Teal Assurance Company Limited (Appellant) v W R Berkley Insurance (Europe) Limited and another
The dispute relates to the professional indemnity insurance of a firm of architects and engineers known as the Black and Veatch Group ("BV"). BV has a 'tower' of insurance contracts providing it with worldwide cover for any one claim (and in an annual aggregate) of US$60 million in excess of the deductible and self-insured retention. The first layer of this tower was written by Lexington Insurance Co. Ltd; above this were three further layers of excess of loss insurance written by the Appellant, Teal Assurance (a captive of BV). There is then what is known as 'top and drop' insurance which provides additional cover up to £10 million per claim once the tower is exhausted. This top and drop cover is also written by the Teal and is reinsured with the Respondents, WR Berkley and Aspen. The top and drop cover excludes claims emanating from the US and Canada.
The issue at play in this case came down to whether BV and Teal (or either of them) was entitled to choose which claims to meet from the primary and/or lower excess layers, so as to ensure that those remaining were not US or Canadian claims and could therefore be met by Teal out of the top and drop cover and passed on to the reinsurers. Thus, unusually for an insurer, Teal was seeking to maximise its own insurance liabilities – to which its reinsurers took exception.
Teal relied on a clause ("Clause 1") contained within both the top and drop policy and the excess layer policies which provided that: "liability to pay under this Policy shall not attach unless and until the Underwriters of the Underlying Policy/ies shall have paid or have admitted liability or have been held liable to pay the full amount of their indemnity inclusive of costs and expenses.
Teal argued that no liability arises unless and until underlying insurers shall have paid or have admitted liability or have been held liable to pay, the full amount of their indemnity inclusive of costs and expenses. Whilst accepting the general principle that under a claims made policy an insurer's liability arises typically as and when loss within the scope of the policy is ascertained as against the insured, Teal submitted that it is only when the claim is met by the insurer that the policy cover is pro tanto exhausted (rather than the ascertainment of a claim against the insured exhausting the insured's insurance cover pro tanto).
In rejecting Teal's appeal, the Supreme Court held:
- The ascertainment, by agreement, judgment or award of the insured's liability gives rise to the claim under the insurance, which exhausts the insurance either entirely or pro tanto.
- An insured can decide not to notify, withdraw or abandon a claim which it may have previously notified to insurers; the insurance will not then be exhausted by that claim and the next claim will be recoverable under the ordinary course of the insurance.
- Clause 1 defines when liability arises and not the claims in respect of which liability arises. Clause 1 does not alter the identity of the claims which fall to be met under any underlying insurance or will in due course fall to be met under the excess layer insurances. Clause 1 provides that liability under the first excess layer only attaches as and when Lexington pays or admits or is held to have liability in respect of the insured's ascertained expenses or third party liability.
- Subject to their differences in threshold, limits, aggregates and premium (and specific exceptions) each layer of the excess of loss tower and top and drop policy operates on the same terms and conditions and attaches to the same risks, albeit at difference times depending upon the settlement of claims under the underlying layers. As and when each layer is exhausted, the next layer will drop down to become the underlying policy, as if it were the primary (Lexington) policy. Liability under the "new" primary policy will then be determined by the timing of the ascertainment of BV's third party liability and expenses.
The Supreme Court observed that had Teal been an independent insurer, rather than a captive, it would have been determined to avoid as much liability to BV as possible; in contrast to the current situation where it is seeking to maximise its own reinsurance liabilities which it can then pass off to its reinsurers.
The Supreme Court has, therefore, reaffirmed and given clarification to the way in which claims made by an insured exhaust layers of insurance cover under a programme of liability insurance.
Finally, the Supreme Court declined Teal's invitation to embark on an analysis of the "legal fiction" that a claim under indemnity insurance is a claim for damages for the insurer's failure to hold the insured harmless. This was because "as the submissions developed, it became apparent that it could make no difference to outcome of this appeal how an insurer's liability to indemnify is formulated. In particular, whether the insurer's liability is by way of damages or in debt does not answer the question whether such liability is exhausted as and when a claim, insured and notified under the policy, gives rise to ascertained third party liability or expenses on BV's part." The possibility of having to consider this potentially very important issue may well explain why the Supreme Court decided to hear this case.