WR Berkley Insurance (Europe) Ltd & Ors

Under liability insurance, an insured loss arises only when the insured’s liability to the third party has been established and its amount ascertained. A settlement requiring funds to be placed in escrow as security does not itself constitute payment of compensatory damages or establish the amount of liability. The escrow sum may be released or returned and may exceed the eventual liability. It is therefore a maximum exposure, not an ascertained loss. An interim payment order is materially different because it determines a minimum sum due by way of damages. Insurer consent to the security arrangement does not alter that analysis.

Black & Veatch faced a claim arising from defects in a wastewater treatment project. A December 2010 settlement required funds of US$13,460,531 to be deposited into escrow, from which payments would be made if specified remedial works were undertaken and certified. Teal, the captive insurer, argued that the insured loss arose when the funds were deposited. The reinsurers argued that loss arose only when money was drawn down. Eder J held that the liability had not been ascertained by the deposit: [2015] EWHC 1000 (Comm). The appeal concerned whether the settlement and escrow payment established and quantified the insured’s liability.

Appeal dismissed. Sir Stephen Tomlinson delivered the judgment, with Arnold J and Lewison LJ agreeing.

1. The court applied the established principle that, under liability insurance, an indemnity obligation arises only once the insured’s liability to the third party has been established and its amount ascertained or quantified. That approach was consistent with Post Office v Norwich Union Fire Insurance Society Limited [1967] 2 QB 363 and Bradley v Eagle Star Insurance Co Limited [1989] AC 957.
2. The Payment Deed and Escrow Agreement created security for possible future payments. The deposit itself compensated nobody, was not irrevocably paid away, could be returned in whole or in part, and earned interest for the insured. Future payments depended on the award of a new contract, performance of remedial works and certification. The escrow sum was therefore a maximum potential liability, not an ascertained loss.
3. The arrangement was materially different from an interim payment order. Such an order determines liability in damages and fixes a minimum sum due or likely to be payable. The escrow arrangement did neither. The court also applied the reasoning in Burns v Shuttlehurst Limited [1999] 1 WLR 1449 and Enterprise Oil Limited v Standard Insurance Co Limited [2007] Lloyd’s Rep IR 186.
4. Insurer consent to the settlement did not amount to agreement to fund the provision of security or to indemnify the amount secured.

The court distinguished the interim-payment reasoning in Cox v Bankside Members Agency Limited [1995] 2 Lloyd’s Rep 437. It considered it unnecessary to decide whether that case was correctly decided, although it observed obiter that a policy requiring final determination of liability might make the reasoning questionable.

• Court of Appeal (Civil Division): dismissed the reinsurers’ appeal and upheld the conclusion that the escrow deposit did not ascertain the insured liability.
• Queen’s Bench Division, Commercial Court: Eder J decided the preliminary issue against the argument that loss arose on payment into escrow: [2015] EWHC 1000 (Comm).