Teal Assurance Company Ltd v W R Berkley Insurance (Europe) Ltd & another [31.07.13]
Supreme Court reaffirms ascertained losses ordered in chronological sequence when determining erosion of layers of insurance.
In January 2012, we reported on the decision of the Court of Appeal in the above case. The Supreme Court has now upheld this decision.
Each excess layer included "clause 1" market form wording, so that liability would not attach until the underlying policies had paid, admitted liability or been held liable to pay the full amount of their indemnities.
Teal wrote a further "top and drop" policy above the tower. This was on different terms, with a £10 million per claim, no annual aggregate and excluding US & Canadian claims. The Defendants were Teal's reinsurers on this top and drop cover.
There came a time when the self-insured retention and primary were both exhausted but $55 million cover remained in the tower. B&V had incurred $31 million of losses in respect of two non-US claims that it had not yet presented to Teal. Additionally, it faced a further US claim which was expected to exhaust the tower.
The issue which arose was whether B&V and Teal were entitled to present losses to the (re)insurance programme in whatever order they chose, regardless of the order and timing of the establishment and ascertainment of B&V's liability or the incurring of the loss by B&V.
Both the Commercial Court and Court of Appeal found in favour of the defendant reinsurers, holding that losses attached to the layers of cover in the order in which they were ascertained or incurred - meaning the non-US losses were to be applied to the tower before the US losses. Teal appealed.
Dismissing Teal's appeal, the Supreme Court upheld the decision of the Court of Appeal, confirming that an insurer's liability does not arise until the liability of the insured to a third party is ascertained by way of judgment, settlement or arbitration award.
This decision will be welcomed by industry practitioners, as it provides certainty to the market and reaffirms the principle that ascertained losses should be dealt with in chronological order for the purposes of determining the exhaustion of the primary and excess layers.
It is also clear that the courts are not prepared to allow insureds/insurers to manipulate the operation of excess of loss liability towers, unless there is clear contractual wording between the parties to the contrary.