Allocation of Losses – Recent Developments in English Law Dr Keren Wu University of East Anglia

Equitas Insurance Ltd v Equitas Insurance Ltd v. Municipal Mutual Insurance Ltd [2019] EWCA Civ 718 Summary of facts: Underlying Employers’ Liability Insurance between 1 Jan 1950 and 31 Dec 1981, each on annual basis. MMI reinsured its liability with Lloyd’s syndicates, with annually varied retentions and various layers. Employer insureds have faced a large number of mesothelioma claims. As for inward claims, MMI settled without apportionment to particular years with a precise start of finish date of the exposure period; As for outwards claims, MMI initially presented claims on the basis of a time on risk allocation, but changed later so that it presented the whole claim to one year of reinsurance.

Questions of Law (1) Is the EL insurer obliged to present any outwards claim on a pro rata, time on risk basis either because of: A. the deemed allocation of losses (implied term) in each engaged policy on this basis; or B. the doctrine of good faith requires the claim to be presented on this basis. (2) If the EL insurer is not so obliged, then how to calculate the reinsurers’ rights of recoupment and contribution?

Time-on-risk allocation Municipal Mutual Insurance Ltd v. Sea Insurance Co Ltd [1998] EWCA Civ 946. One successive insurance contract from 1986 to 1989. 3 separate annual reinsurance contracts from Jun 1986 to Jun 1989. Losses occurred between Mar 1987 and Sep 1988. Inwards claims: all losses allocated to the underlying policy without doubt as the coverage was consecutive. Outwards claims: reinsurance contract only responds to losses occurring during the period of cover. “Straight line” approach adopted as to spread the underlying losses proportionately in each period of reinsurance cover.

Time-on-risk allocation Wasa International Insurance Co Ltd v. Lexington Insurance Co. [2009] UKHL 40. “service of suit” clause led to the uncertainty against the governing law of the insurance contracts. 36-month’s v. 50-year’s liability. Inwards claims: 50-year’s liability; Outward claims: 36-month’s liability. Ousting of back-to-back principle applies to the most fundamental terms of the reinsurance – duration of coverage.

Time-on-risk allocation Exclusion of American claims Intermediate layer: global risks Primary layer Self-Insured Retention Deductible Teal Assurance Company Ltd v. WR Berkley Insurance (Europe) Ltd [2013] UKSC 57. “Ground-up” allocation: following the chronological order that the claims were established and quantified.

Complexities within Fairchild enclave Fairchild v. Glenhaven Funeral Services Ltd [2002] UKHL 22: Negligent exposure to asbestos is a sufficient cause if it has materially increased the risk of contraction; Any employer is 100% liable. Barker v. Corus UK Ltd [2006] UKHL: Each employer should be proportionately liable according to the relative degree of contribution to the risk. Compensation Act 2006, s.3: Any person negligently causing the victim to be exposed to asbestos shall be liable for the whole of the damage caused to the victim by the disease.

Durham v. BAI (Run off) Ltd, Employers’ Liability Trigger Litigation [2012] UKSC 14. “Injury sustained”/“disease contracted”: cause-triggered “weaker” causation rather than a “new tort” causation. Every exposure giving rise to mesothelioma was a causation, and that it attracted 100% of the liability to the victim. Dissenting opinion: an insurer should not be bound to pay for liability arising outside the period of insurance.

Zurich Insurance PLC UK Branch v Zurich Insurance PLC UK Branch v. International Energy Group Ltd [2015] UKSC 33. 27-year’s employment. EL policies: EI for 2 years and Zurich for 6 years. 19 years uninsured. Two particular points: Governing law was the law of Guernsey, so that Compensation Act 2006 did not apply; Both insurers and the insured employer were all solvent.

Issue I: 100% liability going for any one of insurers? Unanimous: Barker remains good law. Majority: the employer insured was allowed to allocate the loss to any of the insurers in any year of cover (spiking), subject to the rights of pursuing contribution and recoupment. Minority: the employer was only liable for his contribution to the chance of causing the disease.

Issue II: the right of contribution Legal disguise: double insurance Majority: A broader view of “double insurance” should be taken under the new Fairchild context to adapt to meet the unique anomalies. The measurement of contribution in cross-year policies had to be time on risk. Minority: no legal basis for the extension of the concept of double insurance to the cross-year policies.

Issue III: the right of recoupment Controversies: Law of restitution: non-entitlement of restitution where the defendant was contractually entitled to the enrichment. Subrogation in insurance: the insurer can stand into the assured’s shoes to sue a third-party; “Self-insurance”: a concept when a person did not insure at all??

A review of the law at insurance level until IEG “Significant anomalies in the law”. “Intended as it was to ensure a remedy for victims of negligent exposure to asbestos.”: Either from a solvent employer; Or a solvent insurer; Or in cases where the insurer is insolvent, a statutory or industry compensation scheme. “Once unorthodoxy has served its purpose, we should revert to orthodoxy.” “Unnecessary to perpetuate them at the reinsurance level.” “Revert to the principles of the common law whereby liability should be apportioned in accordance with Barker by reference to contribution to risk.” “A principled solution must be found, even if it involves striking new ground.”

Equitas’ solution in summary: First: The deemed allocation (implied term) of inwards mesothelioma claims on time on risk basis would be a danger in seeking to counteract what is effectively one deeming provision (the weak causal link in Fairchild); The deemed allocation would also collide headlong with other fundamental principles: The nature of reinsurance is a form of insurance on the original subject matter insured (Wasa); Absence of any valid basis on which to distinguish the insurance and reinsurance contracts as a matter of construction; Therefore, MMI’s unallocated settlement of inwards claims were unproblematic and it had a contractual right to present its reinsurance claims to the policy year of its choice, BUT it’s not an “absolute” contractual right.

Equitas’ solution in summary: Secondly: Insurer’s right to present its reinsurance claims must be exercised in a manner which is not arbitrary, irrational or capricious. “Rationality” requires the claims to be presented by reference to each year’s contribution to the risk, which will normally be measured by reference to time on risk unless there is a good reason for some other basis of presentation. Spiking is inconsistent with the presumed intentions and reasonable expectations of the parties at the time when the contracts were concluded.

Equitas’ solution in summary: Thirdly: The rights of contribution and recoupment should be calculated in each year from the ground up. “The critical exposures to a group of victims will have occurred in a number of years, in each of which MMI agreed to bear a retention, so that it is unjust that only a single retention applies.” “The higher layer reinsurers agreed to participate only until the retention and any lower layers had been exhausted.” “The broad equitable principles which we must apply are sufficiently flexible in these circumstances to enable effect to be given to this method of calculation.” Therefore, the question of calculating the reinsurer’s rights of contribution and recoupment would not rise unless the implication of “good faith” as raised in the second point was wrong, in which case the above method should be applied.

Further thoughts The nature of reinsurance: whether a further insurance or liability insurance? The financial conditions of insurers: what if they are insolvent so that the victim is still not sufficiently compensated at the insurance level? The “good faith” in English law: a firm ground or not? New anomalies? A principled solution??

Thank you!