Teal Assurance Company Limited v W R Berkley Insurance (Europe) Limited and another

Under a liability insurance programme with aggregate limits, an insured loss engages and exhausts the available cover, wholly or pro tanto, when the insured’s liability is ascertained by agreement, judgment or award. Covered quantified expenses have the same effect when incurred.

Successive claims therefore attach to the primary and excess layers in the order of ascertainment. A clause postponing an excess insurer’s liability until underlying insurers have paid, admitted liability or been held liable governs the time of attachment. It does not permit the insured or an insurer to select or rearrange the claims allocated to each layer. An insured may abandon or withdraw a claim, but cannot continue pursuing it while changing its priority against the insurance programme.

Black and Veatch Corp had a professional liability insurance programme comprising a primary policy, three successive excess layers written by its captive insurer, Teal Assurance Company Limited, and a further “top and drop” layer also written by Teal. The top layer excluded claims emanating from or brought in the USA or Canada and was reinsured by the respondents.

Teal sought to arrange the claims paid through the lower layers so that non-US and non-Canadian claims would reach the reinsured top layer. Andrew Smith J rejected that position in the Commercial Court, [2011] EWHC 91 (Comm). The Court of Appeal also rejected it, [2011] EWCA Civ 1570.

The central issue was whether the insured or Teal could choose the order in which notified claims exhausted the primary and lower excess layers, or whether claims attached in the order in which the insured’s liabilities and covered expenses were ascertained.

1. The appeal was dismissed unanimously. Lord Mance delivered the judgment, with which Lord Neuberger, Lord Clarke, Lord Sumption and Lord Toulson agreed.

2. When an insured’s third-party liability is ascertained by agreement, judgment or award, a claim arises under the liability policy and exhausts its limit wholly or pro tanto. It makes no sense to treat the insured as having recoverable claims which together exceed the policy limit. If successive liabilities exceed that limit, the later claim is recoverable only to the extent that cover remains. This accords with the principle established in Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363, Bradley v Eagle Star Insurance Co Ltd [1989] AC 957 and Cox v Bankside Members Agency Ltd [1995] 2 Lloyd’s Rep 437.

3. The same analysis applies to quantified expenses falling within the indemnity. Such expenses first use the self-insured retention and deductible. Further expenses then engage the primary insurance and, as its limit is exhausted, the successive excess layers. The programme meets each ascertained loss when, and in the order in which, it occurs.

4. An insured may refrain from notifying a claim or may withdraw or abandon it. The policy is then not exhausted by that claim. The insured cannot, however, continue pursuing a claim while adjusting its priority against the policy or layered programme.

5. The requirement in the primary policy that the deductible and retention be “paid” before indemnification did not confer a choice about the subject matter or order of the indemnity. “Paid” probably measured an incurred liability rather than requiring monetary disbursement, consistently with Charter Reinsurance Co Ltd v Fagan [1997] AC 313. Even if disbursement were required, delaying it could not alter the order in which ascertained liabilities attached.

6. Clause 1 of the excess wording, under which liability did not attach until underlying insurers had paid, admitted liability or been held liable for their full indemnity, determined when an excess insurer’s obligation became payable. It did not determine which claims fell within each layer. The programme operated from the bottom upwards. Each excess layer attached to the same risks, subject to its limits and specific exclusions, and dropped down on exhaustion of the underlying layer.

7. The policy language and structure supplied the answer. Commercial common sense reinforced that conclusion: the proposed freedom of selection would place insured risks under the deliberate control of the insured or its captive insurer.

1. United Kingdom Supreme Court: Dismissed Teal’s appeal unanimously and affirmed that claims attached to the successive layers in the order in which the insured’s liability or covered expenses were ascertained, [2013] UKSC 57.
2. Court of Appeal: Held that Teal could not choose the claims allocated to the lower layers so as to preserve non-US and non-Canadian claims for the top layer, [2011] EWCA Civ 1570.
3. Commercial Court: Andrew Smith J held that Teal could not rearrange the allocation of claims between the successive insurance layers, [2011] EWHC 91 (Comm).