Court of Appeal holds payment into an escrow account did not mean that liability had been ascertained

Clyde & Co (James Roberts and Chris Dunlop) for appellants

The insured entered into a settlement agreement with one of its customers, pursuant to which on 15 December 2010 it entered into a payment deed and escrow agreement under which it was required to pay an amount into an escrow account, which it did on the same day. The appeal concerned the question of whether the execution of the agreement, and/or the payment of the money, generated an immediate enforceable obligation on the insured's professional liability insurers to indemnify the insured, on the basis that the money was a sum which the insured had "become legally obligated to pay as Damages" (which was the language of the insuring clause).

In Cox v Bankside (1995), Phillips J said that "no obligation on the part of the insurer arises until the liability of the assured to a third party is established and quantified by judgment, arbitration award or settlement". The question was whether entry into the agreement and/or payment into the escrow agreement meant that the liability of the insured was established and ascertained or quantified. At first instance, the judge held that it did not. The insurer appealed, arguing that the payment deed did ascertain the liability, as an insured will have suffered a loss if an established liability required him to part with a sum of money. It also pointed to Cox v Bankside, in which an interim payment on account of damages was held to trigger a right to indemnity under the policy.

The Court of Appeal found that the deed and payment did not trigger a liability under the policy to indemnify. This was on the basis that the agreement did not require the insured to part with its money, but to instead put money aside in the escrow account from which there might be subsequent payments, subject to various conditions, and therefore there was no loss to the insured. The Court of Appeal considered the terms of the agreement and deed and found, amongst other things, that the sum had not been paid away and under the terms of the deed might be released back to the insured, that interest accrued on the money for the insured whilst in escrow, and that the agreement identified no specific sum which, without more, the insured was required to pay the customer. Tomlinson LJ considered that a closer analogy than an interim payment (which is a minimum amount that will be due by way of damages) was a judgment for damages to be assessed. It would be the payment out of the escrow account on ascertainment of a liability that would constitute a loss. In the circumstances it was not necessary for the Court of Appeal to consider arguments that Cox v Bankside had been wrongly decided, and the appeal was dismissed.