JUDGMENT
Teal Assurance Company Limited (Appellant) v W
R Berkley Insurance (Europe) Limited and another
(Respondents)
before
Lord Neuberger, President
Lord Mance
Lord Clarke
Lord Sumption
Lord Toulson
JUDGMENT GIVEN ON
31 July 2013
Heard on 17 and 18 June 2013
Appellant Respondents
Christopher Butcher QC Colin Edelman QC
Rebecca Sabben-Clare QC Alison Padfield
(Instructed by DAC (Instructed by Clyde & Co
Beachcroft LLP) LLP)
LORD MANCE (with whom Lord Neuberger, Lord Clarke, Lord Sumption
and Lord Toulson agree)
Introduction
1. Black and Veatch Corp (“BV”) is an engineering company incorporated in
Delaware. This appeal concerns the top layer of its professional liability insurance
programme for the year from 1 November 2007. The first or primary layer was
with Lexington Insurance Co (“Lexington”). There are then three successive
excess layers (described as the “PI tower”) with the appellant, Teal Assurance Co
Ltd (“Teal”), which is an associate or “captive” of BV based in the Cayman
Islands. Teal reinsured the risks under these layers with various retrocessionaires
(Swiss Re, Zurich, etc). Finally comes the top layer, a “top and drop” policy, again
placed with Teal and reinsured by Teal with the respondents, WR Berkley
Insurance (Europe) Ltd and Aspen Insurance UK Ltd for 50% each. Unlike the
layers beneath it, which provided worldwide cover, the top and drop policy
excludes any claims emanating from or brought in the USA and Canada.
2. BV has received and notified to its insurers various claims, some emanating
from or brought in the USA or Canada, others not. The ultimate issue on this
appeal is whether BV and Teal or either of them is entitled to choose which claims
to meet from the primary and/or lower excess layers, so as to ensure that those
remaining are not US or Canadian claims, and can be met by Teal out of the top
layer and passed on to the respondents. The courts below (Andrew Smith J, [2011]
EWHC 91 (Comm), and the Court of Appeal, [2011] EWCA Civ 1570) have held
that Teal cannot do this. They have held that the claims fall to be allocated to the
successive layers, starting with Lexington’s primary layer, as and when BV’s third
party liability is ascertained by agreement, judgment or award in accordance with a
general principle of liability insurance established in Post Office v Norwich Union
Fire Insurance Society Ltd [1967] 2 QB 363 and Bradley v Eagle Star Insurance
Co Ltd [1989] AC 957.
3. Teal now appeals with the Court’s permission. Teal submits that a party is
entitled to exercise contractual rights as best suits it, here to maximise the
insurance cover available to its associate BV. The primary and lower excess layers
covered US and Canadian claims and BV and Teal were entitled to take full
advantage of this. Further, Teal submits that the top and drop, and each of the
lower excess layers, contains a clause (clause 1 of a set of clauses LSW055)
making clear that no liability can arise under them unless and until underlying
insurers “shall have paid or have admitted liability or have been held liable to pay,
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the full amount of their indemnity inclusive of costs and expenses”. Teal’s case is
that liability thereunder necessarily depends upon the order in which underlying
insurers, including Teal, choose (or are held liable) to settle insurance claims,
rather than upon the order in which third party liability claims are ascertained by
agreement, judgment or award as against BV. Teal submits that this scheme is
complemented by clause IV.E of the Lexington policy, requiring BV to pay the
deductible and self-insured retention prior to Lexington indemnifying BV.
4. Teal’s application for permission and written case also suggested that the
case raises, or may raise, what Teal calls a legal fiction, that a claim under a
liability insurance is for damages for the insurer’s failure to hold the insured
harmless. It submits that a more appropriate analysis would be that insurers
undertake to pay valid claims on the occurrence of particular events. This would
have the potential effect that insurers could become liable in damages for non- or
late payment, contrary to the rule presently established by cases such as Ventouris
v Mountain (The “Italia Express”) (No 2) [1992] 2 Lloyd’s Rep 281 and Sprung v
Royal Insurance (UK) Ltd [1999] 1 Lloyd’s Rep IR 111. It would also enter upon
an area presently under consideration by the English and Scottish Law
Commissions: see their Issues Paper 6: Damages for Late Payment and the
Insurer’s Duty of Good Faith (2010) and their subsequent formal consultation
paper Insurance Contract Law: Post Contract Duties and Other Issues (2012).
