Royal & Sun Alliance Insurance Plc v Textainer Group Holdings Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Phillips,Lady Justice Falk,Lord Justice Arnold |
| Judgment Date | 22 May 2024 |
| Neutral Citation | [2024] EWCA Civ 547 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: CA-2022-002068 |
[2024] EWCA Civ 547
Lord Justice Arnold
Lord Justice Phillips
and
Lady Justice Falk
Case No: CA-2022-002068
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT (KBD)
DAVID RAILTON KC (SITTING AS A DEPUTY JUDGE OF THE HIGH COURT)
[2022] EWHC 1995 (Comm)
Royal Courts of Justice
Strand, London, WC2A 2LL
Peter MacDonald Eggers KC (instructed by Kennedys LLP) for the Appellants
Christopher Smith KC (instructed by BDM Law LLP) for the Respondents
Hearing dates: 22 & 23 November 2023
Approved Judgment
This judgment was handed down remotely at 10.30am on Wednesday 22 May 2024 by circulation to the parties or their representatives by e-mail and by release to the National Archives
The principal issue on this appeal is whether insurers, who have paid out under excess of loss policies, are entitled to a proportionate share of relevant recoveries subsequently made by the insured, or whether those recoveries are to be applied first to uninsured losses, applying the “top down” approach adopted by the House of Lords in Lord Napier and Ettrick v Hunter [1993] AC 713.
The essential facts
The respondents (“Textainer”) are companies in the Textainer group, one of the largest intermodal container lessors in the world. For the year commencing 1 October 2015 Textainer benefited from a container lessee default insurance programme, consisting of a US$5m retention, a primary policy of US$5m (in excess the US$5m retention) and five excess of loss policies providing cover up to US$80m in excess of the US$5m retention (“the Policies”). The respondents are, or represent, most of the insurers subscribing to the primary policy and the first to third excess policies (“the Insurers”).
On 31 August 2016 one of Textainer's lessees, Hanjin Shipping Co. Ltd (“Hanjin”), applied to the Seoul Central District Court for receivership, an event entitling Textainer to an indemnity under the Policies against the loss of containers on-hire to Hanjin and not recovered within 183 days, uncollected rental during that period, and the costs of retrieving and/or repairing recovered containers. At that date Hanjin was in possession of about 113,000 of Textainer's containers, held on a mixture of operating leases and finance leases. Hanjin was adjudged to be bankrupt on 17 February 2017, at which date Textainer's losses were assessed as being about US$117.7m. That figure changed over time as all but 8,820 containers were recovered, counterbalanced by increasing costs and lost rental. For the purposes of this appeal, Textainer's total losses are agreed to have been US$101,856,624, of which the net sum of US$478,265 was received from Hanjin Bankruptcy Trustee in early 2019 in respect of container rentals, paid in order to release a vessel arrested by Textainer.
The primary policy and the first to fourth excess policies paid out in full and, on 31 December 2018, the claim under the fifth excess policy was settled for US$25.1m (the limit under that policy being US$30m) so that the total sum paid to Textainer was US$75.1m, leaving uninsured losses in the region of US$21m (in addition to the retention of US$5m). As part of the settlement, the rights of subrogation under the fifth excess policy were transferred to Textainer. The rights of subrogation of insurers under the fourth excess policy (providing cover for US$10m) were also transferred to Textainer pursuant to a settlement agreement dated 26 June 2019.
In May 2019, at the invitation of Hanjin's Bankruptcy Trustee, Textainer made a claim against Hanjin. By a settlement agreement dated 28 October 2019 Hanjin agreed to pay US$25,886,647.60 to Textainer in respect of its claim relating to operating leases only (“the Hanjin Settlement”). Between November and December 2019 Hanjin's Bankruptcy Trustee paid Textainer US$14,706,880.84 of that agreed sum.
The proceedings
In these proceedings the Insurers claimed to be entitled to 39.3% of the sums received or to be received by Textainer pursuant to the Hanjin Settlement (having insured US$40m of Textainer's total loss of US$101,856,624). Textainer resisted the claim, maintaining that it was entitled to retain all recoveries up to a total of US$56,378,359 (being its net loss of US$101,378,359 less the US$40m covered by the Insurers and the US$5m retention).
