Losses under a programme of excess liability insurance are sometimes prioritised in order to maximise the potential insurance recoveries under the programme. On 31 July 2013, the Supreme Court confirmed the order in which such losses should be prioritised.
The Supreme Court has dealt with the prioritisation of losses under the standard form of wording for a typical programme of excess layer liability insurance. In our briefing note of 5 January 2012, we looked at the Court of Appeal’s earlier decision in Teal Assurance Company Limited v W R Berkley Insurance (Europe) Limited.
The Supreme Court unanimously rejected Teal’s appeal because:
- Cover is burned through the layers sequentially in the order in which the liability of the original insured to the complainant third party is ascertained by agreement, judgment or arbitration award.
- Cover is not burned through the layers according to when the insurers pay or admit liability for a claim.
- Liability under the excess layer only attaches as and when the primary insurers pay or admit or are held liable to pay the original insured’s ascertained liability which exhausts the primary policy.
- On "payment" by the primary insurers of such ascertained liability, the first excess layer policy "drops down" to continue in force as the primary policy (on the same terms as the primary policy).
- The same position applies successively under each excess layer as each is exhausted in turn.
This litigation arose because Teal, the captive of the original insured (BV) had a major participation in BV’s excess layer insurance programme and it suited Teal to claim that BV (or Teal) could adjust the order in which claims impacted the different programme layers, in order to assist BV in maximising its insurance recoveries. However, it was held that BV could not choose the order in which it presented its claims to Teal and neither could Teal prioritise its liabilities to maximise recovery under its outwards reinsurance programme. This made commercial common sense although the Supreme Court felt that the terms and scheme of the programme were sufficiently clear to arrive at its conclusion without needing to interpret them so as to make "commercial sense". If the outcome contended for by Teal was desired then clear words would have to be used.
Teal submitted that the case raised the "legal fiction" that a claim under a liability insurance policy is for damages for the insurers’ failure to hold the insured harmless, and that a more appropriate analysis would be that insurers undertook to pay valid claims on the occurrence of particular events. If so, insurers could become liable in damages for non or late payment (contrary to the presently established rules in cases such as The Italia Express (No.2) (1992) and Sprung v Royal Insurance (UK) Limited (1999).
The Supreme Court decided that it made no difference to the outcome of the appeal how the insurers’ liability to indemnify was formulated and it did not provide any further comments. In so doing, it appeared to be anxious not to anticipate consideration of this issue by the English and Scottish Law Commissions (see issues paper 6: Damages for Late Payment and the Insurer’s Duty of Good Faith 2010).