However, as the submissions developed, it became apparent that it could make no
difference to the outcome of this appeal how an insurer’s liability to indemnify is
formulated. In particular, whether the insurer’s liability is by way of damages or in
debt does not answer the question whether such liability is exhausted as and when
a claim, insured and notified under the policy, gives rise to ascertained third party
liability or expenses on BV’s part.
The insurance programme
5. With this introduction, I describe the insurance programme in greater detail:
a. BV accepted a deductible of US$100,000 per claim (or US$250,000 for
remedial work under an endorsement) and a self-insured retention of
US$10m per occurrence and US$20m in the aggregate (though it was
permitted to insure part of this with Teal under a policy No 2007-006 not
relevant to this appeal).
b. BV’s layer of cover with Lexington was for US$5m excess of the
deductible of US$100,000 (or US$250,000) per claim and the self-insured
retention of US$10m per occurrence, with an aggregate limit of US$20m.
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c. Above that, the “PI tower” consisted of the three excess layers:
i. Policy No 2007-009 for US$5m any one claim and in the
aggregate excess of US$15m any one claim (i.e. excess of the
Lexington cover);
ii. Policy No 2007-010 for US$30m any one claim and in the
aggregate excess of US$20m any one claim; and
iii. Policy No 2007-011 for US$20m any one claim and in the
aggregate excess of US$50m any one claim.
d. The top and drop policy (number 2007-012) applied in excess of the
Lexington policy and the PI tower, and had a limit of liability of £10m or
equivalent excess of the underlying retention of US$10m any one claim and
US$20m in the aggregate.
6. The Lexington policy read:
“NOTICE: THIS IS A CLAIMS-MADE POLICY. SUBJECT TO
THE TERMS AND CONDITIONS OF THE POLICY, THIS
INSURANCE APPLIES TO ONLY THOSE CLAIMS THAT ARE
FIRST MADE AGAINST THE INSURED AND REPORTED TO
THE COMPANY DURING THE POLICY PERIOD, OR THE
OPTIONAL EXTENDED REPORTING PERIOD. THE COSTS OF
DEFENSE UNDER THIS POLICY, INCLUDING ATTORNEY’S
FEES, REDUCE THE LIMITS OF COVERAGE AND THE
DEDUCTIBLE AND SELF-INSURED RETENTION, STATED IN
THE DECLARATIONS. THE COMPANY SHALL NOT BE
OBLIGATED TO PAY ANY CLAIM OR CLAIM EXPENSES, OR
UNDERTAKE TO CONTINUE DEFENSE OF ANY SUIT OR
PROCEEDING AFTER THE LIMIT OF THE COMPANY’S
LIABILITY HAS BEEN EXHAUSTED.
Declarations
…
Deductible and Self-Insured Retention:
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a. $ 100,000 per Claim Deductible (including Claim Expenses)
b. $10,000,000 per Claim Self-Insured Retention (including Claim
Expenses)
c. $20,000,000 aggregate Self-Insured Retention per Policy Period
(including Claim Expenses)
The Insured shall have the obligation to pay up to:
1. the Deductible amount stated in line a.; and
2. the per Claim Self-lnsured Retention amount stated in line b.
Payments made under the per Claim Self-Insured Retention, line b.
are subject to the maximum Aggregate Self-Insured Retention
amount in line c.
…
THIS IS A CLAIMS-MADE AND REPORTED POLICY. CLAIMS
MUST FIRST BE MADE AGAINST THE INSURED AND
REPORTED TO THE COMPANY DURING THE POLICY
PERIOD UNLESS AN EXTENDED REPORTING PERIOD
APPLIES. THE PAYMENT OF CLAIM EXPENSES REDUCES
THE LIMITS OF INSURANCE.
