Teal Assurance Co Ltd v W R Berkley Insurance Europe Ltd & Anor

Under liability insurance, loss ordinarily arises when the insured’s liability is established and its amount is ascertained. A voluntary payment into escrow does not necessarily establish an insured loss when made. Where payment is conditional, may be returned, and does not quantify any minimum liability, loss occurs only as and when the liability claimant becomes entitled to draw down the funds. A court-ordered interim payment is materially different where the court has determined liability and the likely minimum amount of damages. The general “hold harmless” principle does not create a separate entitlement to indemnity where the underlying requirements for an insured loss are absent.

Teal, a captive insurer, sought a declaration concerning the operation of its professional indemnity insurance programme and reinsurance of its top-and-drop layer. The dispute concerned a settlement of the Ajman claim, under which BVC paid US$13,460,531 into an escrow account. The funds could be drawn down only if specified conditions were satisfied, and any balance could revert to BVC.

The issue was whether BVC suffered an insured loss when the escrow payment was made on 15 December 2010, or only as and when the liability claimant drew down the money. Earlier decisions on the ordering of insured losses had been upheld on appeal: [2011] EWHC 91 (Comm), [2011] EWCA Civ 1570 and [2013] UKSC 57.

1. Issue 1.1 answered in favour of Teal. BVC suffered an insured loss in respect of the Ajman escrow funds only as and when ASPCL drew down the money. Issues 1.2 and 1.3 therefore did not arise.
2. The relevant principles require the insured’s liability to be established and the amount of liability to be ascertained. The escrow agreement did establish actual liability in principle, but its conditional structure meant that the payment might never be made to ASPCL. Funds could return to BVC if the replacement contract was not concluded, if the fund exceeded the remedial cost, or on the longstop date.
3. The agreement also failed to ascertain any minimum amount of BVC’s liability. Apart from specified initial instalments, further payments depended on remedial work being performed and independently certified. The amount paid into escrow was therefore security for possible future payments, rather than an ascertained liability to pay that sum as damages.
4. Cox v Bankside Members Agency Ltd [1995] 2 Lloyd’s Rep 437 was distinguishable. A court-ordered interim payment involved a judicial determination that the defendant was liable for damages and of the likely minimum amount. Its provisional character did not prevent ascertainment. Those features were absent from the voluntary escrow arrangement.
5. The commercial policy reasoning supporting indemnity for a compelled interim payment did not apply. BVC voluntarily agreed the escrow security, and there was no equivalent policy reason requiring indemnity when the funds were placed into escrow rather than when they were drawn down.
6. The “hold harmless” principle was accepted in general terms, but it did not provide a separate route to recovery. Its application depended on whether an insured loss had first arisen under the policy, which it had not when the escrow payment was made.
7. Counsel were directed to seek agreement on a draft order; outstanding issues were to be dealt with if agreement failed.

The earlier first preliminary issue was decided by the Commercial Court in favour of the reinsurers: [2011] EWHC 91 (Comm). That decision was upheld by the Court of Appeal, [2011] EWCA Civ 1570, and by the Supreme Court, [2013] UKSC 57. The present judgment determined further preliminary issues at first instance.