The order of losses - how does your liability stack up?

The Court of Appeal held in Berkley v Teal [2017] EWCA Civ 25 that paying sums into escrow pursuant to a compromise agreement did not give rise to an insured loss. Liability was not yet “ascertained”, as putting money aside which could be used to make compensatory payments was not the same as paying damages pursuant to a legal obligation.  

In W R Berkley Insurance (Europe) Ltd and Another v Teal Assurance Co Ltd [2017] EWCA Civ 25 the Court of Appeal applied the established rule that an insurer faces liability for claims in the order in which the insured’s losses are incurred, and in the case of a liability policy the loss occurs when the insured’s liability to a third party is established and quantified (see our elexica article about the 2013 Supreme Court decision in Teal v Berkley here). As such, the payment of a sum by an insured into an escrow account from which there might be subsequent payments pursuant to a compromise agreement did not give rise to an insured loss and an indemnity obligation on the part of the paying party's insurer.

Teal, the captive insurer of international engineering company Black & Veatch (B&V), issued several layers of insurance cover for B&V’s professional indemnity liabilities. These policies provided $60m of underlying cover and sat on top of B&V’s self-insured retention of $10m. Teal also wrote a "top and drop" policy (which was reinsured by W R Berkley) providing £10m of excess cover which sat above the underlying $60m tower. The main difference between the "top and drop" (and associated reinsurance) policy and the underlying policies was that the former excluded losses emanating from or brought in the USA or Canada.

Five claims were issued against one of B&V’s companies (BVC) during the policy period (three in the USA and two outside the USA), and the issue before the Court of Appeal related to the date at which Teal became liable in relation to a particular non-US claim (which in turn determined the allocation of losses and in turn whether reinsurance cover was available). The non-US claim concerned a settlement agreement dated 15 December 2010 whereby BVC placed approximately US$ 13.5m into an escrow account to be used for remedial works. W R Berkely argued that the settlement agreement was akin to an interim payment and therefore an establishment and quantification of liability existed on 15 December 2010. If this was correct then no reinsurance cover was available as in terms of timing, this non-US claim would be allocated to the underlying tower resulting in various US claims being allocated to the "top and drop" policy which excluded such claims. Teal argued, however, that BVC’s liability was established and quantified only when drawdowns on the escrow account were made (on later dates) resulting in earlier US claims being dealt with first by the underlying policies leaving the "top and drop" (and in turn reinsurance) policy in place to cover the non-US claim.

The Court of Appeal agreed with Teal as the particular settlement agreement included a provision whereby the monies within the escrow account may never be released to the ultimate claimant, and that BVC’s liability could not be ascertained until relevant certificates proving costs of the remedial works were submitted.

This decision accords with the general rule that for the purposes of exhausting underlying policies, it is not open to an insurer (or reinsurer) to determine for itself the order in which claims are to be allocated to the insurance. Rather, claims are to be allocated in the order in which losses have occurred; under a liability policy that is the date upon which the liability of the insured is established and quantified by way of judgment, award or settlement. It appears that very clear wording would be needed to vary this principle and allow an insurer to order the claims as it saw fit.

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