Various provisions in this policy restrict coverage. Read the entire
policy carefully to determine rights, duties and what is and is not
covered. Refer to SECTION IV – DEFINITIONS for the special
meaning of other words and phrases that appear in bold face.
In consideration of the premium charged, the undertaking of the
Named Insured to pay the Deductible and/or Self-Insured
Retention and in reliance upon the statements in the application, and
subject to the Limit of Liability of this Insurance as set forth in the
Declarations, and the Exclusions, Conditions and other terms of this
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Policy, Lexington Insurance Company, hereafter referred to as the
Company, agrees with the Named Insured as follows:
PART A
I. INSURING AGREEMENT – COVERAGE
The insurance afforded by this Policy applies to Claims…which
allege any negligent act, error or omission provided …
The Company will indemnify the Insured all sums up to the Limits
stated in the Declarations, in excess of the Insured’s Deductible
and/or Self-Insured Retention, which the Insured shall become
legally obligated to pay as Damages if such legal liability arises out
of the performance of professional services in the Insured’s capacity
as an architect or engineer and as stated in the Application provided
…
IV. DEFINITIONS
…
E. Deductible and/or Self-Insured Retention means the amount
stated in Item 5. of the Declarations that the Insured will pay, as set
forth in the Declarations, for Claim Expenses and Damages with
respect to every Claim made during the Policy Period. This amount
must be paid prior to the Company indemnifying the Insured under
the terms and conditions of this Policy.
…”
7. By Endorsement No 8 the Lexington policy further provided:
“In addition to the coverage granted under this Policy, but subject to
the same Self-Insured Retention and limits of liability, we agree to
indemnify the Named Insured for the Named Insured’s Actual and
Necessary Costs and Expenses incurred in rectifying a Design Defect
in any part of the construction works or engineering works for any
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project upon which you are providing design/build services
provided:
A) the Insured reports the Claim for such Actual and Necessary
Costs and Expenses as soon as practicable after discovery of such
Design Defect but in no event after any certificate of substantial
completion has been issued;
B) the Insured proves to us that its Claim for Actual and Necessary
Costs and Expenses arises out of the Insured’s rendering of
professional services which resulted in a Design Defect for which a
third party could otherwise make Claim against the Insured.”
8. Each of the PI tower policies provided cover to BV as “the Assured” as
follows:
“To indemnify the Assured for claim or claims which may be made
against the Assured during the period of insurance hereon up to this
Policy’s amount of liability (as hereinafter specified) in the
aggregate, the excess of the Underlying Policy/ies limits (as
hereinafter specified) in the aggregate, the latter amount being the
subject of Indemnity Policy/ies (as hereinafter specified) or any
Policy/ies issued in substitution or renewal thereof for the same
amount effected by the Assured and hereinafter referred to as ‘the
Underlying Policy/ies’.”
Each PI tower policy then went on to specify its limit, and the underlying policy
number(s) and limit(s). Each then set out the following set of clauses, with the
reference LSW055 indicating that they were in fact a standard excess wording
(dating, as appears elsewhere, from August 1998):
“1. Liability to pay under this Policy shall not attach unless and until
the Underwriters 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.
2. It is a condition of this Policy that the Underlying Policy/ies shall
be maintained in full effect during the currency of this Policy except
for any reduction of the aggregate limits contained therein solely by
payment of claims or of legal costs and expenses incurred in defence
or settlement of such claims.
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3. If by reason of the payment of any claim or claims or legal costs
and expenses by the Underwriters of the Underlying Policy(ies)
during the period of this Insurance, the amount of indemnity
provided by such Underlying Policy/ies is:-
(a) Partially reduced, then this Policy shall apply in excess of the
reduced amount of the Underlying Policy/ies for the remainder of the
period of insurance;
(b) Totally exhausted, then this Policy shall continue in force as
Underlying Policy until expiry hereof.
4. In the event of a claim arising to which the Underwriters hereon
may be liable to contribute, no costs shall be incurred on their behalf
without their consent being first obtained (such consent not to be
unreasonably withheld). No settlement of a claim shall be effected
by the Assured for such a sum as will involve this Policy without the
consent of Underwriters hereon.
