Liability insurance: Professional indemnity insurance tower – operation of liability policies
Teal Assurance Company Limited v WR Berkley Insurance (Europe) Limited & another
31 July 2013
Robert Goodlad and Jacquetta Castle comment on the Supreme Court’s welcome re-emphasis of the orthodox interpretation of the operation of liability insurance which provides certainty to the market as to the operation of liability policies.
This appeal decision relates to an attempt to manage the order in which claims are to be paid from a Professional Indemnity insurance tower so that reinsurance recovery could be made in circumstances where the top layer excess policy (and its reinsurance) excluded claims from the USA, unlike the underlying policies. The Supreme Court held that claims under the policies had to be allocated in the order in which losses were suffered by the insured, based on the date on which its liability was established and quantified in respect of each claim against it. The Supreme Court’s re-emphasis of the orthodox interpretation of the operation of liability insurance is welcomed, and provides certainty to the market as to the operation of liability policies.
The case concerned the insurance arrangements of Black & Veatch Corp (“BV”), architects and engineers. BV’s programme of professional liability insurance for the year commencing 1 November 2007 contained various layers.
- The primary layer, underwritten by Lexington, operated above BV’s self-insured retention and deductible. Indemnity of US$5 million was to be provided to BV once it had “paid” the retention and the deductible.
- BV’s own captive Insurer, Teal Assurance Company Limited (“Teal”), wrote the next three excess layers in the programme, referred to as the “PI Tower”. The three excess layers provided a further total of US$55 million of cover, excess of the Lexington policy and BV’s self-insured retention and deductible.
- At the top of BV’s insurance programme was a US$10 million layer of “top and drop” insurance. This was again underwritten by Teal, and was reinsured with W R Berkley Insurance (Europe) and Aspen Insurance UK Limited, for 50% each.
It is important to note that, unlike the underlying policies, the “top and drop” insurance excluded US and Canadian claims.
Each of the excess layer policies, including the “top and drop” policy, was expressed to be subject to the same terms and conditions as the primary, Lexington policy. Each excess layer policy was intended to “drop down” to continue as the underlying policy, should those policies underlying it became exhausted. Each excess layer policy provided that liability to pay under it “shall not attach unless and until the Insurers of the Underlying Policy(ies) shall have paid or have admitted liability or have been held liable to pay, the full amount of their indemnity inclusive of costs and expenses”.
BV had received and notified to its insurers various claims during the policy period, some of which emanated from or were brought in the US or Canada, and others which were not. The issue on appeal to the Supreme Court was whether BV and Teal, or either of them, was entitled to choose which claims were to be met from the primary and/or lower excess layers, so as to ensure that those claims remaining were not US or Canadian claims, and so would fall to be met by Teal from the “top and drop” layer, and so could in turn be passed on to Teal’s reinsurers, the Respondents (i.e. whether BV/Teal can choose the order in which claims are presented or paid, regardless of the order in which BV’s liability to third parties was ascertained).
First instance and appeal findings
The Courts below, both at first instance and on appeal, had held that claims fall to be allocated to the successive layers, starting with the Lexington primary policy and moving up through the excess layers, as and when BV’s third party liability was ascertained by agreement, judgment or award (following the general principles of liability insurance established in Post Office -v- Norwich Union Fire Insurance Society Ltd  2 QB 363 and Bradley -v- Eagle Star Insurance Co Ltd  AC 957).
Teal argued that the insurance cover was not partially exhausted when the claim was ascertained against the insured party, but rather only when the claim was met by the insurer. Thus, Teal argued, BV could seek indemnity in respect of a second, later claim that was made against it prior to seeking indemnity in respect of an earlier claim, and it would be the second claim that first acted to erode the indemnity that was available under the policy as it was paid first by insurers.
Supreme court findings
Lord Mance, delivering the Supreme Court’s single judgment, rejected Teal’s arguments. Lord Mance noted that Teal’s analysis could lead to a situation in which an insured had causes of action or recoverable claims against an insurer which exceeded the limit of the cover; that made no sense in the context of liability insurance. Lord Mance said that “[t]he ascertainment, by agreement, judgment or award, of the insured’s liability gives rise to the claim under the insurance, which exhausts the insurance either entirely or pro tanto”.
Whilst, the Supreme Court noted, it was open to an insured to forbear from notifying a claim, or even withdraw or abandon a claim for indemnity, Teal was proposing that all such claims could be pursued, with the priority of such claims being adjusted as against the programme of insurance. The Supreme Court came to the view that was simply not permitted by the policies.
- Although the Lexington policy required BV to have “paid” the retention and deductible prior to indemnity being afforded, BV was not required to have literally paid money across. “Paid” in context was better understood as a reference to a liability having been incurred by BV.
- Teal’s interpretation of the insurance was an artificial one as it had looked at the insurance programme from the top down, rather than looking at claims as they impacted upon the programme – from the bottom up. Teal was liable under the excess layer policies (as Lexington was liable under the primary layer policy) for claims in the order that BV incurred ascertained expenses or third party liability up to the respective policy limits.
The freedom of choice which Teal sought to argue for, both in its own interests and those of BV, could not, it was said by the Supreme Court, readily be reconciled with the basic philosophy that insurance covers risks that lie outside an insured party’s own deliberate control.
In rejecting the appeal from the decision of the Court of Appeal, Lord Mance, and the Supreme Court, was also keen to support the Court of Appeal’s view of the commercial “common sense” interpretation of the insurance arrangements that BV had put in place. Lord Mance noted that, although he agreed with the Court of Appeal’s views on the commercial impact of Teal’s arguments, he had reached the conclusions that he had purely on the basis of construction of the policies themselves.
Teal had also sought to argue that, when underwriting a liability insurance policy, insurers are in fact undertaking to pay valid claims on the occurrence of certain events. A logical extension to that analysis would be to hold insurers potentially liable for non- or late payment (which is contrary to established case law). As the appeal developed this particular argument had fallen away (as it made no impact on the central issue of the appeal). Further, as Lord Mance noted in his judgment, these are also issues that are presently under consideration by the English and Scottish Law Commissions.
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