“Spiking” of asbestos reinsurance policies: an attempt to remedy the anomaly
This article was originally published in the Journal of Personal Injury Law, Issue 4 2019.
Mesothelioma claims have never been simple but most of the issues have been long settled in the courts allowing parties to have the certainty required to deal with these complex claims. However, there is no doubt that the Fairchild decision and subsequently, the Compensation Act 2006 created substantial anomalies in the law. What started as an attempt to provide a secure remedy for innocent employees exposed to asbestos has resulted in unforeseen consequences in liability insurance and more recently into reinsurance.
It was previously held in Zurich v IEG that an employer is entitled to recover 100% of its loss from (or “spike”) an individual employers liability insurance policy which was on risk at any time during the period of asbestos exposure. The issue of reinsurance was not covered by that judgment.
The issue of “spiking” of reinsurance recoveries in asbestos claims had been one of the few unresolved issues within this field with no prior authority until Equitas Insurance Ltd v Municipal Mutual Insurance Ltd. The Court of Appeal held in this case, that claims to reinsurers must be presented using a time on risk (apportioned) basis, as opposed to allowing an insurer the choice of applying the full claim to a specific reinsurer policy year. However, the aim of correcting anomalies to return the law to the fundamental common law principles seems to have resulted in yet another anomaly in the way the decision has been reached.
Special treatment for mesothelioma claims
Mesothelioma cases have long been treated differently due to the unique issues involved in these claims. There are rules which apply exclusively to asbestos and mesothelioma within the Civil Procedure Rules (“CPR”) PD 3D, a specific section in the Disease Protocol covering mesothelioma, specialist high court lists heard by Masters and an exemption from the Jackson reforms.
The current litigation has its roots in 2002 when the House of Lords made the ground-breaking decision in Fairchild v Glenhaven Funeral Services. A new rule was created to compensate innocent victims of mesothelioma; the employee only had to show the employer exposed the victim to asbestos (be that in negligence or breach of a statutory duty) and then show the symptoms that developed as result may have been caused by this exposure. This meant the civil burden of proof of proving on the balance of probability did not apply to causation of the mesothelioma injury. This was later affirmed by the Compensation Act
2006, which gave statutory force to making an employer liable for the entirety of the damage caused by exposure resulting from their employment. This is despite the employee being exposed to asbestos elsewhere and it not being determined which exposure has actually caused the illness. The Act specified joint and several liability. The primary purpose of the courts and parliament deciding in this way was to prevent the injustice to victims of this fatal disease being left without recourse to compensation. Mesothelioma can theoretically be caused by a single fibre. However, medical science was not able to, (and remains unable to,) distinguish which of the individual asbestos fibres ultimately triggered the cancerous change many years after the employment.
“Spiking” of claims
Where joint and several liability applies, there is nothing to prevent employers or insurers who have settled the claim then seeking proportionate contributions from other insurers or uninsured solvent employers. Equitas v MMI had a similar issue at its heart; whether an insurer which had been on risk for the entire period could seek full reimbursement from a reinsurer who only covered part of the period.
The background to this case is Municipal Mutual Insurance (MMI) provided employers liability (EL) cover to include disease with individual annual policies and each policy was without limit and with no deductible. The appellant (Equitas) had liabilities transferred to them on policies where MMI had reinsured the liabilities with Lloyd’s syndicates. These policies had various layers of reinsurance involving other reinsurers too. The employers insured by MMI had many asbestos claims and each annual policy was fully liable for each claim. Even where multiple years were involved, thus multiple policies affected, no apportionment was undertaken by MMI and they simply paid in full. Where there were other insurers, or the employer had not taken out insurance, then MMI would seek contributions using a time on risk basis to apportion.
The dispute in this case, arose when MMI started to seek recovery of the whole claim from one year of reinsurance on the basis that each policy was liable for the entire sum. Therefore 100% of the claim was presented to a specific reinsurance policy year and thus would only affect a single reinsurer. MMI would attempt a claim against the reinsurers in the first year of the policy where exposure took place and if this did not yield a full recovery then MMI would claim against the reinsurer of the year where they could get the fullest recovery. Equitas disputed this method and argued for the time on risk apportionment that used to take place.
Flaux LJ sitting as a Judge-Arbitrator held spiking to be allowed at reinsurers level. However, the Court of Appeal held that whilst insurers could spike a specific reinsurance year, the same did not apply to reinsurers where apportionment on a time-on-risk basis would be required. This was because a duty of good faith is to be implied into reinsurance contracts meaning the EL insurer is to spread any given claim across all relevant years exposed.
The 2002 Fairchild decision involved the creation of a special rule to ensure victims were not without a remedy as the task of proving causation would have left innocent employees unable to prove the claim. The Compensation Act 2006 reflected the public policy of ensuring victims were protected. In between them was the decision in Barker v Corus UK, where the House of Lords had attempted to mitigate the departure from common law, They did this by holding any liability held under the Fairchild rule is proportionate to the defendant’s contribution to the risk of developing mesothelioma, this being measured by the duration and intensity of asbestos exposure involved in that employment. This was found using the principles of common law. The parliamentary intervention by use of the 2006 Act rejected this and again created an anomaly as employers and insurers were having to again meet claims where the claimants were unable to prove causation on the balance of probability.
