In the recent case of Teal Assurance Company Ltd v (1) WR Berkley Insurance (Europe) Ltd (2) Aspen Insurance UK Ltd (2011) EWHC 91 (Comm), the Commercial Court considered the order in which losses eroded liability in a complex professional indemnity tower.
Teal, the captive insurer of engineering company Black & Veatch (BV), issued a number of policies covering the professional indemnity liabilities and costs of mitigating losses of BV (the Underlying Policies). These policies provided cover on a "claims made and reported" basis. Teal issued a further policy insuring BV for liability in excess of the several layers of cover provided by the Underlying Policies (the Policy). The Policy was then reinsured by Teal with the defendant reinsurers (the Reinsurance). The Policy and the Reinsurance did not cover claims from the United States, however the Underlying Policies did.
The Policy contained the following clause (Clause One):
"Liability to pay under this Policy shall not attach unless and until the Underwriters of the Underlying Policy/ies shall have paid or admitted liability or have been held liable to pay, the full amount of their indemnity inclusive of costs and expenses".
The Policy also contained a 'drop clause' whereby if a payment made under the Underlying Policies reduced the indemnity provided by those policies, the Policy would apply in excess of the reduced amount; if the payment exhausted the indemnity, the Policy would continue in force as an underlying policy until expiry.
A number of claims were made against BV, comprising both US and non-US claims. Teal argued that the US claims exhausted, or were likely to exhaust, the cover provided by the Underlying Policies and so the non-US claims would fall under the Policy (therefore allowing a claim under the Reinsurance).
Mr Justice Smith, rejecting the submissions made by Teal, held as follows:
- Claims were to be allocated to the underlying insurance structure in the order in which losses were suffered by BV, based on the date on which BV's loss was established and quantified. Clause One did not operate to postpone Teal's liability by reference to the time at which it either paid claims or admitted liability for those claims.
- Teal was not permitted to aggregate losses in the relevant period without regard to when they were incurred in the period of insurance; an insurance programme to be placed on this basis would have required clear wording to that effect.
- The Underlying Policies were not eroded successively by claims according to the order in which they were notified to Teal.