5. All recoveries or payments recovered or received subsequent to a
loss settlement under this Policy shall be applied as if recovered or
received prior to such settlement and all necessary adjustments shall
then be made between the Assured and the Underwriters provided
always that nothing in this Policy shall be construed to mean that
loss settlements under this Policy are not payable until the Assured’s
ultimate net loss has been finally ascertained.
6. Except as otherwise provided herein this Policy is subject to the
same terms, exclusions, conditions and definitions as the Policy of
the Primary Insurers. No amendment to the Policy of the Primary
Insurers during the period of this Policy in respect of which the
Primary Insurers require an additional premium or a deductible shall
be effective in extending the scope of this Policy until agreed in
writing by the Insurers. …
8. If the Assured shall prefer any claim knowing the same to be false
or fraudulent, as regards amount or otherwise, this Policy shall
become void and all claims hereunder shall be forfeited.”
9. The top and drop policy followed similar wording. It was:
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“To indemnify the Insured for claim or claims first made against the
Insured during the Period of Insurance hereon up to this Policy’s
amount of liability (as hereinafter specified) in the aggregate, the
excess of the Underlying Policy(ies) limits (as hereinafter specified)
in the aggregate, the latter amount being the subject of Indemnity
Policy(ies) (as hereinafter specified) or any Policy(ies) issued in
substitution or renewal thereof for the same amount effected by the
Insured and hereinafter referred to as ‘the Underlying Policy(ies)’.”
After stating its policy limits, and the underlying policy numbers and limits, it too
set out the LSW055 clauses, but with the addition of the following clause (clauses
5 and 6 above being renumbered accordingly as clauses 6 and 7):
“5. Any claim(s) made against the Insured or the discovery by the
Insured of any loss(es) or any circumstances of which the Insured
becomes aware during the subsistence hereof which are likely to give
rise to such a claim or loss, shall, if it appears likely that such
claim(s) plus costs and expenses incurred in the defence or
settlement of such claim(s) or loss(es) may exceed the indemnity
available under the Policy(ies) of the Primary and Underlying Excess
Insurers, be notified immediately by the Insured in writing to the
Insurers hereon.”
10. The reinsurance taken out by Teal in respect of the top and drop layer
identified the reinsured interest as “Architects and Engineers Professional Liability
as more fully defined in the primary policy wording, in connection with the
Original Insured’s business activities as Architects and Engineers”. It also
identified the underlying layers and provided “Excess Policy in any event no
broader than any underlying form”, and by Endorsement Seven it defined the basis
and scope of indemnity as follows:
“A. REINSURING CLAUSE
Except as otherwise agreed, the Reinsurer’s liability under this
Agreement shall follow that of the Reinsured for losses under all
terms, conditions, and limits to the Reinsured Original Policy or
Policies specified therein (‘the Policy’). Subject to treaty reinsurance
only, the Reinsured warrants to retain for its own account the amount
indicated as its Net Retention for the Agreement period. The
Reinsured shall provide to the Reinsurer promptly after closing a
copy of the Policy and any endorsements thereto affecting this
Agreement, and shall make available for inspection and place at the
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disposal of the Reinsurer at the office of the Reinsured any of its
records relating to this Agreement or to claims in connection
therewith at all reasonable times during and after the Agreement
period.
B. SCOPE OF INDEMNITY
The Reinsurer shall indemnify the Reinsured to the extent of the
Reinsurer’s written share for any loss, interest or Allocated Expenses
(as defined below) paid by the Reinsured and covered by this
Agreement. …”
The claims made
11. During the relevant insurance year, BV notified 27 claims, four of which
have a value in excess of US$1m. Two of these four are US or Canadian claims,
made against BV by American Electric Power (“AEP”) and known as (a) FRP
Pipe and (b) Jet Bubble Reactors – JBR Internals. BV puts the amount of the FRP
Pipe claim at US$10,491,368, in respect of which BV has paid out its self-insured
retention of US$10m and bears an applicable deductible of US$250,000. BV puts
the cost of repairs in respect of the JBR Internals at over US$200m, of which its
own incurred costs and liability are said to represent the major part. The two nonUS/Canadian claims are known as (c) Ajman Sewage and (d) PPGPL – Trinidad –
Design Issues. BV puts its incurred costs and liability in respect of the Ajman
Sewage claim at over US$33.9m. The PPGPL Trinidad Design Issues represent in
fact three separate design issues. After deductibles totalling US$750,000, BV puts
the claim at US$8,169,487.
