The Court of Appeal in the United Kingdom has handed down judgment in the case of Equitas Insurance Limited v Municipal Mutual Insurance Limited - the first reinsurance case before the courts to consider the presentation of reinsurance claims arising out of mesothelioma liabilities in the context of the Fairchild enclave.
This case is the latest line of cases arising out of the House of Lords decision in Fairchild v Glenhaven Funeral Services Ltd  UKHL 22, where the court held that the appropriate test for causation for mesothelioma victims should not be the standard ‘but for’ test but rather one of a ‘material contribution to the risk of injury’. This so called ‘Fairchild enclave’ has resulted in the court confirming that any Employers’ Liability insurer on-risk during a period in which a mesothelioma victim is exposed to asbestos is 100 percent liable for the victim’s claim.
The Court of Appeal’s decision dates back to an arbitration instigated by MMI in 2013, after MMI sought to ‘spike’ mesothelioma claims in to a single reinsurance year of its choosing irrespective of the number of years that the victim was exposed to asbestos, rather than the usual practice of allocating claims on a pro rata, ‘time on risk’ basis. MMI argued that such an approach was justified as MMI had not allocated claims to a particular insurance policy and each insurance policy on risk during the exposure period was 100 percent liable for the claim.
If MMI could spike, an issue also arose as to how recoupment and contribution rights should be calculated. The parties had agreed that if MMI could spike, such rights exist in a reinsurance context (having been decided upon at the insurance level by the Supreme Court in IEGL v. Zurich  AC 509), but MMI argued that such rights should be calculated on an ‘independent liability’ basis, which would result in MMI retaining a single retention irrespective of the number of years of exposure. Equitas’ position was that it should be calculated from the ground up and therefore MMI would bear a retention in each year of exposure.
Lord Justice Flaux, sitting as a judge-arbitrator, decided that (i) MMI was entitled to ‘spike’ claims into a reinsurance year of its choosing; and (ii) contribution and recoupment calculations should apply on an ‘Independent liability’ basis.
The Court of Appeal granted Equitas permission to appeal under s.69 of the Arbitration Act 1969. The appeal was heard last month and the Court of Appeal has unanimously overturned the award of Flaux LJ and in so doing has determined that MMI is not free to arbitrarily choose a single reinsurance year to spike its claim. Rather, MMI is obliged under the doctrine of good faith to present claims on a time on risk basis unless there is some other rational basis for ascertaining the contribution to the risk in each triggered policy year.
As a result, the issue of contribution and recoupment falls away. However, the court did state that if it is held to be wrong on the issue of spiking, Equitas’ method of calculating from the ground up should be applied.