The following article is taken from ICLG. Click here to go to the original article.

Norton Rose Fulbright (NRF) has won a rare England and Wales Court of Appeal victory against an arbitration award, as the case heads to the Supreme Court.

NRF recently advised insurance firm Equitas in a long-running reinsurance dispute related to the insurance treatment of claims for damages arising out of mesothelioma liabilities, an asbestos exposure-related lung cancer.

At issue were the insurance aspects of what Lord Justice Males said were “whether and how liability should be apportioned between employers when there could be many employers over a period of years, any one of whom might have been responsible for the critical exposure”, in such cases.

As Males LJ explained: “If an employer had a series of annual employers’ liability policies, perhaps with different insurers, and perhaps some years when there was no insurance in place, which policy responded to the loss and how should the loss be apportioned between the various insurers on risk or (in cases [in] a period during which an employer had no insurance) between the insurers and the employer?”

The case was one of a long series of appellate rulings on the relationship between claims against employers and insurers, and whether they fell under the employer’s liability insurance or the reinsurers, in this case, for excess of loss. Past precedents have led to acknowledged distortions in the law to give justice to the victims of mesothelioma.

As made clear in a briefing by 7 King’s Bench Walk (7KBW), whose counsel acted for both claimants and defendants, a previous United Kingdom Supreme Court ruling in 2015 found that where an employer was liable for such a claim, that defendant could contractually recover the whole of its losses from its employer’s liability insurance; in insurance parlance, ‘spiking’ the whole of the claim to the insurer on notice while the liability was live.

That ‘spiked’ insurer then acquired the right to claim off other insurers similarly at risk in the same period, as well as the defendant itself, where that company was held to be self-insured in industry parlance.

In this case, the defendant, Municipal Mutual Insurance (MMI) changed the way it calculated claims. The choice before the court was a technical one. Should MMI be able to present such claims on a pro rata, time-on-risk basis and thus spread the claims out over all the years it had acted as a reinsurer? Or was it allowed to ‘spike’ such claims into a single year regardless of how long it had been on risk for the claim?

Having refused to pay the ‘spiked’ reinsurance claims, arbitration proceedings commenced in 2013 between the two insurers. The defendant said the change of policy was justified on the basis that it had not settled the claims against any one particular insurance policy, which meant each policy on risk was wholly liable for the claim during the time the defendant was liable under the policy.

MMI was represented by Alistair Schaff QC and Timothy Kenefick of 7KBW, instructed by Cooley, while Equitas was represented by Colin Edelman QC of Devereux Chambers and Keir Howie of 7KBW, who were instructed by NRF.

Lord Justice Flaux, sitting as a judge-arbitrator, agreed with MMI’s calculation. Equitas appealed to the England and Wales Court of Appeal on the question of how the reinsurance claims should be considered. Having been granted leave to appeal, Lord Justice Patten, Lord Justice Leggatt and Males LJ heard the case and ruled in favour of Equitas.

The Court of Appeal held that the reinsured party needed to present such claims without being arbitrary, irrational or capricious, consistent with the principle of good faith, a duty which was implied into the reinsurance contracts, thus spreading the risks.

Both Leggatt LJ and Males LJ, who delivered considered judgments, accepted their decision was a complex one, but as Males LJ argued, citing Lord Mance in the Supreme Court: “‘A principled solution must be found, even if it involves striking new ground’” and that “‘the courts have made it incumbent on themselves to reach a solution representing a fair balance of the interests of victims, insureds and insurers’”, to which Males LJ noted that he would “add ‘reinsurers’”.

Michelle George, who led the case for NRF with Jon Ogle commented in a statement: “This is a welcome development for Equitas as well as a landmark decision for the reinsurance market. The court has taken a pragmatic and straightforward approach to a complex set of issues,” noting that the judgment provides “clear guidance as to how all mesothelioma reinsurance claims should be handled going forward”.

Others, however, argued that the ruling has arguably led to a distinction to the way in which different insurance contracts treated the risk.

On the one hand, employer’s liability claims can now be ‘spiked’, under the original insurance contract to a year of that insurer’s choice. But on the other, a reinsurance claim would have to be spread across different years – with a deductible for each applicable year – which 7KBW called in a firm blog post a “fundamental disconnect between the way in which mesothelioma claims fall to be paid at the reinsurance level and the way in which they fall to be paid at the insurance level”.

Leave to appeal to the Supreme Court was granted in May this year, with a ruling likely next year.