In the recent case of Teal Assurance Company Ltd v W R Berkley Insurance (Europe) Ltd & Anor, the Commercial Court was asked to consider when the top excess layer of a professional indemnity programme was triggered.

Teal was a captive insurer which underwrote various layers of a professional indemnity programme for Black & Veatch ("B&V"). Policies underwritten by Teal and another insurer provided cover of US$60 million in excess of B&V’s self insured retention (the “Underlying Tower”). The Underlying Tower responded to worldwide claims in respect of B&V’s liabilities to third parties and necessary costs and expenses incurred in mitigation attempts. Teal also provided cover for liability in excess of the Underlying Tower (the “Original Policy”) which was reinsured through the claimants under an excess reinsurance policy (the “Excess Policy”). Both the Original and the Excess Policies excluded US and Canadian claims. A number of claims were made against B&V during the policy period. These included (1) non-American claims for alleged design defects in respect of which mitigation costs had already been incurred; and (2) alleged design defects for power plants in the US in respect of which mitigation costs were expected to exceed the Underlying Tower.

The issue in dispute was whether it was open to B&V to present its claims in any order it saw fit to maximise its recoveries. If it was, then B&V could choose to present its losses in such a way that the American claims would exhaust the Underlying Tower and the non-American claims would fall under the Original Policy thus allowing a claim under the Excess Policy. The claimants argued that B&V’s entitlement to an indemnity arose when B&V’s liability was established and ascertained or when losses were incurred. The Commercial Court endorsed this principle and held that the losses eroded the tower in the order in which they had been suffered by B&V. Since the non-American losses had already been incurred, they should be presented to the Underlying Tower and would not, therefore, reach the excess layer.

This decision reaffirms the principle that an insured must present its losses in a chronological order for the purposes of determining the exhaustion of primary and excess layers.