The Insurers' claim was dismissed on 5 October 2022 by David Railton KC, sitting as a deputy High Court judge (“the Judge”), following a trial. In his reserved judgment dated 27 July 2022, the Judge held, in so far as relevant to this appeal, that:
(i) as a matter of principle, any recoveries made pursuant to the Hanjin Settlement were to be applied on a top down basis, and not on a proportionate basis;
(ii) in any event, the Insurers had failed to prove, as a matter of fact, that the recoveries made in respect of losses relating to operating leases had been indemnified proportionately or at all by the primary policy and/or the first three excess policies; and
(iii) this was not a case of under-insurance within section 81 of the Marine Insurance Act, 1906 (“the 1906 Act”), so recoveries were not to be shared pro rata, the principle of “averaging” not being applicable.
The Insurers were granted permission to appeal that decision, challenging each of the Judge's findings set out above. Textainer opposed the appeal and further contended, by its Respondent's Notice, that even if the principle of averaging applied between the insured tranches of loss and the uninsured, the recoveries should nevertheless be applied “top-down” as between the layers of insurance. As the rights of subrogation in respect of the top two layers had been transferred to Textainer, Textainer submitted that the Judge had in any event been right to dismiss the claim.
The Policies
The Judge explained that the detailed structure of the insurance was as follows:
“22 …. a Primary Policy of US$5m excess a US$5m retention, followed by five excess layers providing cover up to US$85m. The Excess Policies comprised the 1st Excess Policy of US$5m excess US$10m; the 2nd Excess Policy of US$5m excess US$15m; the 3rd Excess Policy of US$25m excess US$20m; the 4th Excess Policy of US$10m excess US$45m and the 5th Excess Policy of US$30m excess US$55m. Losses over US$85m were uninsured”
The Policies were governed by English law. Each of the excess policies incorporated the terms of the primary policy, save that the fifth excess policy excluded loss of earnings, a factor in the level of settlement of Textainer's claim in respect of that layer. Each of the excess policies also included a “no drop down” clause, providing that the policy would only ever provide cover for the identified tranche of excess loss, and would not provide cover for the layers below in any circumstances.
The primary policy included the following provisions:
“SECTION 1 — PHYSICAL DAMAGE & EQUIPMENT RECOVERY
The Insurers will indemnify the Assured to the extent provided by this policy if Equipment is lost, destroyed or damaged whilst being moved delivered or repositioned or whilst located in Depots or otherwise in store anywhere in the World during the Period of Insurance …
SECTION 1 – PHYSICAL DAMAGE & EQUIPMENT RECOVERY (continued)
EXTENSIONS APPLICABLE TO ON- HIRE EQUIPMENT
In respect of On-hire Equipment the Insurers will indemnify the Assured to the extent provided by this policy for:
1. LOST EQUIPMENT AND REPAIR AND ASSOCIATED COSTS
costs incurred in retrieving and/or repairing Equipment abandoned by the Lessee and outstanding repair costs and/or service charges incurred by the Lessee relating to Equipment incurred or arising from the failure of any Lessee to fulfil their obligations to the Assured for such Equipment and not recovered within 183 days of the Date of Occurrence.
2. SURVEY, DAMAGE REPAIR AND RE-MARKING COSTS
repair and re-marking costs including survey and/or inspection charges incurred by the Assured in assessing the extent of damage insured under 1. above …
3. OUTSTANDING REPAIR COSTS AND SERVICE CHARGES
repair and/or service charges relating to the Equipment raised by the Assured to the Lessee after the Date of Occurrence which the Assured are unable to collect …
4. RECOVERY, HANDLING AND DROP-OFF COSTS
1. costs and expenses reasonably incurred to recover Equipment to a Specified Location or other premises for repair and/or storage and/or releasing as appropriate and
2. Equipment handling charges incurred by the Assured or the Lessee which the Assured are unable to collect …
caused by or arising from the failure of any Lessee to fulfil their obligations to the Assured with respect to such Equipment…
SECTION 2 — LOSS OF EARNINGS
The Insurers will indemnify the Assured for uncollected rental and other charges as specified in the lease or conditional sale agreement which:
a) relate specifically to leased Equipment which has not been returned to a Specified Location prior to any Lessee's contractual default, bankruptcy (de factor or de jure), insolvency … during the Period of Insurance and
b) are not received as a direct result of such...
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