Last week the UK Supreme Court handed down its Judgment1 on the appeal by captive insurer Teal Assurance Company Limited (“Teal”) against the 2011 decision of the Court of Appeal dismissing its claim that it is entitled to choose the order in which liability claims can be presented under a tower of excess liability insurance programme in order to maximise its recoveries. Click here to view a copy of the Judgment.
The respondents in this appeal were W R Berkley Insurance (Europe) Limited and Aspen Insurance UK Limited, reinsurers of the top layer (“Respondents”).
The Dispute and Court’s Holding
The underlying insured liability concerns 27 claims made in 2007 against Black and Veatch Corp (“BV”), a US engineering company, out of which only 4 had a value in excess of US$1m. Out of these 4 substantial claims 2 originated in the US or Canada totalling US$215m (“American Claims”) and 2 originated elsewhere in the world to the value of approximately US$35m.
BV purchased a primary layer of cover, above which sat a tower of 3 excess insurance layers with worldwide cover, underwritten by Teal, and reinsured with independent reinsurers not involved in the proceedings (“PI Tower”).
Above the PI Tower sat a top layer which was also underwritten by Teal but reinsured with the Respondents (“Top Layer”). It applied in excess of the primary policy and the PI Tower, and had a limit of GBP£10m (or equivalent), excess of the underlying retention by BV. Importantly, and central to the case, the Top Layer excluded claims originating in the US and Canada.
Incorporating the standard Lloyd’s LSW055 clause, each of the PI Tower policies and the Top Layer policy was made subject to the same terms and conditions of the primary policy and provided that once the underlying layer was exhausted it would, in turn, take its place or “drop down”.
In order to trigger attachment under the Top Layer, and recover from it from reinsurers, Teal’s objective, as BV’s captive insurer, was to meet the American Claims first to ensure that the remaining ones were not US or Canadian claims so that these would not be excluded under the Top Layer and passed on to the Respondents.
Teal’s key submissions to the Supreme Court were the following: (1) a party to a contract is entitled to exercise its rights as best suits it, and, in an insurance context, to maximise the cover available to an insured; (2) it is only when a claim is actually met by an insurer that the policy cover is exhausted proportionally and until then it is possible, if a second claim is made against an insured, to speak of a second cause of action or claim existing under the policy; (3) an insured is free to claim, and insurers liable to make payment of, the later rather than the earlier claim (points 1 to 3 referred to as “the Two Causes of Action Argument”); and, (4) as applied to standard excess layer policy wordings, the Two Causes of Action Argument determines the liability of the Top Layer by the order in which the underlying insurers pay, or admit or are held to have liability, to the effect that a captive insurer participating in the whole programme can shape its own liability in order to best suit the interests of its associate insured by controlling its own settlements.
The Supreme Court had no difficulty in rejecting these submissions. As Lord Mance put it “[t]his produces the unfamiliar phenomenon of an insurer seeking to maximise its own insurance liabilities...Had Teal been an independent rather than captive insurer…BV would no doubt vigorously have objected to the legitimacy of Teal as its excess layer insurer under the PI tower policies adjusting the order of payment of claims ascertained as against BV, with the aim of ensuring that it was only US and Canadian claims that reached the top and drop policy.”
Lord Mance held that the Two Causes of Action Argument is senseless when an insurance has a limit of liability and the recoverable claims exceed that limit, and confirmed that it is the ascertainment (by agreement, judgment or award) of the insured’s liability which exhausts the insurance either entirely or proportionally (e.g. if the limit is US$10m and the insured has incurred 3rd party liability of US$10m in respect of each of 2 successive 3rd party claims, the insured is not entitled to recover claims from its insurer totalling US$20m). It makes no difference if under English law the nature of the liability towards its insured is by way of damages or a debt.
The Supreme Court also held that it made no difference if the word “payment” in the drop-down clauses of LSW055 meant an actual disbursement instead of being shorthand for “ascertained” liability. As is standard, as per Clause 1 of LSW055, the excess policies are triggered when the underwriters of the underlying policies “shall have paid or have admitted liability or have been held liable to pay”. The primary policy in turn provided indemnity subject to BV’s liability towards the 3rd party being ascertained.
The Court further considered that if “payment” in those clauses means actual disbursement, and, if there were a difference between the time in which liability attaches to the 1st excess layer (e.g. by admission or finding of liability) and the time when the primary insurer disburses payment, this does not entitle Teal in the gap period to make payments “in a different order than those for which it will in due course become underlying insurer when its excess insurance drops down to become the underlying policy under clause 3(b) [of LSW055]”.
The UK Supreme Court preferred the commercial considerations of the Court of Appeal over those submitted by Teal, whilst noting that this was a case where there was no need to go beyond the analysis of the terms of the relevant insurance policies.
Teal submitted that the Respondent’s case gave some degree of control by an insured or primary layer insurer in the timing in which the 3rd party liabilities are ascertained, with the effect that intentionally or unintentionally a claim arising later may be ascertained ahead of a claim arising earlier in time. Lord Mance agreed this is true but observed that the freedom of choice pleaded by Teal in the interests of BV cannot be readily reconciled with the “basic philosophy that insurance covers risks lying outside an insured’s own deliberate control”.
The Judgment will be welcomed by professional liability insurance markets as it puts an end to any degree of uncertainty that there may have been in the utilisation of LSW055.