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UK Court Opinions

U.K. Court of Appeal Prohibits “Spiking” in Mesothelioma Cases in Win for Reinsurers

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In a closely watched case, the Court of Appeal of England and Wales has given reinsurers a win with respect to reinsurance claims related to mesothelioma and other asbestos-related diseases. The decision bars insurers from engaging in “spiking.” Under that practice, insurers were making a single reinsurance claim for the entire loss to an injured employee under a single reinsurance policy of their choosing rather than allocating the loss on a pro rata basis between the various policy years in which the employee was exposed to asbestos. Prohibiting “spiking” is a significant win for reinsurers.

The decision stemmed from a dispute between insurer Municipal Mutual Insurance Limited (MMI) and reinsurer Equitas Insurance Limited.

For decades, MMI has issued employers’ liability (EL) policies to insured entities on an annual basis. Many of the entities insured by MMI faced claims from their employees for mesothelioma and other diseases related to exposure to asbestos in the workplace. Because of unique developments in the law of the United Kingdom regarding asbestos litigation, employees who made such claims did not need to prove which employer caused the critical exposure or the year in which the critical exposure occurred. (Under the Fairchild jurisprudence, all employers who made a material contribution to the risk of mesothelioma are jointly and severally liable for the employee’s injury. Pursuant to an act of Parliament that reversed a Barker decision, an employee can recover their entire damages from any employer during the years in question.) As a result, MMI did not need to, nor did it, identify which policy provided coverage for a particular claim when it paid claims. Nor did MMI apportion the claims among policy years.

MMI reinsured its liability under its EL policies with Lloyd’s syndicates whose liabilities are currently held by Equitas. Unsurprisingly, MMI presented its claims for asbestos-related losses to Equitas initially on a pro rata basis whereby the loss was divided over the years the claimant was exposed to asbestos. However, after several years, MMI began presenting each claim under a single year of reinsurance. MMI claimed that, because each underlying insurance policy was liable in full for the loss, each claim could be presented to a single annual reinsurance policy of its choice, i.e., “spiking.” Spiking benefited MMI because it maximized its recovery. By spiking, MMI avoided multiple retentions, submitting claims to reinsurers who were insolvent and reducing paperwork and potential disputes. Spiking was detrimental to Equitas because, by MMI’s spiking, MMI had fewer retentions and was able to submit more to reinsurance, and Equitas could find itself paying for years it had not provided reinsurance.

Equitas and MMI arbitrated whether MMI could engage in “spiking.” A judge-arbitrator ruled in favor of MMI, agreeing that, because developments in the law made each annual EL policy liable for all of an insured’s loss, MMI had a contractual right to present its claim for reinsurance under any reinsurance policy year that corresponded to an EL policy year that was liable for the individual claimant’s loss. The judge-arbitrator further concluded, among other things, that even if MMI had a duty of good faith with respect to how it presented its reinsurance claims, MMI did not breach that duty because it had “expressly acknowledged that there was a need for equitable recoupment and contribution to redress any anomalies.”

Equitas obtained leave to appeal the judge-arbitrator’s decision.

The Court of Appeal reversed. The court rested its decision on the duty of good faith. (Notably, the court (and the judge-arbitrator) explained that the duty of good faith in New York differs significantly from the duty of good faith under the law of the United Kingdom.) Lord Justice Males, whose decision was joined by Lord Justice Leggatt (who also wrote a concurrence) and Lord Justice Patten, summarized his reasoning regarding the duty as follows:

In my judgment there are powerful reasons to support the implication of a term in the very specific reinsurance context existing within the Fairchild enclave that the insurer’s right to present its reinsurance claims must be exercised in a manner which is not arbitrary, irrational or capricious, and that in that context rationality requires that they be presented 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.

The reasons supporting applying the duty of good faith in that manner included the fact that “spiking is inconsistent with the presumed intentions and reasonable expectations of the parties at the time when the contracts were concluded,” which was long before the unique Fairchild jurisprudence that allowed MMI to choose between numerous policies existed.

The Court of Appeal therefore adopted the method proposed by Equitas: Reinsurance claims based on exposure in multiple policy years for which the insurer has not allocated its loss among the various policy years at issue must nevertheless be presented to the reinsurer on a pro rata basis for purposes of calculating the applicable reinsurance payment.

MMI will likely appeal the decision to the Supreme Court of the United Kingdom.

Assuming it stands, the Court of Appeal’s decision constitutes a significant win for reinsurers exposed to asbestos-related claims in the United Kingdom. Spreading reinsurance claims regarding asbestos injuries across multiple policy years will require compliance with multiple retentions and potentially mean that more than one reinsurer is involved in each claim.

Equitas Ins. Ltd. v. Municipal Mut. Ins. Ltd., [2019] EWCA Civ 718 (Apr. 17, 2019).

