In Teal Assurance Co Ltd v (1) W R Berkley Insurance Europe Ltd and (2) Aspen Insurance UK Ltd  EWHC 1000 (Comm), the High Court held that a defendant’s liability under a settlement agreement was only ascertained and established for the purposes of its professional indemnity insurance when the claimant drew funds down from, rather than on payment by the defendant of funds into an escrow account opened as part of the settlement. The Court distinguished Cox v Bankside Members Agency Ltd  2 Lloyd’s Rep 437 in which it was held that Court-issued interim payment orders established and ascertained a defendant’s liability for the purposes of its insurance and triggered the insurer’s obligation to indemnify the insured.
As outlined in our e-bulletins on the decisions of the Court of Appeal and Supreme Court on another preliminary issue in this litigation, the Black and Veatch Group (“BV”) is an engineering firm incorporated in Delaware. BV’s professional indemnity insurance programme from 1 November 2007 to 1 November 2008 (the “Programme”) was structured as a “tower” of policies. The primary layer provided cover up to a limit of US$5 million. Above this, there were three excess layers of cover totalling US$55 million of cover. The fifth layer, described as the “top and drop” insurance (the “Top and Drop Policy”) provided a further £10 million in excess of the other layers, but was subject to an exclusion in respect of claims emanating from or brought in the USA or Canada. The primary layer was underwritten by Lexington Insurance Corporation. The other layers were underwritten by Teal Assurance Co Ltd (“Teal”), BV’s captive insurer. The Top and Drop Policy was reinsured with WR Berkley Insurance Europe Ltd and Aspen Insurance UK Ltd (together the “Reinsurers”) up to a limit of GB£10 million per claim. The reinsurance policy was subject to the same terms and conditions as the Top and Drop Policy, including the US/Canada exclusion.
A number of claims were brought against BV during the policy period, some US based and some not. They included a claim arising out of BV’s design, procurement and construction of a waste water treatment plant in Ajman (the “Ajman Claim”).
Teal had argued previously that it was entitled to vary the order in which insurance claims were paid so that the US claims would fall in layers below the Top and Drop Layer, avoiding the US/Canada exclusion and Teal (and thus its Reinsurers) would be liable. On a trial of this preliminary issue, the Supreme Court in 2013 found that the Programme responded to claims by reference to the order in which BV suffered insured loss.
Under a settlement agreement entered into with the claimant in the Ajman Claim in December 2010, BV paid around US$13 million into an escrow account subject to an escrow agreement (the “Escrow Agreement”) which provided the claimant could draw down, subject to certain contingencies:
- US$1.4 million within 21 days of award of a new contract for the remedial work;
- a further US$1.2 million within 52 days of commencement of work by the new contractor; and
- further amounts on completion of instalments of the remedial work (subject to independent verification of the value of the work performed and various time limits).
Any remaining funds were to be repaid to BV.
The Court was asked to consider a number of preliminary issues but ultimately only needed to consider whether BV suffered a loss for which it was entitled to be indemnified under the Programme when:
- it paid money into the escrow account in December 2010 following settlement of the Ajman Claim; or
- the claimant drew down money paid into the escrow account.
Teal argued the answer was (b). If correct, the various dates of draw down out of the escrow account would mean that around US$11 million in respect of the Ajman Claim was payable by Teal under the Top and Drop Policy and Reinsurers would be liable to indemnity Teal under its reinsurance. Reinsurers argued the answer was (a) and, therefore, no payment was due to Teal.
Eder J agreed with Teal and held that BV only suffered a loss for which it was entitled to be indemnified under the Programme when the claimant was entitled to draw down money paid into the escrow account.
The starting point was that an insured has not suffered insured loss until liability is both (i) established in principle; and (ii) ascertained (i.e. quantified). Eder J accepted Teal’s arguments that BV’s agreement to pay money into escrow did not establish and ascertain BV’s liability in the Ajman Claim. First, it was not automatic that all, or indeed any, of the funds paid into escrow would be paid to the claimant. Second, the Escrow Agreement did not quantify BV’s liability. Although there were two quantified contingent payments, the claimant could not draw down further sums, and BV would have no liability until the new contractor had performed remedial work and the value of that work been certified. Counsel for Teal also referred to the fact that the money paid into escrow was not paid to the claimant, but Eder J was sceptical about the weight which should be placed on this factor.
Reinsurers relied on the decision in Cox v Bankside Members Agency Ltd  2 Lloyd’s Rep 437 (“Cox”), where Phillips J held that “an interim payment order ascertains a quantified sum which is due and payable by way of damages” and was a sum which the assured was“legally liable to pay as damages” for the purposes of the insurer’s indemnity. Reinsurers argued that the obligation to make a payment into an escrow account was analogous to an interim payment order. Eder J drew five principles from the decision in Cox:
- Interim payment orders were “ordered on account of and in anticipation of an eventual award of damages” and could therefore properly be described as “damages” within the meaning of the policy.
- Interim payment orders ascertain quantified damages, at least on a provisional basis.
- It was irrelevant that the interim payment order did not finally establish the amount of the assured’s liability.
- The fact that the order might be varied could cause practical problems for insurance cover, but these were not different from those arising from the possibility of reversal or variation of a first instance judgment on appeal.
- There are strong commercial reasons for treating interim payment orders as ascertained liabilities for the purposes of insurers’ obligations to indemnify assureds.
Eder J distinguished Cox for two reasons.
First, before the Court will make an interim payment order it must be satisfied (i) that the defendant is liable; and (ii) as to the likely minimum amount of the liability. Here, the claimant was only entitled to draw down some of the funds held in escrow; the “damages” were the funds the claimant could draw down. There had been no assessment of the likely amount of BV’s liability, and unlike the typical interim payment order, payment into the escrow account was voluntary.
Second, there was no policy reason why the Programme should indemnify BV for a payment into escrow to which it agreed, rather than for draw downs from the escrow account.
It is long established authority that an insurer’s liability under a liability policy is triggered when the insured’s liability to the third party is established and quantified by judgment, arbitral award or settlement. As found in Cox, this would include the establishment of liability pursuant to an interim payment order, at least where such order was not made by consent.
It is difficult to understand why an agreement to pay into escrow should be treated any differently. The agreement, like an interim payment order or indeed a successful appeal, might result in repayment – and, it can be assumed, the insured would not usually agree to an escrow arrangement unless there was a probability of ultimate liability. Moreover, it is also questionable whether Cox can properly be distinguished on policy grounds and why, if policy reasons were relevant, it is appropriate to permit an insured/a reinsured the opportunity to manipulate recoveries in this way.
It is understood that an application for leave to appeal has been made to the Court of Appeal.