (D) 23 (May) applied; Durham v BAI (Run Off) Ltd (in scheme of arrangement)  [2012] All ER (D) 201 (Mar) applied; Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] All ER (D) 92 (Jan) considered; Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [2001] All ER (D) 33 (Jul) considered; Drake Insurance plc v Provident Insurance plc [2003] All ER (D) 307 (Dec) considered; Socimer International Bank Ltd (in liq) v Standard Bank London Ltd [2008] All ER (D) 331 (Feb) considered; Wasa International Insurance Co Ltd v Lexington Insurance Co; AGF Insurance Ltd v Lexington Insurance Co [2009] All ER (D) 328 (Jul) considered; Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust [2013] All ER (D) 200 (Mar) considered; Braganza v BP Shipping Ltd; The British Unity [2015] All ER (D) 185 (Mar) considered; Zurich Insurance plc UK Branch v International Energy Group Ltd [2015] All ER (D) 170 (May) considered; Versloot Dredging BV v HDI Gerling Industrie Versicherung AG; The DC Merwestone [2016] All ER (D) 92 (Jul) considered.

(2) Whether there was any scope for a duty of good faith when principles of contribution and recoupment were available to the reinsurer.

The Equitas method of calculating the rights and contribution, namely, that rights of contribution and recoupment would be calculated in each year from the ground up, just as if a proportionate part of the claim had been presented under each reinsurance policy, was correct. In light of that conclusion, there was no conflict between the application of those principles and the existence of a duty of good faith. The argument that the implication of such a duty was unnecessary if principles of contribution and recoupment were available to the reinsurers was not well founded (see [75], [129] of the judgment). 

Barker v Corus UK Ltd; Murray v British Shipbuilders (Hydrodynamics) Ltd; Patterson v Smiths Dock Ltd [2006] All ER (D) 23 (May) applied; Napier and Ettrick (Lord) v RF Kershaw Ltd [1993] 1 All ER 385 considered; National Farmers Union Mutual Insurance Society Ltd v HSBC Insurance (UK) lTD [2010] All ER (D) 111 (Apr) considered; Zurich Insurance plc UK Branch v International Energy Group Ltd [2015] All ER (D) 170 (May) considered.

Colin Edelman QC and Keir Howie (instructed by Norton Rose Fulbright LLP) for Equitas.

Alistair Schaff QC and Tim Kenefick (instructed by Cooley (UK) LLP) for MMI.

Paul Mclachlan - Barrister.