In the recent case of WR Berkley Insurance (Europe) Limited v Teal Assurance Company Limited[1], the Court of Appeal delivered the latest in a series of rulings in a long-running reinsurance dispute. The dispute concerns the order in which a series of losses eroded a programme of excess professional liability insurance, provided by T (a captive insurer) to the original insured, B.

The appellants in this case (W) reinsured T in respect of the “top and drop” layer of the programme, the four underlying layers of which each had aggregate limits. Importantly, cover under the underlying policies was broad, covering risks on a worldwide basis. Cover under the top and drop layer and its reinsurance was narrower, excluding US and Canadian claims.

Previously, T had argued against W that B’s losses eroded the liability tower in the order in which they were settled by T, and that it was therefore open to T to order B’s losses however it chose for reinsurance recovery purposes. If correct, this would have allowed T to collect US losses from the lower layers of the tower, and non-US losses from the top and drop layer, giving T access to W’s reinsurance of that layer.

However, in his Commercial Court judgment (which was subsequently upheld by both the Court of Appeal and the Supreme Court) Mr Justice Andrew Smith held that it was not open to T to order the losses in this way and that those losses instead eroded the liability tower in the order in which B’s liability to third party claimants was established and ascertained. For further details of the previous arguments and the various rulings upon them, see our October 2013 bulletin[2].

T subsequently revised its case, so that, instead of arguing that it was entitled to order B’s losses howsoever it chose to settle them, T argued that, on the facts, B’s liability to third party claimants was established and ascertained in an order which meant that the non-US losses impacted the top and drop layer.

One particular non-US loss had been settled by way of an agreement providing for payment by B into escrow and subsequent draw down upon the escrow funds by the third party claimant, upon certain conditions being fulfilled. T’s revised argument was that B’s liability was established and ascertained at the (relatively late) point at which the escrow funds were drawn down upon by the third party claimant. Against this, W argued that B’s liability was instead established and ascertained on an earlier date at which the payment into escrow was made.

As we reported in our 7 May 2015 bulletin[3], at first instance Mr Justice Eder preferred T’s arguments on this preliminary issue, holding that B suffered a loss for the purposes of its professional liability programme as and when the third party claimant drew down on the escrow funds. The programme provided an indemnity in respect of sums which B became “legally obligated to pay as damages”. Central to this conclusion was the determination that the agreement by B to pay money into escrow was not an agreement to pay damages; such damages were only payable as and when the third party became entitled to draw down upon the funds. Following, an appeal by W, the Court of Appeal has now upheld this ruling, on the basis of essentially the same reasoning.