Teal Assurance Company Ltd v WR Berkley Insurance (Europe) Ltd & Anor

An excess “top and drop” policy which continues as the underlying policy after lower layers are exhausted must be construed by reference to the liability trigger in the underlying cover. The insurance programme is exhausted sequentially when the insured’s liabilities to third parties are established, not when each underlying insurer elects to pay, admit, or is held liable for its own layer.

A condition deferring an excess insurer’s payment while underlying liability remains unresolved regulates the relationship between layers. It does not permit the insured or its insurer to choose the order in which claims exhaust the programme. Where competing constructions are available, the commercially sensible construction should be preferred.

Black and Veatch held US$60 million of worldwide professional-indemnity cover in a layered insurance tower. Teal also provided a £10 million “top and drop” policy, reinsured by the respondents, which excluded claims from the United States and Canada.

The dispute concerned whether the tower was exhausted when liabilities of Black and Veatch to claimants were established, or only when insurers in each underlying layer had paid, admitted liability, or been held liable. The latter construction could allow American claims to be met in the worldwide tower and non-American claims to be deferred to the reinsured cover.

Andrew Smith J decided the preliminary issue for the reinsurers: [2011] EWHC 91 (Comm). Teal appealed.

Appeal dismissed unanimously. Longmore LJ gave the principal judgment. Tomlinson LJ and Sir Robin Jacob agreed.

1. Subject to an express contractual term or a defence, a liability insurer becomes liable when the insured’s liability to the third party is established by agreement, judgment or award. The insurer’s liability does not await its own payment or admission. That ordinary position, drawn from Post Office v Norwich Union Insurance Co Ltd [1967] 2 QB 363, governed the primary Lexington layer.

2. Condition 3 of the top-and-drop policy provided that, once the underlying policies were totally exhausted, the policy would continue as the underlying policy. Each excess layer therefore dropped down as the preceding layer was exhausted. The tower was exhausted in the order in which Black and Veatch’s liabilities were established, so the top-and-drop cover could not respond while relevant worldwide cover remained available.

3. Condition 1 could, if it stood alone, defer liability under an excess layer until the underlying insurers had paid, admitted liability, or been held liable. The reasoning in Firma C & Trade v Newcastle P & I Association (The Fanti and The Padre Island) was therefore not determinative. Condition 3 required a different result once the cover dropped down. Tomlinson LJ further held that condition 1 regulated the relationship between layers and the deferral of payment pending resolution of underlying disputes; it did not determine the sequence in which claims exhausted the programme.

4. A Lexington provision requiring payment of the deductible or self-insured retention did not clearly displace the ordinary accrual of liability. At most, it created a procedural bar to recovery, consistently with Coburn v Colledge [1897] 1 QB 702.

5. The reinsurers’ construction was commercially sensible. Teal was a captive insurer associated with the insured, and the alternative construction would enable manipulation of the order of American and non-American recoveries. Applying Rainy Sky S.A. v Kookmin [2011] UKSC 50, the court preferred the construction that avoided that result.

• Court of Appeal (Civil Division) — dismissed Teal’s appeal and affirmed the construction adopted below: [2011] EWCA Civ 1570.
• High Court, Commercial Court — Andrew Smith J held that the US$60 million tower was exhausted by liabilities established against the insured, rather than only by determination of the underlying insurers’ liabilities: [2011] EWHC 91 (Comm).