Teal Assurance v WR Berkley and Aspen
| Jurisdiction | England & Wales |
| Judge | Lord Justice Longmore,Lord Justice Tomlinson,Sir Robin Jacob |
| Judgment Date | 15 December 2011 |
| Neutral Citation | [2011] EWCA Civ 1570 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2011/0365 |
| Date | 15 December 2011 |
[2011] EWCA Civ 1570
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE SMITH
Royal Courts of Justice
Strand, London, WC2A 2LL
The Right Honourable Lord Justice Longmore
The Right Honourable Lord Justice Tomlinson
and
The Right Honourable Sir Robin Jacob
Case No: A3/2011/0365
Mr Christopher Butcher QC & Ms Rebecca Sabben-Clare (instructed by DAC Beachcroft LLP) for the Appellants
Mr Colin Edelman QC (instructed by Clyde & Co) for the Respondents
Hearing dates : 4 th November 2011
Introduction
This appeal is about the professional indemnity insurance of a firm of (mainly American) architects and engineers known as the Black and Veatch Group. The Group has a "tower" of insurance contracts providing it with worldwide cover for any one claim (and in an annual aggregate) of US$60 million in excess of the deductible and self insured retention. The first layer of this tower was written by Lexington Insurance Co Ltd; above this were three further layers of excess of loss insurance written by Teal Insurance Co Ltd ("Teal") who were the claimants in the proceedings and are now the appellants. (The Lexington policy is referred to in the Teal contracts as "the primary policy"). There is then what is known as "top and drop" insurance which provides additional cover up to £10 million per claim once the tower is exhausted. This top and drop cover is also written by Teal and is reinsured with the defendants (the respondents to the appeal). It is not, however, world wide because it excludes claims emanating from the USA and Canada.
In general terms in English law a liability insurer's liability only arises when (and does not arise until) the liability of the insured to the third party is established (whether by agreement, judgment or award), see Post Office v Norwich Union Insurance Co Ltd [1967] 2 QB 363 and Bradley v Eagle Star Insurance Co Ltd [1989] 1 AC 957. Thus Lexington will be liable to Black and Veatch, subject to any express term of the insurance contract to the contrary and any defence Lexington may have, when Black and Veatch agree to pay any sum to the third party to whom they are liable or when the third party obtains a judgment or award against them. The question in this case is whether Teal as first excess of loss insurer can say that they are not liable until Lexington have themselves agreed to settle with or have been adjudged to be liable to Black and Veatch or whether Teal become liable at the same time as Lexington. If the former argument is correct, then the question arises whether Teal as second excess of loss insurer can say that they are not liable until liability is established against the first excess of loss insurer and so on back up the tower so that Teal as top and drop insurer (and reinsured) can say that they are not liable until liability has been established against the insurers in the tower.
The particular difficulty giving rise to the dispute stems from the fact that the tower gives worldwide cover but the top and drop insurance/reinsurance excludes what I may call for short American claims. If, say, a non-American claim for $80 million is made against the Group and the Group agrees to pay that claim or is found liable to do so (and the claim is, therefore, established) on 1 st January of a given year and an American claim is agreed to be paid or is otherwise established in the same amount on 1 st February, does that mean that the tower is exhausted on 1 st January so that the top and drop insurers/reinsurers become exposed but can deny liability for the later claim since it is an American claim? Similarly, if an American claim is established against the Group on 1 st January and a non-American claim is established on 1 st February, is the tower exhausted on 1 st January so that the top and drop insurers/reinsurers then become liable for the non-American claim?
Alternatively, is the position that Teal can say that the tower is not exhausted until first Lexington and then Teal themselves have agreed that there is a liability on them or they have been found liable by judgment or award so that Teal can effectively decide to pay the American claims first (in the tower) and non-American claims subsequently, looking to their reinsurers for reimbursement for such (deferred) non-American claims?
The question needing resolution arises between Teal as the original insurer under the top and drop policy and their reinsurers; it asks whether the tower is to be regarded as exhausted once claims which amount to $60 million are settled by the Group or only when the liability of the insurers in the tower has been determined whether by agreement or award or judgment. Andrew Smith J decided that the former solution is correct; the answer must, of course, depend on the terms of the reinsurance contract but the true construction of those terms may be influenced by the terms of (a) the top and drop, (b) the intermediate (Teal) or (c) the primary (Lexington) contract(s) of insurance.
Policy Terms
The obligations of Teal as top and drop insurers are:-
"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) 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)".
| This Policy's amount of liability: | GBP 10,000,000 or its equivalent in other currencies each and every claim including claims emanating from or brought anywhere in the world excluding USA, its territories or possess ions, or Canada. |
| Underlying Policy(ies) limits: | USD 20,000,000 any one claim in the annual aggregate emanating from or brought anywhere in the world, including Claims Expenses |
| USD 30,000,000 any one claim and in the annual aggregate emanating from or brought anywhere in the world, including Claims Expenses | |
| Only to pay excess of; | |
| USD 5,000,000 any one claim and in the annual aggregate emanating from or brought anywhere in the world, including Claims Expenses | |
| Only to pay excess of: | |
| USD 5,000,000 any one claim and in the general aggregate emanating from or brought anywhere in the world, including Claims Expenses for Claims | |
| Only to pay excess of a retention of: | |
| USD 10,000,000 any one claim, including Claims Expenses for Claims emanating from or brought anywhere in the world | |
| USD 20,000,000 in the annual aggregate, including Claims Expenses for Claims emanating from or brought anywhere in the world | |
| Which in turn in Excess of: | |
| USD 100,000 each and every claim including Claims Expenses | |
| Underlying Policy(ies) Number(s): | i) Lexington # 0101085 ii) 2007–009 iii) 2007–010 iv) 2007–011" |
There are then relevant conditions:-
"1. Liability to pay under this policy shall not attach unless and until the Insurers of the underlying policy(ies) shall have paid or admitted liability or have been held liable to pay, the full amount of their indemnity inclusive of costs and expenses.
…
3. If by reason of the payment of any claim or claims or legal costs and expenses by the insurers 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 insurers 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 insured for such a sum as will involve this policy without the consent of insurers hereon.
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."
These conditions are also present in the intermediate Teal contracts of insurance.
The substantive clause of the reinsurance contract provides:-
"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 primary (Lexington) policy provides:-
"1. INSURING AGREEMENT – COVERAGE
The Insurance afforded by this policy applies to claims, as defined in Section IV A(ii) and B of this part of the policy, which allege any negligent act, error or omission provided the claims are either (i) first made against the Insured during the Policy Period and reported in writing to the Company during...
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