This blog post is by Helen Waller. In it, she explains the recent decision of Mr Justice Turner, in which he allowed the Second Defendant’s appeal of a Master’s decision to enter judgment against it at a show cause hearing. An approved transcript of the ex tempore judgment is now available and it can be viewed here.

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The show cause procedure is a feature of Practice Direction 3D which applies to mesothelioma claims. It is intended to identify at an early stage those cases in which a defendant has no reasonable prospect of maintaining a defence. Pursuant to paragraph 6.2 of the Practice Direction, at the first case management conference a defendant will be expected to show cause why a judgment on liability should not be entered against it.

It was this exercise of ‘showing cause’ that was the subject of an appeal before Mr Justice Turner in the case of Helm v (1) William Kenyon & Sons Ltd (2) Somewatch Ltd [2019] EWHC 1108 (QB).

At a show cause hearing before Master Davison, judgment was entered against both Defendants to the claim. The Second Defendant appealed against this decision. The First Defendant did not.

Turner J allowed the Second Defendant’s appeal, primarily on the basis that the Master had made an “evident mistake” in relation to the Claimant’s exposure to asbestos dust from his use of Caposite.

The Claimant alleged that was he exposed to asbestos dust from Caposite in the course of his employment with the First Defendant, but it was not apparent on the face of his written evidence that he made the same allegation in relation to the Second Defendant. However, it was clear that the Master had assumed that the Claimant did allege exposure to Caposite with the Second Defendant and had relied on this assumed exposure when entering judgment against it. Further, it was not clear that Caposite was in use at the time the Claimant worked for the Second Defendant. This error alone was sufficient to justify the appeal being allowed.

Although this was an appeal which turned on its own facts, the observations Turner J made at in relation to the show cause process at [17]-[18] are of possible wider interest:

I appreciate that the rate at which the procedure under Practice Direction 3D identifies defendants who have no real prospects of success is in the region of 95 percent. That, however, still leaves 1 in 20 in which the defendant has at least established a sufficiently strongly arguable case to escape the net. It is tempting, in cases in which there is only one defendant and only one potential employment when the claimant is exposed to asbestos, to work backwards from the established fact that mesothelioma, by and large, is overwhelmingly (not exclusively) caused by exposure to asbestos. So if there is only one defendant, then it equips the judge to say with relative confidence, all other things being equal, that there was exposure and that it is very likely, in those circumstances, that the claimant will establish liability.

In this case, however, there was exposure which the Master uncontroversially laid at the door of the first defendant which, in itself, was sufficient to provide an explanation, at least arguably, for the contracting by the claimant of the condition of mesothelioma. So this is not one of those cases in which working backwards a judge could be confident from the fact that mesothelioma was contracted that there was exposure during the course of the employment of both defendants.

For the Claimant in this case, the consequences of the appeal are likely to be limited to costs: he still has judgment against the First Defendant in respect of mesothelioma, which is an indivisible injury.

This post was written by Spencer Turner. A link to the judgment can be found here.

Summary

In Equitas Insurance Limited v. MMI Limited [2019] EWCA 718, the Court of Appeal (Lord Justice Patten, Lord Justice Leggatt and Lord Justice Males) has addressed fundamental issues relating to the presentation of Fairchildmesothelioma claims by insurers to their reinsurance programme.

The Court distinguished the majority’s reasoning in IEG v Zurich[2015] UKSC 33 and held that the liability of a reinsurer to an insurer should be determined in accordance with orthodox common law principles and should therefore be apportioned in accordance with Barker v Corus[2006] UKHL20. The primary basis for the decision is that the policy behind the Fairchild jurisprudence and s.3 of the 2006 Act – which is to ensure that mesothelioma victims are fully compensated – is not engaged at the reinsurance level.

This means that where an EL insurer has settled a mesothelioma claim arising out of exposure which spans multiple policies without apportioning the loss between them (because pursuant to IEG v Zuricheach policy renders the insurer liable for the whole of the loss) it cannot present a subsequent reinsurance claim for the whole of the loss to any policy year of its choice. This is a practice which is known as “spiking” which insurers have developed to maximise the benefit of their reinsurance in mesothelioma claims, for example by avoiding a year with an insolvent reinsurer.

