The Court of Appeal recently confirmed the rule that as soon as the insured's liability is established then its insurer also becomes liable.
A tower of insurance contracts provided Black and Veatch (a group of engineers) with worldwide cover of US$60 million in excess of the deductible and self insured retention. Lexington wrote the primary layer, whilst B&V's captive insurer, Teal, wrote the next three layers in the tower.
A top and drop insurance provided further cover of £10 million upon the exhaustion of the tower. This insurance was also written by Teal, but was different in that it excluded US and Canadian claims. Teal's participation in the top and drop insurance was reinsured by WR Berkley.
In its December 2011 Judgment, the Court of Appeal considered the order in which losses would be allocated to the tower of insurance and the top and drop insurance. The dispute between Teal and WR Berkley concerned whether the tower was exhausted (1) once claims which amounted to US$60 million were settled by B&V; or (2) only when the liability of the insurers in the tower had been determined whether by agreement, award or judgment.
The dispute arose when (1) the retention and primary layer were both exhausted; (2) B&V had incurred US$30 million in losses in respect of two non-US claims which had not yet been presented to Teal; and (3) B&V faced a US claim, which was expected to exhaust the tower.
Teal argued that B&V could choose the order in which they presented claims to Teal and Teal could choose the order in which the claims were settled. If correct this would mean that Teal (with B&V) could settle the US claims first and postpone the settlement of the non-US claims, thereby settling the latter under the top and drop insurance.
This case turned on the wording found in the top and drop insurance. Lord Justice Longmore stated that the key provision provided: "that once the indemnity provided by the underlying policies is exhausted, then "this policy shall continue in force as Underlying policy"...The insurance in excess of $60 million "drops down" and becomes the underlying policy, or is, at least, on the same terms as the underlying (namely, ultimately, the Lexington) policy..."
Longmore LJ stated that under the Primary Policy Lexington became liable whenever claims were established against Black and Veatch, applying the usual Post Office v Norwich Union principles. He went on to say: "Once their layer has been exhausted, the next policy (009) becomes the underlying policy and Teal are, therefore, liable (as Lexington were) once the liability of Black and Veatch is established by admission, judgment or award; and so on up the tower."
According to Longmore LJ this was the "commercial common sense" of the drop and top insurance. Any other result would allow Teal and B&V to allocate losses so as to maximise reinsurance recoveries, which "is unlikely to have been the intention of the parties".
Further reading: Teal Assurance Company Ltd v WR Berkley Insurance (Europe) Limited and Aspen Insurance UK Limited [2011] EWCA Civ 1570
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
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The original publication date for this article was 26/01/2012.
