Out-Law Legal Update | 05 Jun 2019 | 3:46 pm | 4 min. read
LEGAL UPDATE: Insurers are not permitted to 'spike' mesothelioma-related reinsurance claims arising under employers' liability policies, the Court of Appeal in the UK has ruled.
· Insurers can't 'spike' mesothelioma reinsurance claims
· They must present them on a pro-rata, time-on-risk basis
· Court says: law should return "to a more orthodox approach"
Spiking is where insurers select any year of reinsurance cover under which to make their reinsurance claim rather than selecting the year in which the loss is incurred. As a result of the decision, insurers will now have to present reinsurance claims to their reinsurers on a pro-rata, time on risk basis in the absence of any allocation of loss to a specific year of exposure.
The decision in the case between Equitas
Insurance and Municipal Mutual Insurance provides clarity for those involved in handling reinsurance
mesothelioma claims arising under employers' liability policies. This was
an unusual case because the Court was asked to consider if a reinsurer could be
liable to compensate an insurer in full under an insurer's reinsurance claim. Previous
decisions dealt with insurance aspects only.
insurer, Municipal Mutual Insurance (MMI) had previously attempted to spike the reinsurer,
Equitas Insurance with mesothelioma-related reinsurance claims by selecting an
annual reinsurance policy under which to make the claims rather than by
presenting them on a pro-rata basis. A previous
Arbitral Tribunal decision had found that MMI was entitled to "spike"
at the reinsurance level and an arbitration award was made accordingly.
The Court of Appeal, in granting leave to appeal the award, considered that there were "questions of general public importance" which cast "serious doubt" over the Tribunal decision. The Court has now ruled that insurers are not allowed to 'spike' at the reinsurance level. Instead insurers must present the claims to its reinsurers on a pro-rata, time on risk basis.
The Court rejected MMI's argument that the relationship between an insured employer and its liability insurers ought to apply equally to the relationship between a liability insurer and its reinsurers. It found that it would be anomalous for a liability insurance underwritten for a specific period with a corresponding premium to end up covering losses from unpredictable risks which extend beyond that period.
that if "spiking" is permitted at the insurance level, it cannot be
contrary to a duty of good faith at the reinsurance level. In a claims
context, there is a duty not to act dishonestly in connection with the making
of a claim. Therefore, the presentation of the claim to one
reinsurance year, where there is a need for equitable recoupment and
contribution to redress any anomalies, could "not conceivably be said to
be in bad faith or Wednesbury
The COA recognised that although parties have a duty to act in good faith in a claims context, a new term should be implied at the reinsurance level which would require insurers to present reinsurance claims “in a manner which is not arbitrary, irrational or capricious”. The implied term would require insureds to present reinsurance claims: “by reference to each year's contribution to the risk, which will normally be measured by reference to time on risk unless in the particular circumstances there is a good reason (such as differing intensity of exposure) for some other basis of presentation”.
In response to MMI’s objections that it was contrary to principle to imply such a term at the reinsurance level but not at the insurance level, the Court said that there was a material distinction. It said: “at the insurance level, as already explained, such a term would risk subverting the policy of ensuring full compensation to victims, but that risk no longer exists or at any rate is minimal at the reinsurance level”. The Court also acknowledged that “it would be harsh to impose on a reinsurer who wrote an annual policy for (say) 1969 the risk of developments in the law affecting his liability which did not take place for another third of a century”. Importantly, the implied term would be specific to the context of mesothelioma claims and it would not have wider ramifications.
The Court's clear
intention was for the law as between insurer and reinsurer to "return in a
principled way to a more orthodox approach".
The decision in this case usefully sets out the legal position with
regard to employers and insurers' obligations for mesothelioma-related claims
before distinguishing the position in respect of the treatment of those claims
at a reinsurance level.
In a case between Fairchild and Glenhaven
Funeral Services the House of Lords
found that causation could be established if a particular employer had
materially increased the risk that a
victim would contract the disease. The Lords considered that it was unjust to deny the claimants a remedy in law when it
was not possible to prove on the balance of probabilities which employer, of a
number, was responsible for the exposure.
The Court of Appeal has reaffirmed in
the Equitas case that an employer who
has, in breach of duty, exposed a victim to asbestos, for however short a
period, is liable to fully compensate that individual. By virtue of the Compensation Act
2006, an employee is also at liberty
to choose which employer to sue in respect of the whole claim. The Act allows an employer to then pursue a claim
against another employer for contributory negligence, or a claim for joint
contributions from other employers.
An employer who becomes liable for asbestos exposure may make a
claim under its employer's liability insurance. As set out in a case between Zurich
and International Energy Group the insurer must then indemnify the employer for the whole
of the claim even if it is only insured for part of the period of the
employee's exposure. The law has developed such that while an insurer may end
up liable for the whole claim they can rely on the principles of
contribution to recoup losses from other
Although the Fairchild
case and the Compensation
Act 2006 had created special rules which ensured
claimants were appropriately compensated for mesothelioma claims, the Court of
Appeal's objective was for the law to return to the fundamental principles of
the common law: "Put shortly, once unorthodoxy has
served its purpose, we should revert to orthodoxy".
This decision emphasises that the law surrounding the treatment of mesothelioma-related claims in a liability insurance context generally, remains complex and continues to develop over time.
Nick Bradley and Sophia Hytiris are insurance law experts at Pinsent Masons, the law firm behind Out-Law.com