Equitas Insurance Ltd v Municipal Mutual Insurance Ltd

A liability insurer settling an unallocated mesothelioma claim arising across several annual policies must present its outward reinsurance claims by reference to each policy year’s contribution to the risk. Time on risk is the normal measure, unless another rational basis, such as differing intensity of exposure, applies.

Although each triggered reinsurance is prima facie liable for the whole ultimate net loss, the reinsured’s fortuitous power to choose a year is constrained by an implied obligation of good faith. The choice must not be arbitrary, irrational or capricious. If that conclusion is wrong and a claim may be spiked to one year, equitable contribution and recoupment must be calculated from the ground up, respecting each annual retention and the attachment of successive reinsurance layers.

Municipal Mutual Insurance Ltd insured employers against liability for bodily injury and disease under annual employers’ liability policies. It reinsured those liabilities under annual excess-of-loss contracts whose liabilities were transferred to Equitas Insurance Ltd. Municipal Mutual settled mesothelioma claims without allocating each settlement among the policy years in which asbestos exposure occurred.

Municipal Mutual initially allocated outward claims among its reinsurances by time on risk. It later claimed the whole settlement under whichever triggered reinsurance year produced the best recovery, a practice described as “spiking”. A judge-arbitrator held that this was contractually permissible, subject to contribution and recoupment.

On an appeal under section 69 of the Arbitration Act 1996, the central questions were whether the settlements had to be treated as proportionately allocated, whether good faith required proportionate presentation, and how contribution and recoupment should be calculated if spiking were permitted.

1. Appeal allowed. The settlements could not be deemed to have been allocated among annual insurance policies by time on risk. Each relevant insurance policy had been liable for the whole claim, and each liability had been discharged by the unallocated settlement. Accordingly, each corresponding reinsurance was prima facie liable for the whole ultimate net loss. Neither the “real basis of settlement” authorities nor an implied allocation term justified altering that contractual analysis.

2. Nevertheless, the reinsured’s choice of the year to which it presented its claim was constrained by an implied obligation of good faith. Whether a contractual choice is absolute depends on construction of the contract in context. It cannot be assumed merely because the express wording confers a right. Within the Fairchild enclave, the power to spike was fortuitous, unforeseeable when the annual contracts were made, inconsistent with the relationship between premium, period and risk, and capable of being exercised amid a conflict of interest and informational imbalance.

3. The implied term required claims to be presented by reference to each triggered year’s contribution to the risk. Time on risk was the normal measure. A different allocation could be adopted where a rational basis existed, such as materially different intensity or nature of exposure. An evaluative allocation would be challengeable only if it had not been made honestly and reasonably. The term was specific to reinsurance within the Fairchild enclave because the policy of securing full compensation for mesothelioma victims, which justified the approach at the insurance level, did not require spiking at the reinsurance level.

4. The ordinary post-contractual duty of utmost good faith in insurance law did not supply this constraint. That doctrine had been confined by The Star Sea and Versloot Dredging. The relevant implication instead arose from the established contractual doctrine controlling the abuse of powers and choices, as illustrated by Braganza, Socimer and Gan Insurance.

5. It was therefore unnecessary to determine contribution and recoupment. If the good-faith conclusion were wrong, however, the Equitas method would apply. Contribution would be calculated from the ground up by each year’s contribution to risk. Municipal Mutual would bear the applicable retention in every year, and higher layers would contribute only after the relevant retention and lower layers had been exhausted.

1. Court of Appeal (Civil Division): Allowed Equitas’s appeal and held that good faith required outward claims to be apportioned among triggered reinsurance years by contribution to risk, normally time on risk. The court also determined the alternative basis for contribution and recoupment.

2. Court of Appeal (permission): Permission to appeal was granted because the questions were of general public importance: [2018] EWCA Civ 991.

3. Arbitration: Flaux LJ, sitting as judge-arbitrator under section 93 of the Arbitration Act 1996, held that Municipal Mutual could present the whole settlement to any triggered reinsurance year, subject to contribution and recoupment.