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Allocation of Losses – Recent Developments in English Law

This article examines complex legal issues surrounding allocation of losses in English law, focusing on cases like Equitas Insurance Ltd v. Municipal Mutual Insurance Ltd. Key topics include time-on-risk allocation, fair compensation, and insurer liability.

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Allocation of Losses – Recent Developments in English Law

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  1. AllocationofLosses–RecentDevelopmentsinEnglishLaw DrKerenWu UniversityofEastAnglia

  2. EquitasInsuranceLtdv.MunicipalMutualInsuranceLtd[2019]EWCACiv718EquitasInsuranceLtdv.MunicipalMutualInsuranceLtd[2019]EWCACiv718 • Summaryoffacts: • UnderlyingEmployers’LiabilityInsurancebetween1Jan1950and31Dec1981,eachonannualbasis. • MMIreinsureditsliabilitywithLloyd’ssyndicates,withannuallyvariedretentionsandvariouslayers. • Employerinsuredshavefacedalargenumberofmesotheliomaclaims. • Asforinwardclaims,MMIsettledwithoutapportionmenttoparticularyearswith aprecisestartoffinishdateoftheexposureperiod; • Asforoutwardsclaims,MMIinitiallypresentedclaimsonthebasisofatimeonriskallocation,butchangedlatersothatitpresentedthewholeclaimtooneyearofreinsurance.

  3. QuestionsofLaw • (1)IstheELinsurerobligedtopresentanyoutwardsclaimonaprorata,timeonriskbasiseitherbecauseof: • A.thedeemedallocationoflosses(impliedterm)ineachengagedpolicyonthisbasis; • or • B.thedoctrineofgoodfaithrequirestheclaimtobepresentedonthisbasis. • (2)IftheELinsurerisnotsoobliged,thenhowtocalculatethereinsurers’rightsofrecoupmentandcontribution?

  4. Time-on-riskallocation • MunicipalMutualInsuranceLtdv.SeaInsuranceCoLtd[1998]EWCACiv946. • Onesuccessiveinsurancecontractfrom1986to1989. • 3separateannualreinsurancecontractsfromJun1986toJun1989. • LossesoccurredbetweenMar1987andSep1988. • Inwardsclaims:alllossesallocatedtotheunderlyingpolicywithoutdoubtasthecoveragewasconsecutive. • Outwardsclaims:reinsurancecontractonlyrespondstolossesoccurringduringtheperiodofcover. • “Straightline”approachadoptedastospreadtheunderlyinglossesproportionatelyineachperiodofreinsurancecover.

  5. Time-on-riskallocation • WasaInternationalInsuranceCoLtdv.LexingtonInsuranceCo.[2009]UKHL40. • “serviceofsuit”clauseledtotheuncertaintyagainstthegoverninglawoftheinsurancecontracts. • 36-month’sv.50-year’sliability. • Inwardsclaims:50-year’sliability; • Outwardclaims:36-month’sliability. • Oustingofback-to-backprincipleappliestothemostfundamentaltermsofthereinsurance–durationofcoverage.

  6. Time-on-riskallocation • TealAssuranceCompanyLtdv.WRBerkleyInsurance(Europe)Ltd[2013]UKSC57. • “Ground-up”allocation:followingthechronologicalorderthattheclaimswereestablishedandquantified.

  7. ComplexitieswithinFairchildenclave • Fairchildv.GlenhavenFuneralServicesLtd[2002]UKHL22: • Negligentexposuretoasbestosisasufficientcauseifithasmateriallyincreasedtheriskofcontraction; • Anyemployeris100%liable. • Barkerv.CorusUKLtd[2006]UKHL: • Eachemployershouldbeproportionatelyliableaccordingtotherelativedegreeofcontributiontotherisk. • CompensationAct2006,s.3: • Anypersonnegligentlycausingthevictimtobeexposedtoasbestosshallbeliableforthewholeofthedamagecausedtothevictimbythedisease.

  8. Durhamv.BAI(Runoff)Ltd,Employers’LiabilityTriggerLitigation[2012]UKSC14.Durhamv.BAI(Runoff)Ltd,Employers’LiabilityTriggerLitigation[2012]UKSC14. • “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.

  9. ZurichInsurancePLCUKBranchv.InternationalEnergyGroupLtd[2015]UKSC33.ZurichInsurancePLCUKBranchv.InternationalEnergyGroupLtd[2015]UKSC33. • 27-year’semployment. • ELpolicies:EIfor2yearsandZurichfor6years. • 19yearsuninsured. • Twoparticularpoints: • GoverninglawwasthelawofGuernsey,sothatCompensationAct2006didnotapply; • Bothinsurersandtheinsuredemployerwereallsolvent.

