JOHN WYETH & BROTHERS LTD v CIGNA INSURANCE COMPANY OF EUROPE SA/NV AND ORS

An excess insurer's obligation to meet defence costs depends on the construction of the policy as a whole. A bona fide payment by a primary insurer of its full indemnity limit to the insured in response to covered claims can exhaust the primary layer. It does not breach a maintenance clause merely because the underlying claims have not been established by judgment or settlement.

Where the policy provides litigation insurance, an obligation to defend, pay, or reimburse defence costs applies to claims which might fall within cover. It continues until the claims can be confined outside cover. The insured need not reimburse costs incurred before that point. Under a policy covering costs reasonably related to defending a covered injury, there is no further apportionment merely because the pleading also alleges injury in uninsured periods.

Users of benzodiazepine drugs brought about 11,000 claims against Wyeth. The claims did not proceed to judgment, but Wyeth incurred substantial defence costs.

The primary insurer, GRE, exercised a contractual buy-out. It paid its policy limits and defence costs incurred to that date, and was discharged from further liability. Cigna, as successor to insurers providing excess cover governed by New York law and primary cover governed by English law, disputed liability for subsequent costs.

Langley J determined preliminary construction issues in judgments dated 18 April and 13 November 2000. Cigna appealed. The central questions were whether the buy-out breached the maintenance clauses or triggered excess cover, whether defence costs were recoverable without retrospective apportionment, and whether costs under the English-law Home policy required allocation.

1. The Court of Appeal unanimously dismissed both appeals. Waller LJ gave the principal judgment, with which Dyson LJ and Sir Murray Stuart-Smith agreed.

2. Under the New York-law policies, GRE's bona fide buy-out payment exhausted the primary indemnity limit. It was payment in respect of claims made by Wyeth as insured. The maintenance clauses did not require payment directly to third-party claimants and did not permit the word established to be added to the word “claims”. The underlying policies had therefore been maintained in force and there was no breach of the maintenance clauses.

3. The exhaustion of GRE's cover triggered the excess insurers' obligation to take over the defence or meet defence costs. The relevant St Paul and Aetna provisions provided litigation insurance. Their references to paying or reimbursing defence costs did not merely postpone payment until liability to third parties had been established. They covered costs incurred in defending claims which might fall within the policies, including claims which were groundless or ultimately unsuccessful.

4. That obligation continued until a claim could be confined outside the period of cover. Once it could be so confined, the future obligation ceased, but the insured was not required to repay costs already incurred. There was consequently no basis for retrospective apportionment of pre-confinement costs between insured and uninsured periods. The efficacy exclusion did not exclude the benzodiazepine claims.

5. As to the English-law Home policy, Cigna accepted liability for costs reasonably related to defending a claim alleging injury within its policy period. Once that threshold was met, the insurer could not reduce the indemnity merely because the same pleading alleged worsening injury or a separate injury in uninsured years. Cigna remained free to show that a particular cost related solely to an uncovered claim, but had not established any basis for the proposed allocation.

• Court of Appeal (Civil Division): Cigna's appeals from both preliminary rulings were dismissed.
• High Court, Queen's Bench Division (Commercial Court), Langley J: Preliminary construction issues were decided in Wyeth's favour on 18 April 2000 and, concerning the Home policy, on 13 November 2000.