English Court Enjoins Washington State Court Action in Favor of Arbitration in London

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In a dispute involving a complex, multilayered excess insurance policy, the Commercial Court of the Queen’s Bench Division enjoined Weyerhaeuser, a Washington company, from suing Catlin Syndicate Limited, a London-based insurer, in Washington based on the parties’ agreement to arbitrate in London.

The “Layer 4 Policy” at the heart of the lawsuit provided that the choice of law and jurisdiction governing disputes under the contract would be “as per Lead Underlying Policy.” Endorsement 7 of the Lead Underlying Policy provided for “any dispute, controversy or claim arising out of or relating to the policy to be determined in London under the Arbitration Act 1996.” However, Endorsement 8 of the Lead Underlying Policy stated that Washington state law governed the policy, and Endorsement 9 provided that Catlin would “submit to the jurisdiction of any court of competent jurisdiction within the United States.” Significantly, however, Catlin’s submission to jurisdiction in the United States was “solely for the purpose of effectuating arbitration.” Therefore, the court held the result was dictated by Endorsement 7, which required the parties to arbitrate disputes in London.

The court gave great weight to the “commercial parties” involved in the dispute, finding that a conflict in drafting “could or should [not] lightly be attributed to commercial parties,” and “struggl[ing]” to see why “commercial parties” would provide for the “unusual” limits on arbitration advanced by Weyerhaeuser.

The court’s ruling was based on English law, but the court found the result would be the same under Washington law, as presented to the court via expert evidence. Although the court recognized that Washington’s adopted policy is “adverse to arbitration,” the court stated that an interpretation of the parties’ contract that “does not work commercially … weigh[s] strongly against” a finding that Washington state policy should alter the parties’ agreement.

Catlin Syndicate Limited v. Weyerhauser Company, No. CL-2018-000292, [2018] EWHC 3609 (Comm) (Dec. 21, 2018).

English High Court Refuses to Set Aside an Order for Enforcement of an International Arbitration Award

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This case relates to a dispute between Eastern European Engineering Ltd. (“EEEL”) and Vijay Construction (Proprietary) Ltd. (“VCL”), both of which are incorporated in the Seychelles, arising out of the construction of a hotel resort and spa. In 2011, the parties had entered into six materially identical contracts. Disputes arose and EEEL eventually terminated the contracts. EEEL referred the disputes to an International Chamber of Commerce (“ICC”) arbitration seated in Paris. A sole arbitrator was appointed, who issued an award in November 2014 in EEEL’s favor (the “Award”).

VCL challenged the Award in the French courts on three grounds. The French court dismissed VCL’s challenge. Although VCL initially appealed that decision, it did not purse the appeal and it was subsequently dismissed in May 2017. Concurrently, in January 2015, VCL also initiated proceedings in the Seychelles, seeking to set aside the Award on essentially the same grounds as those on which the challenges were based in the French proceedings. In April 2017, the Seychellois court dismissed all of VCL’s challenges and held that the Award was enforceable. VCL, however, successfully appealed that decision because, under Seychellois law, there is no power to order enforcement on the basis that the New York Convention had been previously repudiated by the Seychelles. The merits of the substantive grounds of the lower court’s decision were not considered in the appeal.

In August 2015, EEEL successfully obtained an order from the English High Court to enforce the Award in England and Wales and to enter judgment against VCL (the “August 2015 Order”). In October 2015, VCL applied under section 103 of the Arbitration Act 1996 to set aside the August 2015 Order. That application was stayed while the French and the Seychellois proceedings were pending. EEEL argued that VCL’s application should be denied because of issue estoppel and public policy on finality. As to issue estoppel, EEEL argued that the conditions were satisfied because the decision of the French court was a final merits decision in a court of competent jurisdiction between the same parties.

The English High Court denied VCL’s application to set aside the August 15 Order. First, the English court agreed that, in relation to VCL’s challenge based on jurisdiction, VCL was estopped as VCL’s argument in the English proceeding appeared to be exactly the same as that which was made in the French proceeding. As to VCL’s challenge on the ground of procedural unfairness, the court found that VCL’s argument was “slightly different” in the English proceeding, and thus the court considered the merits of the challenges. In considering each of VCL’s challenges, the court found that they failed. Thus, the English court did not have to reach the question of public policy on finality. It, however, noted that it would “have concluded that the balance came down in favor of upholding the public policy on finality,” explaining that the facts here, where VCL had sought to raise substantially the same challenges to the Award in two other courts, one of which had a full evidentiary hearing, “are circumstances which would weigh very heavily against allowing VCL a third challenge.”

Eastern European Engineering Ltd. v. Vijay Construction (Proprietary) Ltd., [2018] EWHC 2713 (Comm) (Oct. 11, 2018).