12. In what order these claims may have been ascertained in the sense used in
Post Office v Norwich Union and Bradley v Eagle Star, and what relevance this
may have is in issue. Teal’s objective is to ensure that the Ajman Sewage and
PPGPL Trinidad Design Issues claims are met from the top and drop policy,
irrespective of the dates of their ascertainment against BV. But, if and so far as
ascertainment as against BV is relevant, BV and Teal also intend to argue that all
or some of BV’s liability in respect of the Ajman Sewage claim was ascertained
after the PI tower was exhausted by the ascertainment of the other claims, and so
falls within the top and drop policy.
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The nature of third party liability insurance
13. The nature of liability under a third party liability insurance cover was
considered in the context of the Lloyd’s litigation of the 1990s in Cox v Bankside
Members Agency Ltd [1995] 2 Lloyd’s Rep 437. The problem there was that some
agents had policies against which there were likely to be various calls, either
because several claims were being pursued against the same agents by different
Lloyd’s Names, or because the policies were group policies covering several
agents against each of which claims were being pursued, by different Lloyd’s
Names. The essential issue was whether each claim ascertained as against an agent
exhausted the agent’s insurance cover pro tanto, or whether all claims falling
individually within a policy’s scope ranked or could be treated as ranking pari
passu against the policy in whatever order they were ascertained against the
insured agent or agents. Both Phillips J and the Court of Appeal held that the
former was the correct answer. Phillips J said at p 442 (right) 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.”
A little later, he added:
“Thereafter if further third party claims are established it does not
seem to me that these can result in further liability on the part of the
insurer.”
In between these two passages, he analysed insurers’ liability in the traditional
terms which Teal criticises, that is as a liability for damages for breach of duty in
failing to hold harmless or to provide the indemnity. But, whether that analysis is
adopted has no bearing on the conclusion that an insurer’s liability under the
policy arises on the ascertainment of the insured’s third party liability, and that
once it arises the policy indemnity is pro tanto used up.
14. In Cox v Bankside itself, Phillips J held that the policy was called upon to
respond in this way to a court order for interim payment; if this were not so, an
insured “adequately protected by E & O insurance, would nonetheless be liable to
be rendered insolvent by his inability to call upon his E & O underwriters to
indemnify him against his liability to comply with an interim payment order” (p
453, left). In such circumstances, where the quantum of an insured’s third party
liability or insured expenses is ascertained in stages, its cause of action on its
insurer is progressively enlarged, and the insurance limit is progressively used up.
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15. In the Court of Appeal Saville LJ expressed a similar conclusion to Phillips
J’s. He was speaking of the position after the statutory assignment to a claimant
under the Third Parties (Rights against Insurers) Act 1930 of the potential right to
recover under the insurance policy claims as yet unascertained against the
insolvent insured. He said at p 467 (right) that in such a case:
“That right [the right to immediate payment under a liability policy]
only arises when, in each case, the claim is established, just as that
right, while owned by the insured, would also arise only when the
particular claim in question was established. It is only when that
right arises that the insurers come under the correlative obligation to
make payment. To my mind it follows that as each claim is
established (whether this occurs before or after the statutory
assignment), the right to payment arises and thus the amount of the
available insurance is in effect diminished, so that when it is
exhausted later established claims have no right to an indemnity. I
can find nothing in the Act which begins to suggest that somehow a
claimant third party whose claim is established cannot recover that
claim under the Act, or has to share that recovery with others who
have no rights against the insurers because the limit of cover has
been reached.”
