• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

  • About
    • Events
  • Articles
    • Treaty Tips
    • Special Focus
    • Market
  • Contact
  • Exclusive Content
    • Blog Staff Picks
    • Cat Risks
    • Regulatory Modernization
    • Webinars
  • Subscribe
You are here: Home / Arbitration / Court Decisions / U.K. Court of Appeal Prohibits “Spiking” in Mesothelioma Cases in Win for Reinsurers

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

June 4, 2019 by Brendan Gooley

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).

Filed Under: Arbitration / Court Decisions, Reinsurance Claims, UK Court Opinions

Primary Sidebar

Carlton Fields Logo

A blog focused on reinsurance and arbitration law and practice by the attorneys of Carlton Fields.

Focused Topics

Hot Topics

Read the results of Artemis’ latest survey of reinsurance market professionals concerning the state of the market and their intentions for 2019.

Recent Updates

Market (1/27/2019)
Articles (1/2/2019)

See our advanced search tips.

Subscribe

If you would like to receive updates to Reinsurance Focus® by email, visit our Subscription page.
© 2008–2025 Carlton Fields, P.A. · Carlton Fields practices law in California as Carlton Fields, LLP · Disclaimers and Conditions of Use

Reinsurance Focus® is a registered service mark of Carlton Fields. All Rights Reserved.

Please send comments and questions to the Reinsurance Focus Administrators

Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please contact us. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites. This site may be considered attorney advertising in some jurisdictions.