The special features of mesothelioma (its “indivisible” nature and its long latency) have thrown up many complex legal questions resulting in the creation of special mesothelioma jurisprudence and legislation governing the liabilities arising from the disease and how insurance should respond. Those developments have taken nearly 20 years, but the courts have not (yet) directly addressed how mesothelioma claims should be allocated to reinsurance programmes. None of the decisions in the “Fairchild enclave” directly addresses reinsurance.
From about 1984, an ACOD B clause was inserted in many, perhaps most, relevant London market excess of loss reinsurance contracts. The clause sets out an allocation methodology for claims arising from “occupational disease or physical impairment which does not arise from a sudden and identifiable occurrence”, where the employer’s liability to the victim is “established on an exposure basis”. Mesothelioma, along with many other occupational diseases, falls within this description.
The clause (and other versions for different circumstances) was introduced following meetings of the Occupational Disease sub-group of the Accident Circle (hence ACOD), a group of reinsurers that included most of the main players in the excess of loss reinsurance market at the time. The Accident Circle met routinely to discuss important market issues. It seems that the responsibilities of the Accident Circle have been assumed by the International Underwriting Association (IUA). The IUA’s Casualty Treaty Group still has an ACOD Sub-Group. The clause is still going strong today. The IUA reviewed the wording several years ago and as recently as last year made a small amendment. The clause, however, remains substantially as drafted in 1984.
In the early 1980s, employers’ liability (EL) insurers were facing industrial disease claims, perhaps for the first time in significant numbers and this was a concern to their reinsurers. Information varies as to the industrial disease or condition that was producing these claims. Market folklore has it that these claims were arising from one or more of asbestosis, hearing loss and flax byssinosis (also known as brown lung, which is normally caused by exposure to dust from vegetable fibres including cotton, hemp, flax and sisal). It may be that different reinsurers were facing different types of claims from their reinsureds, but the issue that the reinsurers faced or at least feared was essentially the same.
The common problem was that there was no provision in reinsurance contracts to determine what the “accident”, “event” or “occurrence” was for the purposes of allocation to the reinsurance in circumstances where long-term exposure was the cause of the disease or condition. There was perceived to be a risk that the EL insurers would pick one year of reinsurance and aggregate claims. Some of the reinsurers had underwritten unlimited top layers and aggregated claims would have hit these. There is also some suggestion that reinsurers wanted to avoid the potential for expensive argument about different levels of causative exposure (and therefore liability) in different years.
The ACOD B clause applies where relevant exposure took place during the period of the reinsurance contract. There are three main aspects to the clause:
- It ensures that the reinsurance will respond on what is generally called a “one man one event” basis. The clause provides that “any one claim [sic] in respect of any one employee…shall be considered individually as one event” (or occurrence) and thus prevents aggregation.
- The clause provides that each reinsurance contract bears only a proportionate part of the claim. This is achieved by prorating the “total claim amount” by reference to the period of exposure and the period of the reinsurance contract. A consequence is that the loss is allocated evenly across the exposure period, thus removing scope for argument about the level of causative exposure in different years. By implication, the “accident”, “event” or “occurrence” may be regarded as being in each of the years of causative exposure.
- The retention and the limit are reduced proportionately. This is achieved through prorating by reference to the period of the reinsurance contract and the period of culpable exposure insured by the reinsured. The proration methodology takes account of any change in the level of the retention or the limit across different reinsurance contracts.
The ACOD B clause was apparently introduced by reinsurers without any discussion or negotiation between reinsurers and insurers and it seems without any or much argument from the insurers. This may be because both sides obtain some benefit as well as certainty from the clause. From the reinsurer’s perspective, the advantage of the clause is that it prevents the claim from being “spiked” to one year of reinsurance and any aggregation; and exposes only a proportionate part of the limit. From the reinsured’s perspective, the advantage is that overall it effectively bears only one averaged retention in respect of each claim.
How an insurer allocates a claim to a reinsurance programme makes a potential difference in several respects. The most important is whether the claim is subject to only one retention or to a full retention in respect of each year in which there was culpable exposure. Any insurer with a large EL book covering the 1960s onwards will have insureds with a significant number of high-value mesothelioma claims and those claims will continue to come through for the next few decades. The number of retentions that are applied to such claims by reinsurers is likely to make a significant difference to the reinsurance recovery. Where a full retention is applied in each year and the level of the retention is significant or the exposure covers many years, there may well be no recovery.
The dividing line between reinsureds and reinsurers on the “correct” approach to allocation used to be clear. Reinsureds would typically argue that they should bear only one retention (usually achieved by “spiking” the whole of the claim to one year of reinsurance). Reinsurers would argue that the claim should be prorated across the years of exposure and that a full retention should be applied in each reinsurance period. In recent years, that line has become blurred. Many of the market’s largest players have acquired run-off portfolios and therefore now have interests on each side, both as ceding insurer of EL and as reinsurer. Whether the balance of their economic interest lies in applying only one or multiple retentions is often not clear and might not become clear for decades.
The drafting of the clause leaves some scope to argue about precisely how it is to be applied at the margins in certain situations. However, the consensus appears to be that its purpose is clear and that it provides a workable solution that balances the interests of the parties. That may be why the ACOD B methodology (or something akin to it) has been agreed by parties as a compromise in allocation disputes. It is widely known that there are a number of coverage-in-place agreements in the market that provide for recovery on an ACOD B basis or some method reflecting ACOD B. It remains to be seen whether those agreements are on terms that permit the parties to re-open the basis of recovery, should the law or the practice of the market change.