General analysis
16. Mr Christopher Butcher QC for Teal challenges the proposition that the
ascertainment of a claim against the insured exhausts the insured’s insurance
policy cover pro tanto. He accepts that, under a claims made liability policy like
the present, an insurer’s liability arises typically as and when loss within the scope
of the policy is ascertained as against the insured. But he submits that it is only
when the claim is met by the insurer that the policy cover is pro tanto exhausted;
until then it is possible, if a second notified claim is made and ascertained against
BV as insured, to speak of a second cause of action or claim existing under the
policy; BV is free to claim and the insurer is liable to make payment of the later,
rather than the earlier, ascertained claim. As regards expenses incurred by BV and
covered under Endorsement No 8 to the Lexington policy, he submits that BV as
insured can again choose which expenses are paid first and against which claim or
claims it sets the self-insured retention or deductible, and, after the retention and
deductible are used up, in respect of which claim it claims payment of such
expenses from its insurer; in the last situation, it is again only when insurers pay
those, rather than any earlier ascertained, expenses, that the cover can be said to be
exhausted.
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17. I cannot accept Mr Butcher’s case on these points. Where an insurance has
a limit, it makes no sense to speak of the insured having causes of action or
recoverable claims which together would exceed that limit. If the limit is US$10m
and the insured incurs ascertained third party liability of US$10m in respect of
each of two successive third party claims, it makes no sense to speak of the insured
having two causes of action or two recoverable claims against its insurer totalling
US$20m. Likewise, if its liability is ascertained at US$7.5m each claim, the
insured will have two causes of action or claims against its insurer, but the second
will only be for US$2.5m. The 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. The claim against the insured must of
course fall within the scope of the policy and the insured may have to fulfil
procedural requirements regarding notification to the insurer as a condition of
recovery (see e.g. Clarke, The Law of Insurance Contracts, paras 17-4D4 and 26-
2G), but this appeal raises no issue regarding either of such points.
18. Similar considerations govern the incurring of ascertained expenses where,
as here under Endorsement No 8 to the Lexington policy, these fall potentially
within the policy indemnity. As and when BV incurs quantified expenses, they fall
to be set against the policy retention and deductible; over and above the retention
and deductible, any further expenses incurred fall not within the retention and
deductible, but within the insurance provided by Lexington (and thereafter,
potentially within the successive excess layers).
19. The policy thus serves the purpose of meeting each ascertained loss when
and in the order in which it occurs. An insured can forbear from notifying, or can
withdraw or abandon, a claim under an insurance in respect of expenses or third
party liability. The insurance will not then be exhausted by that claim, and the next
claim will be recoverable in the ordinary course under the insurance. But what is
here proposed is not the withholding or withdrawal of a claim; it is its continued
pursuit, coupled with adjustment of its priority as against the insurance or
programme of insurances.
Policy terms
(a) Lexington
20. On this basis, it is necessary to consider the terms of the insurances
involved in the programme to see whether they are consistent with this analysis or
lead to a different result. Starting with the Lexington policy, the Definition in Part
A.IV.E, read together with the Declarations section and the insuring provisions,
requires BV to have “paid” the amount of the deductible and self-insured retention
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“prior to the Company indemnifying the Insured under the terms and conditions of
this Policy”. Three points arise. First, this provision relates to the deductible and
retention; it underlines that, before Lexington can be called upon, the deductible
and retention must be used up in meeting expenses or liability to which the policy
indemnity otherwise applies. It is not a clause which would be expected to affect,
or give a choice as to, the nature or subject-matter of the indemnity.
21. Second, it is not certain that the word “paid” here means disbursed. As was
held in Charter Reinsurance Co Ltd v Fagan [1997] AC 313, under a differently
worded excess of loss reinsurance referring to the “sum actually paid”, so here the
word “paid” should in my opinion probably be understood as being used only as a
measure of liability incurred, rather than with the intention of insisting on
monetary disbursement. Otherwise, the present liability insurance would not meet
the aim of providing the insured with an indemnity to avoid the insolvency which
third party claims might otherwise threaten – a consideration emphasised in the
context of reinsurance in Charter Re and in the context of liability insurance by
Phillips J in Cox v Bankside.