In the Equitas case, the Court of Appeal aimed to remedy this anomaly; “it is desirable that the anomalies should be corrected and the law should return to the fundamental principles of common law”. As a result of the unique situation created by Fairchild, the court wished to revert to established common law principles. The case throws up interesting arguments. However, the court ended up using a contradictory method in getting there. In conventional court judgments, the judge will grapple with analysing the facts, the law, relevant evidence and submissions then applying the law to the facts to reach a conclusion. Most unusually, the Court of Appeal decided on the end goal before working backwards to meet this objective. They cited the reason for this being the unprecedented consequences created by the Fairchild exception. This is hardly in keeping with trying to preserve the common law principles desired but reflects the complex nature of asbestos claims.
Effects of decision
Nevertheless, what is the implication of this decision for EL insurers? The original employer is allowed to spike at the insurance level, meaning the employer could pick which insurance policy over the relevant exposure period would be triggered to meet the full mesothelioma claim. If there is a deductible on that policy, it would only fall to be met by the employer once.
However, spiking is not allowed at reinsurers level meaning affected EL insurers must then present separate claims to each relevant year of reinsurance. If the exposure is alleged over say 20 years, and each year was separately reinsured, then there is now a burdensome task of presenting potentially 20 claims to each of the reinsurers. The EL insurer is also to tolerate the deductible for each year, which could force EL insurers to consider the economics of attempting full recovery. 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.
It seems a strange outcome and arguably does not reflect the aim that had been set out in removing anomalies. The contradictory approach between insurers and reinsurers gave way to yet another anomaly. However, it is not without logic:
- It cannot be statistically correct for critical exposure being limited to a single policy year if an employer received many claims in that year.
- The risk undertaken by insurers/reinsurers would be made unpredictable if an insured were to be able to choose the period/policy to which a loss attaches.
- Even reinsurance markets require certainty and predictability in order to be able to operate.
- Reinsurers would struggle to obtain contributions where only the insurer (MMI in this case) would have exclusive knowledge on the insurance arrangements in each relevant year.
- Common law operates on the principle of fairness, which extends beyond innocent victims to insurers and reinsurers.
It is important to consider how the decision has been reached. The Court of Appeal refused to impose deemed allocation on MMI, whereby it would be deemed that MMI’s settlement of claims must be deemed on a time on risk basis, (as this would have contradicted with spiking being allowed at the insurance level as held by the Supreme Court in Zurich Plc v IEG). If deemed allocation was allowed then it would have introduced yet more distortions into insurance/reinsurance law. The eventual decision came from the novel principle of “good faith” being implied into the contract. This duty of “good faith” is implied into the reinsurance contracts and requires 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. The rational approach was deemed to be presenting on a time on risk basis, unless there was evidence of differing intensity of exposure. When entering a contract, a reinsurer would not reasonably expect spiking to occur. One may argue that even the reinsurers have to take into account of developing law but it was deemed this would be harsh to impose as the insurers would not foresee the development in asbestos law over 30 years on from the contract. Hence spiking at reinsurance level was disallowed due to the unprecedented development of the Fairchild exception being created, reminding us of the special and unique way mesothelioma claims are dealt with by the courts.
Permission has been granted for appeal to the Supreme Court. That judgment is expected early next year, thus paving the way to finalising one of the last uncertain issues involving asbestos claims. The case raises issues of wider importance as spiking is allowed for insurers but the current decision does not allow it for reinsurers. Additionally, the way the duty of good has been applied so generously to insurers and reinsurers is also fundamentally different to the position to date.
Issues of public policy are often relevant as it is often the reason for departing from conventional method and common law in mesothelioma claims. The introduction of the Fairchild exception and the Compensation Act had their origins in public policy: ensuring innocent victims are protected by ensuring they have access to compensation. The decision of Zurich v IEG had a similar aim where insurers only covering part of the exposure period were held to be liable for the entire claim. Hence, victims are assured are assured of a remedy as there would be a solvent employer, or a solvent insurer, or a statutory/industry compensation scheme. The Equitas case has no bearings on victims and there is no obvious public policy reason that comes into play that justifies departing from established legal principles. On the one hand, it is concluded that spiking is allowed under contractual rights, yet on the other hand the duty of good faith is extended much further than before resulting in spiking at reinsurance level being disallowed.
The constant departure from established authorities and procedure and using novel approaches reflects the complexity of asbestos claims. The fact that the matter going to the Supreme Court is not necessarily the end of the matter. Many previous asbestos cases have gone to the highest court. Arguably the decision in Zurich v IEG itself created this anomaly in allowing spiking to occur in EL claims without addressing reinsurance issues. There are billions of pounds at stake in the insurance industry on the outcome of these decisions. Despite all the best intentions, the unceasing battle in mesothelioma claims of having to weigh up many competing interests in a fair and principled way seems to have the effect of the Pandora’s box being opened at some point and yet another problem emerging.
This article was originally published in the Journal of Personal Injury Law, Issue 4 2019.