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

In excess reinsurance, the point at which underlying cover is eroded is determined by when liability arises under the original insurance programme, including the underlying layers. It is not determined by when the excess insurer becomes liable under a top-and-drop policy.

Unless the policy clearly provides otherwise, losses are taken in the order in which they are suffered. An annual aggregation of losses, the order of notification, or the order of payment does not determine the excess point. A condition requiring exhaustion of underlying insurance before an excess policy responds is a precondition to recovery, not a mechanism for rearranging the order in which losses erode the underlying cover.

The claimant reinsured its liability under a professional liability insurance programme. The defendants provided excess reinsurance above a multi-layer professional indemnity tower. The underlying programme covered worldwide claims, whereas the excess reinsurance excluded claims emanating from or brought in the United States, its territories, possessions or Canada.

The parties agreed facts and sought determination of a preliminary construction issue. The central question was whether the excess point was reached by reference to the order in which losses were suffered, liability was established, payments were made, claims were notified, or aggregate losses accumulated during the policy year.

1. Construction of the excess point. The court accepted the defendants’ construction of the Excess Policy. The underlying layers were eroded by losses in the order in which those losses were suffered. For liability cover, the relevant loss arose when liability was established and quantified. For mitigation cover, liability arose when the insured incurred the relevant costs and expenses.
2. Clause 1. A clause providing that liability under an excess policy does not attach until the underlying insurers have paid, admitted liability, or been held liable for the full underlying indemnity is a precondition to the policy responding. It does not determine the order in which losses erode the underlying tower. In a programme of top-and-drop policies, the relevant criterion is when liability arises under the original insurance programme, including the underlying cover, rather than when liability arises under the particular excess policy.
3. Alternative constructions. The annual aggregate submission was rejected. Top-and-drop policies ordinarily contemplate erosion during the insurance period, and clear wording would be required to aggregate losses after the period without regard to when they were incurred. The notification submission was unsupported by the wording and by evidence of market practice. The proposed payment-based approach and the suggestion that exhaustion should be viewed from the reporting lawyer’s perspective were also rejected.
4. Authorities and order. The court applied the established principles that reinsurance covers the same risk as the original insurance and that payment by the reinsured is not generally required before the right to reinsurance indemnity arises. North Atlantic Insurance Co Ltd v Bishopsgate Insurance Ltd was not inconsistent with the conclusion and supported rejection of a payment-based test. The various submissions advanced by Teal were rejected. The defendants’ construction was accepted, with precise orders to be addressed after submissions.