Instead, reinsurance claims will have to be pro-rated between the relevant years of reinsurance, usually on a time on risk basis.

Reinsurance

 InEquitas, MMI initially presented claims to Equitas under its reinsurances on the basis of a time on risk allocation, so that each loss was divided pro rata between the years of reinsurance in which the employee claimant was exposed to asbestos. MMI then changed its method or presentation so that it presented the whole claim to one year of reinsurance. MMI did so on the basis that its inwards claims had settled without reference to particular years or policies and that, because each insurance policy was liable in fully, so too each reinsurance policy was liable in full and it was entitled to present its reinsurance claim to any policy year of its choice in which the underlying claimant had been exposed by its insured to asbestos. This became known as ‘spiking’. It is MMI’s revised method of presenting claims which gave rise to the parties’ dispute.

Flaux LJ, sitting as a judge-arbitrator, stated that the issues for determination in Equitas were:

Question 1: Was MMI to be treated as having settled the inwards claims on the basis that each EL policy on risk was contributing a pro rata share of the loss being paid by MMI?

 Question 2: If not, was the basis on which MMI was presenting its reinsurance claims contrary to the duty of utmost good faith or an implied contractual duty requiring MMI to present its reinsurance claims in good faith?

 Question 3:If issues (1) and (2) were determined in favour of MMI, on the proper construction of the reinsurance contracts, were MMI contractually entitled to recover the full amount it has paid in respect of each inwards claim from any reinsurance contracts of its choice which provided cover for any part of the exposure period for which it was on risk, subject to the limits and retentions for those reinsurance contracts and subject to the paying reinsurers’ rights of contribution and recoupment?

 Question 4: If so, what rights of contribution and recoupment do the reinsurers which are called upon to pay the claim acquire against any other reinsurers who were also on risk for the claim, and against MMI in respect of any deemed “self-reinsurance”, and how do those rights fall to be calculated? In particular, should they be calculated using:

1. The “from the ground up” pro rata method of apportionment, taking into account the first layer retention in every year of reinsurance exposure, as Equitas contended (‘the Equitas method’); or
2. The “independent liability” method as MMI contended (‘the MMI method’)?
3. Flaux LJ deiceded all of these issues in favour of MMI. Following Flaux LJ’s decision, Equitas sought leave to appeal to the Court of Appeal which was granted under section 69 of the Arbitration Act 1996.

 

Court of Appeal Decision

The appeal was heard by three Court of Appeal justices comprising Lord Justice Patten, Lord Justice Leggatt and Lord Justice Males. The issues for the court to consider were as follows:

In the event of an insured employee being tortuously exposed to asbestos in multiple years of EL insurance, and the EL insurer settling the employer’s claim without allocation the loss to any particular year of exposure, is the EL insurer obliged (in the absence of specific provision for this situation in the corresponding reinsurance) to present any outwards claim in respect of that loss on a pro rata, time on risk basis for the purpose of calculating reinsurance recoveries, either because:

1. The contribution to the settlement of each engaged policy must by necessary implication be treated as having been on that basis (“question 1”); or
2. The doctrine of good faith requires the claim to be presented on that basis (“question 2”)?
3. If the EL insurer is not so obliged, and may present a claim to a single year of his choice, how are the rights of recoupment and contribution acquired by the reinsurers of that year to be calculated (“question 3”)?

 

In answer to question 1, Males LJ said the answer was no. His Lordship agreed with Flaux LJ that MMI had a contractual right to present its reinsurance claims to the policy year of its choice, but his Lordship did not describe this as an “absolute” contractual right.

The answer to question 2 was yes, unless there was some other rational basis for ascertaining the contribution to the risk in each triggered policy year [see:114-115].

 His Lordship went on to say [at 116] that in an area of law in which considerations of fairness and policy had explicitly loomed larger than usual, and bearing in mind the willingness of the Supreme Court to strike new ground if necessary to achieve a fair balance of all the interests concerned, a term of good faith ought to be implied.

Males LJ said that the need to answer question 3 did not arise unless the answer to question 2 was held to be wrong. In which case the Equitas method should be applied [see: 123].

