The Supreme Court has confirmed that a tower of liability insurance is exhausted in the order in which the insured's liability is ascertained by agreement, judgment or award.

In Teal Assurance Co Ltd v WR Berkley Insurance (Europe) Ltd and Another [2013] UKSC 57 the Supreme Court unanimously rejected the submissions of the appellant Teal and upheld the Court of Appeal's decision in the case (see here for our previous blog).

Teal, the captive insurer of Black and Veatch Corp (BV), a US firm of architects and engineers, argued that liability insurance is only exhausted when the insurer either admits liability or meets the claim. Teal argued for a distinction between the time when liability arises under a claims made policy, ie when a loss is ascertained against the insured, and the consequent partial exhaustion of the policy cover when the claim is met by the insurer. This, it was argued, would allow for the prioritisation of claims so that the insured and its captive insurer could access the "top and drop" policy which sat above the tower and which otherwise would not be impacted because it excluded certain claims.

However, Lord Mance, who delivered the Court's judgment, said that this analysis could lead to the insured having causes of action or recoverable claims which together exceeded the limit of cover, which would make no sense as an insurer is only liable up to its limit. Therefore it is the ascertainment of the insured's liability which gives rise to the claim under the insurance, and this which exhausts the insurance either entirely or partially.

The Supreme Court held that the contract wording at issue did not alter this premise. The requirement that the insured must have "paid" the deductible and self-insured retention before being indemnified by the insurer meant only that liability had been incurred, rather than actual monetary disbursement. Otherwise, liability insurance would not provide the insured with indemnity to avoid the threat of insolvency which might result from third party claims.

This judgment reinforces the expected operation of excess of loss liability towers and shows that the Court is not willing to allow an insured or insurer to manipulate such operation unless there is clear contract wording supporting that party's interpretation.