Royal & Sun Alliance Insurance PLC & Ors v Textainer Group Holdings Limited & Ors

In excess-of-loss insurance, recoveries reducing the insured’s aggregate loss are applied top down: first against the highest layer of loss and then downwards. This applies even where the underlying losses concern separate items occurring at different times, if the policy provides cover against defined layers of aggregate loss. The result preserves the insured’s agreed cover and avoids making recovery allocation depend on when recoveries occur. There is no general presumption that losses occurred evenly and regularly. A party bearing the burden of proof may be refused an inference based on limited evidence where more complete evidence was available but not adduced. Under-insurance and statutory averaging under section 81 of the Marine Insurance Act 1906 do not apply where the policy insures a defined layer of loss rather than a proportion of the value of the insured subject matter.

The appellants were insurers under a container lessee default insurance programme. The respondents’ lessee, Hanjin, became insolvent, causing losses covered by a retention, a primary policy and excess-of-loss layers. The policies paid US$75.1 million, leaving substantial uninsured losses. The respondents later recovered sums from Hanjin’s bankruptcy trustee.

The Commercial Court dismissed the insurers’ claim, holding that recoveries were to be allocated top down, rejecting an asserted inference that losses under operating and finance leases occurred evenly, and holding that section 81 of the Marine Insurance Act 1906 did not require averaging. The central issues on appeal were whether the top-down principle applied, whether the proposed factual inference was available, and whether statutory averaging applied.

1. Appeal dismissed. Recoveries under the Hanjin settlement were to be applied top down, rather than proportionately across insured and uninsured losses.
2. The relevant question was the nature of the cover. The policies insured defined layers of aggregate loss. That required recoveries to reduce the highest layer first and then successive lower layers. Otherwise the insured would receive less than the cover for which it had contracted and could be worse off merely because recovery occurred after the insurers paid. The approach accords with Lord Napier and Ettrick v Hunter [1993] AC 713 and Kuwait Airways Corporation v Kuwait Insurance Co S.A.K [2000] 1 Lloyd's Rep 252, which was neither distinguishable nor wrong.
3. The insurers’ analysis of individual container losses was overly formalistic. The practical subject of the cover was the interconnected accumulation of lost rental, recovery costs and related expenses, which were ultimately ascertained and aggregated. Parties could agree a different distribution of recoveries in an excess policy or programme.
4. The factual alternative also failed. There is no presumption that losses occurred evenly and regularly. Any such pattern must be inferred from the evidence. Where a party bearing the burden of proof does not adduce available evidence that would support the proposed inference, the court may decline to draw it.
5. Section 81 of the Marine Insurance Act 1906 was not engaged. Undervaluation can apply where the whole subject matter, such as a vessel, is insured for less than its value. Layer insurance, by contrast, precisely defines the portion of loss insured and does not expose the insurer to a greater risk than the cover stated. The issue under the Respondent’s Notice therefore did not arise.

• Court of Appeal (Civil Division): appeal dismissed. The court upheld the Commercial Court’s decision that recoveries were allocated top down, that the insurers had not established the necessary factual inference, and that section 81 of the Marine Insurance Act 1906 did not require averaging: [2024] EWCA Civ 547.
• Commercial Court (KBD): the insurers’ claim was dismissed after trial. David Railton KC, sitting as a deputy High Court judge, gave judgment reported at [2022] EWHC 1995 (Comm).