Leggatt LJ, in agreeing with the judgment of Males LJ, added further reasons to explain why the doctrine of good faith requires the reinsurance claims at issue in this case to be presented on a basis which apportions the insurer’s ultimate net loss between each policy year in respect of which the insurer was liable to indemnify the insured employer for the damage caused to a victim by mesothelioma [See:162]

His Lordship went on to distinguish the majority’s reasoning in IEG[see: 163-170] and concluded that [at 172]:

The short of the matter is that the courts need not and should not impose a complicated, burdensome and, to put it charitably, unconventional solution [i.e. that in Fairchild and IEG] on the reinsurance market when a simple, principled and orthodox solution [i.e. Baker] is at hand.

Conclusion

This decision now gives judicial guidance to the reinsurance industry as to how EL mesothelioma claims (where there has been exposure over a number of policy years) should be presented to reinsurers. This means that where an EL insurer has settled a mesothelioma claim arising out of exposure which spans multiple policies without apportioning the loss between them it cannot present a subsequent reinsurance claim for the whole of the loss to any policy year of its choice.

This post is by Rachit Buch.

This decision shows that the human impact of an asbestos-related diagnosis can be a significant factor in limitation decisions under s.33 of the Limitation Act 1980. This, along with the lack of prejudice to the defendant, was a crucial factor in the claimant’s successful s.33 application, which was not overturned by Yip J on appeal.

Facts

George Dunn developed asbestosis. He died from bronchopneumonia on 22 March 2012. The claim was issued posthumously on 15 March 2015. It was alleged that Mr Dunn had been exposed to asbestos in the course of his work for two defendants. 

Mr Dunn was informed of his diagnosis in 2008. He was advised to seek legal advice about bringing a claim. However, he had other significant health problems. His health deteriorated until he passed away. In April 2012, an inquest into his death concluded that he died of industrial disease.

Mr Dunn’s widow gave evidence that “the asbestos problems seemed irrelevant…” against the background of the other health issues.

Judgment

Unsurprisingly, and without challenge on appeal, the judge found that Mr Dunn’s date of knowledge was October 2008.

But the judge found that the delay in bringing the claim was understandable: “He and his wife were concentrating on his health rather than pursuing any potential litigation, and it seems to me that is an excusable reason.”

As to prejudice, the Defendants were found not to be in any different position in 2015 than they were in 2008.

The judge exercised his discretion under s.33 and allowed the claim to proceed out of time.

Appeal

A number of points were pursued on appeal. The arguments in relation to the reasons for the delay and prejudice are of most interest.

The law has been summarised most recently in Carroll v Chief Constable of Greater Manchester  [2017] EWCA 1992.

Mrs Justice Yip placed emphasis on the caution advised by McCombe L.J. in Carr v Panel Products [2018] EWCA Civ 190 at [44] where he stated that one ‘brick’ in the wall of a s.33 decision being shaky need not undermine the overall conclusion, unless it is a ‘foundation stone’ that proved to be unsound.

Here, the two ‘foundation stones’ were reasons for the delay and prejudice.

On delay, Yip J assessed the reasons given by the judge for accepting that the delay was excusable and endorsed the conclusion ([30]). Though there was no explicit consideration of the period after death, it was clear from the judge’s decision that the claimant’s focus on other matters, and her instruction of solicitors a month after the inquest, was understandable.

On prejudice, the judge’s conclusion that the Defendants were in no worse a position in 2015 than they would have been in 2008 was “the only sensible conclusion” that the judge could have reached on the evidence.

Although “the judge might have expressed himself more clearly in relation to other matters”,  Yip J held that it would be inappropriate to interfere with his discretion under s.33. The Defendants’ appeal was dismissed.

Comment

The facts underlying this decision are not uncommon: limitation having expired before the date of death with almost three more years passing before proceedings were issued.

Dunn shows that, in stepping back from the individual factors identified in s.33(3) of the 1980 Act, the reasons for the delay and prejudice will be crucial factors in determining the ultimate question in s.33(1). Whilst the objective evidence on knowledge will lead to the date of knowledge decision, the subjective factors for failing to issue proceedings may tip the balance.

The judgment on appeal also provides useful guidance on assessing the merits of a s.33 appeal. Though the losing party might properly identify flaws in the decision at first instance, the emphasis has to be on whether or not those flaws are sufficiently important to shake the foundation of the decision.