22. Third, even if the word “paid” here means disbursed, a requirement of
disbursement as a pre-condition to recovery from insurers says nothing about what
has to be paid for a right to indemnity to arise under the insurance. It means only
that, as and when expenses and third party liability are incurred and ascertained,
they become recoverable under the insurance, provided that the insured first
disburses an amount equivalent to the deductible and self-insured retention. It does
not mean that the insured, by delaying such disbursement and choosing to make a
disbursement in respect of different, later ascertained expenses or liability, can
alter the order in which or policy in the insurance programme to which the first
ascertained expenses or liability attach. Nor does it give its insurer a right to say
that it will only provide indemnity in respect of later ascertained expenses or
liability, so promoting the claim in respect of such expenses or liability ahead of
the claim in respect of the earlier ascertained expenses or liability.
(b) The PI tower and the top and drop policy
23. It follows that, as and when expenses or third party liability are incurred and
ascertained, they are to be taken into account against the Lexington policy. First,
the self-insured retention and deductible must be used up, and then the policy will
respond up to its limit. Once that limit is used up, the next layer is engaged, and so
on up the PI tower of excess layer policies until the top and drop policy itself is
engaged. Taking the set of clauses LSW055, this is what would be expected from
in particular clause 6 of the PI tower policies (clause 7 of the top and drop policy),
which provides that each excess layer policy, including the top and drop policy, is
subject to the same terms, exclusions, conditions and definitions as the primary
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Lexington policy. It is also the more natural effect of clause 4 of the PI tower
policies (clauses 4 and 5 of the top and drop policy), which postulate a degree of
certainty from the outset about what claims are likely to impact, and what
settlements in particular will impact, different layers of an excess insurance
programme.
24. However, Teal relies upon clauses 1, 2 and 3 as leading to a different
conclusion. Under clause 1, liability only attaches to each excess layer once the
underlying insurers, starting with Lexington and moving upwards, “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”. So, Teal submits, its liability to BV
under the top and drop policy is conditioned by the order in which the underlying
insurers pay, or admit or are held to have liability, meaning that Teal in its
different capacity as underlying excess layer insurers can shape its own liability as
top and drop insurer, in order best to suit the interests of itself or its associate BV.
25. The basic difficulty with this submission is, once again, that it treats a
clause intended to define when liability arises as affecting the claims in respect of
which liability arises. “Liability under an excess policy attaches only after all
primary coverage has been exhausted”: North River Ins Co v American Home
Assurance Co (1989) 210 Cal App 3d 108, 112, quoted in Clarke, The Law of
Insurance Contracts, para 28-9B. Clause 1 of LSW055 goes further in performing
what Andrew Smith J (paras 36-37) and Tomlinson LJ in the Court of Appeal
(para 22) described as the “readily understandable” function of making clear that
the obligation to pay under each excess layer is deferred until the resolution of any
uncertainty or dispute as to the liability of underlying insurers. But it cannot
sensibly be read as intended to alter the identity of the claims which fall to be met
under any underlying insurance or will in due course fall to be met under the
excess layer insurances. The basic aim of a layered insurance programme like the
present is indicated by clause 6 of the PI tower policies (clause 7 of the top and
drop policy). Subject to their differences in threshold, limits, aggregates and
premium and to specific exceptions like that in respect of US and Canadian claims
in the top and drop policy, each layer operates on the same terms and conditions
and attaches to the same risks, albeit under clause 1 at different times depending
upon the settlement of claims under the underlying layers.
26. Teal’s case also looks at the picture from the top down, instead of looking
at claims as they in fact impact the programme, from the bottom up. At the bottom,
as I have already indicated, Lexington becomes liable, up to its policy limit, for
claims in the order in which BV incurs ascertained expenses or third party liability.
There are no other claims which Lexington can pay or in respect of which it can
admit or be held to have liability under its policy. These are the only claims which
Lexington can pay under its policy. To the extent that Lexington has paid or
admitted or been held liable to pay claims, there is no basis upon which Teal as an
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excess layer insurer can pay them either again or instead of Lexington. All that
Teal can pay is any balance remaining of such claims or any later ascertained
expenses or liability which BV may have incurred. Clause 1 of LSW055 cannot
alter this. It merely provides that liability under the first excess layer only attaches
as and when Lexington pays or admits or is held to have liability in respect of
BV’s ascertained expenses or third party liability.