  10. IssueI:100%liabilitygoingforanyoneofinsurers? • Unanimous:Barkerremainsgoodlaw. • Majority:theemployerinsuredwasallowedtoallocatethelosstoanyoftheinsurersinanyyearofcover(spiking),subjecttotherightsofpursuingcontributionandrecoupment. • Minority:theemployerwasonlyliableforhiscontributiontothechanceofcausingthedisease.

  11. IssueII:therightofcontribution • Legaldisguise:doubleinsurance • Majority:Abroaderviewof“doubleinsurance”shouldbetakenunderthenewFairchildcontexttoadapttomeettheuniqueanomalies.Themeasurementofcontributionincross-yearpolicieshadtobetimeonrisk. • Minority:nolegalbasisfortheextensionoftheconceptofdoubleinsurancetothecross-yearpolicies.

  12. IssueIII:therightofrecoupment • 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??

  13. AreviewofthelawatinsuranceleveluntilIEG • “Significantanomaliesinthelaw”. • “Intendedasitwastoensurearemedyforvictimsofnegligentexposuretoasbestos.”: • Eitherfromasolventemployer; • Orasolventinsurer; • Orincaseswheretheinsurerisinsolvent,astatutoryorindustrycompensationscheme. • “Onceunorthodoxyhasserveditspurpose,weshouldreverttoorthodoxy.” • “Unnecessarytoperpetuatethematthereinsurancelevel.” • “ReverttotheprinciplesofthecommonlawwherebyliabilityshouldbeapportionedinaccordancewithBarkerbyreferencetocontributiontorisk.” • “Aprincipledsolutionmustbefound,evenifitinvolvesstrikingnewground.”

  14. Equitas’solutioninsummary: • First: • Thedeemedallocation(impliedterm)ofinwardsmesotheliomaclaimsontimeonriskbasiswouldbeadangerinseekingtocounteractwhatiseffectivelyonedeemingprovision(theweakcausallinkinFairchild); • Thedeemedallocationwouldalsocollideheadlongwithotherfundamentalprinciples: • Thenatureofreinsuranceisaformofinsuranceontheoriginalsubjectmatterinsured(Wasa); • Absenceofanyvalidbasisonwhichtodistinguishtheinsuranceandreinsurancecontractsasamatterofconstruction; • Therefore,MMI’sunallocatedsettlementofinwardsclaimswereunproblematicandithadacontractualrighttopresentitsreinsuranceclaimstothepolicyyearofitschoice,BUTit’snotan“absolute”contractualright.

  15. Equitas’solutioninsummary: • Secondly: • Insurer’srighttopresentitsreinsuranceclaimsmustbeexercisedinamannerwhichisnotarbitrary,irrationalorcapricious. • “Rationality”requirestheclaimstobepresentedbyreferencetoeachyear’scontributiontotherisk,whichwillnormallybemeasuredbyreferencetotimeonriskunlessthereisagoodreasonforsomeotherbasisofpresentation. • Spikingisinconsistentwiththepresumedintentionsandreasonableexpectationsofthepartiesatthetimewhenthecontractswereconcluded.

  16. Equitas’solutioninsummary: • Thirdly: • Therightsofcontributionandrecoupmentshouldbecalculatedineachyearfromthegroundup. • “Thecriticalexposurestoagroupofvictimswillhaveoccurredinanumberofyears,ineachofwhichMMIagreedtobeararetention,sothatitisunjustthatonlyasingleretentionapplies.” • “Thehigherlayerreinsurersagreedtoparticipateonlyuntiltheretentionandanylowerlayershadbeenexhausted.” • “Thebroadequitableprincipleswhichwemustapplyaresufficientlyflexibleinthesecircumstancestoenableeffecttobegiventothismethodofcalculation.” • Therefore,thequestionofcalculatingthereinsurer’srightsofcontributionandrecoupmentwouldnotriseunlesstheimplicationof“goodfaith”asraisedinthesecondpointwaswrong,inwhichcasetheabovemethodshouldbeapplied.

  17. Furtherthoughts • Thenatureofreinsurance:whetherafurtherinsuranceorliabilityinsurance? • Thefinancialconditionsofinsurers:whatiftheyareinsolventsothatthevictimisstillnotsufficientlycompensatedattheinsurancelevel? • The“goodfaith”inEnglishlaw:afirmgroundornot? • Newanomalies? • Aprincipledsolution??

  18. Thankyou!

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