This post written by Jeanne Kohler.

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English Court Holds that Discovery Given by U.S. Citizen Pursuant to a 28 U.S.C. § 1782 Order can be Used in London Arbitrations

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This English court case involved arguments by Dreymoor Fertilisers Overseas Pte. Ltd. (“Dreymoor”), a Singapore trading company, to prevent EuroChem Trading GmbH, a Swiss company, and JSC MCC EuroChem, Russia’s largest fertilizer company (collectively, EuroChem”), from using information obtained through a U.S. court order under 28 U.S.C. §1782 (the “1782 Order”), which allows a federal court to order a person residing in its district to provide testimony or documents “for use in a proceeding in a foreign or international tribunal.”

EuroChem had obtained the 1782 Order in Tennessee federal court in order to obtain information to be used in litigation against Dreymoor proceeding in the British Virgin Islands and in Cyprus. EuroChem also intended to use the information obtained pursuant to the 1782 Order in two arbitrations proceeding in London. In all of the cases, EuroChem alleges that Dreymoor paid bribes to secure various fertilizer supply and sales contracts. Dreymoor sought an injunction in an English court, restraining EuroChem from enforcing the 1782 Order with respect to the London arbitrations, which was originally granted.

However, recently, on an application to continue the injunction, an English court found that EuroChem has a legitimate interest in obtaining the evidence in question for use in the London arbitrations. Thus, the court held “[w]hether enforcement of the 1782 Order would constitute unconscionable conduct requires an overall evaluation,” and “[i]n my judgment, looking at the circumstances of this case as a whole and with particular regard to the factors which I have identified, many of which point strongly against the grant of an injunction, it would not.” Thus, the English court refused to continue the injunction.

Dreymoor Fertilisers Overseas PTE Ltd. v. EuroChem Trading GMBH, [2018] EWHC 2267 (Comm. Aug. 24, 2018).

This post written by Jeanne Kohler.

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In Deepwater Horizon Arbitration, UK Appellate Court Declines to Remove Arbitrator with Multiple Related Appointments

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The underlying case concerned the 2010 explosion and fire on the Deepwater Horizon oil rig in the Gulf of Mexico, when a well which was in the process of being plugged and temporarily abandoned, experienced a blow out. The appellant, Halliburton, provided cementing and well-monitoring services to BP in relation to the temporary abandonment of the well. Halliburton made a claim on its liability insurance against Chubb; however, Chubb refused to pay Halliburton’s claim, contending, among other things, that Halliburton’s settlement of the claims was not reasonable and that Chubb had not consented to the settlement.

At the coverage dispute arbitration between Halliburton and Chubb, two arbitrators were appointed on behalf of Halliburton and Chubb respectively. The third arbitrator, however, was Chubb’s preferred candidate. While the third arbitrator disclosed to Halliburton that he had acted, and was currently acting, as an arbitrator in multiple arbitrations involving Chubb, he did not disclose that he was serving as an arbitrator appointed by Chubb in two other disputes involving Transocean, the owner of the rig in this case. As such, in both instances, the third arbitrator heard similar or identical arguments by Chubb. Upon learning of this information, Halliburton issued a claim form seeking that the third arbitrator be removed. But the claim form was subsequently dismissed, and Chubb went on to win the arbitration against Halliburton.

Among several issues on appeal was “[w]hether and to what extent an arbitrator may accept appointments in multiple references concerning the same or overlapping subject matter with only one common party without thereby giving rise to an appearance of bias.” On this question, the Court reasoned that “the mere fact that an arbitrator accepts appointments in multiple references concerning the same or overlapping subject matter with only one common party does not of itself give rise to an appearance of bias.” With regard to the requirement, if any, of disclosure, the Court reiterated the English law principle that the required disclosure was “facts or circumstances which would or might lead the fair-minded and informed observer, having considered the facts, to conclude that there was a real possibility that the arbitrator was biased.”

Applying these principles, the court was persuaded that “(1) the non-disclosed circumstance does not in itself justify an inference of apparent bias; (2) disclosure ought to have been made, but the omission was accidental rather than deliberate; (3) the very limited degree of overlap means that this is not a case where overlapping issues should give rise to any significant concerns; (4) the fair-minded and informed observer would not consider that mere oversight in such circumstances would give rise to justifiable doubts as to impartiality; and (5) there is no substance in Halliburton’s criticisms of [the third arbitrator’s] conduct after the non-disclosure was challenged or in the other heads of complaint raised by them.” The court then affirmed the judgment, denied Halliburton’s challenge, and declined to find a real possibility that the third arbitrator was biased. Halliburton Co. v. Chubb Bermuda Ins. Co., Case No. [2018] EWCA Civ 817 (Royal Courts of Justice, Apr. 19, 2018).

This post written by Gail Jankowski.

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