27. The position is confirmed by clause 3(b), providing that, upon payment by
Lexington of the relevant ascertained expenses or claim exhausting the Lexington
policy, the first excess layer policy “drops down” to continue in force as the
underlying policy. The Lexington policy itself has no equivalent of clause 1. It
pays, as explained above, by reference to BV’s ascertained expenses or third party
liability. In both clauses 2 and 3, the word “payment” may again be no more than
shorthand (in the Charter Re sense of “established” or “ascertained”) for the
comprehensively expressed test “shall have paid or have admitted liability or have
been held liable to pay”, used in clause 1. But, if this is wrong, it makes no
difference. Upon payment by Lexington, whatever that means, the first excess
layer policy will have to “drop down” under clause 3 to become the underlying
policy, i.e. on the same terms as the Lexington policy. Liability under the first
excess layer, in its new role as underlying policy, will then necessarily be
determined by the timing of the ascertainment of BV’s third party liability and
expenses. The same position will apply successively under each excess layer,
including the top and drop, as each is exhausted in turn.
28. It is true, that, if “payment” in clauses 2 and 3 means disbursement, there
may, at least in some cases, be a difference between the time when liability
“attaches” to the first excess layer under clause 1 (e.g. as a result of an admission
or finding of liability) and a later moment in time when Lexington disburses
payment. But that cannot allow Teal as first excess insurer in that gap period, if it
can and does exist, to make payments other than or in a different order than those
for which it will in due course become underlying insurer when its excess
insurance drops down to become the underlying policy under clause 3(b).
Commerciality
29. What I have said corresponds, very substantially, with the reasoning of
Longmore and Tomlinson LJJ, with both of whose judgments Sir Robin Jacob
agreed, in the Court of Appeal. In reaching his conclusion, Longmore LJ also
placed some weight on what he regarded (in his paras 13 and 16) as the
commercial common sense of the top and drop policy, citing Rainy Sky SA v
Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900, paras 21 to 30. Mr Butcher
took issue with this, and maintained that, on the respondents’ case, there was scope
both for haphazard results and for some degree of control by an insured or primary
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insurer in the timing of the ascertainment of BV’s third party liabilities or
expenses; the scheduling or difficulty of settlement discussions could mean that a
later arising third party claim led to ascertained liability on BV’s part sooner than
an earlier claim; BV or its insurers, in so far as they took over the conduct of a
third party claim, might take steps to ensure that either a third party claim or
expenses were ascertained sooner than another. This is true.
30. On the other hand, the degree of adjustment of the order of claims which
Teal maintains it can achieve, for the benefit of its associate BV, is more
remarkable, and only arises as a possibility because Teal is BV’s insurance captive
and is party to BV’s programme of layered insurance coverage. It suits Teal in the
present case to claim that BV or it itself can adjust the order in which claims
impact the different programme layers, in order to assist Teal’s associate BV. This
produces the unfamiliar phenomenon of an insurer seeking to maximise its own
insurance liabilities. Teal can afford to try to do this on the back of its reinsurance
in respect of the top and drop layer by the respondents. Had Teal been an
independent rather than captive insurer and determined to avoid as much liability
to BV as possible, BV would no doubt vigorously have objected to the legitimacy
of Teal as its excess layer insurer under the PI tower policies adjusting the order of
payment of claims ascertained as against BV, with the aim of ensuring that it was
only US and Canadian claims that reached the top and drop policy. Its objection
would in my view have been well-founded. The freedom of choice which Mr
Butcher advocates on behalf of Teal and in the interests of BV cannot in the
present context readily be reconciled with the basic philosophy that insurance
covers risks lying outside an insured’s own deliberate control.
31. I would myself therefore have no doubt about agreeing with Longmore LJ’s
view of commerciality, as confirming and reinforcing the conclusion which he
reached and I also reach. However, in my view it is also unnecessary to do so. This
is a case where analysis of the terms and scheme of the relevant insurance policies
provides the answer without more.
Conclusion
32. For these reasons, I would dismiss this appeal.
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