REACHING THE TOP OF THE TOWER (OF PI INSURANCE)

Legal Directions

Introduction

In the English case WR Berkley Insurance (Europe) Limited v Teal Assurance Company Limited [2017] EWCA Civ 25, the Court of Appeal decided that a payment of money into an escrow account pursuant to a settlement agreement was not an insured loss under a professional indemnity policy because the payment was not damages.

Background

The insured engineers, Black and Veatch Group (the Insured), had a ‘tower’ of professional indemnity insurance policies. The first layer (the Policy) was written by Lexington Insurance Co. Ltd (the Insurer); above this were three layers of excess of loss insurance (the Reinsurance Policies) written by a captive of the Insured, Teal Assurance (the Captive), the respondent. Cover under this tower of underlying policies was broad, covering risks on a worldwide basis.

Once the tower was exhausted, additional cover of £10 million per claim, written by the Captive (Top & Drop Cover), was available. The Top & Drop Cover was reinsured by the appellants, WR Berkley and Aspen (the Reinsurers). The Top & Drop Cover excluded claims emanating from the US and Canada.

During the Policy period, the Insured faced a non-US claim by Ajman Sewerage (Private) Company Limited (the Third Party) arising out of the failure of a waste water treatment plant in the UAE to process sewage to its contractual specification. To settle the claim by the Third Party, the Insured entered into a settlement agreement (the Agreement) whereby it was required to deposit an amount (the Deposit) into an escrow account, which it did on the same day. Following this, from time to time, the Third Party drew down on the Deposit when the conditions of the Agreement were met.

The Court of Appeal considered whether the execution of the Agreement, and/or the payment of the Deposit, generated an obligation on the Insurer to indemnify the Insured, on the basis that the Deposit was a sum which the Insured had ‘become legally obligated to pay as Damages’ (which was the language of the insuring clause in the Policy).

The Captive argued that the Insured’s liability was established and ascertained at the (relatively late) point at which the escrow funds were drawn down upon by the Third Party, thus impacting the Top & Drop Cover. The Reinsurers argued that the Insurer’s liability was established and ascertained at the earlier date when the payment into escrow was made, meaning that the Top & Drop Cover was not impacted.

Decision

The Court of Appeal held that the Agreement and the Deposit did not trigger a liability under the Policy to indemnify. This was on the basis that the Agreement did not require the Insured to part with its money, but instead to put money aside in the escrow account from which there might be subsequent payments, subject to the various conditions of the Agreement. Sir Stephen Tomlinson (with Lord Justice Lewison and Mr Justice Arnold agreeing) held that:

This [D]eposit was a sum from which there might be subsequent payments which would represent sums payable as compensatory damages, but it was not such a payment itself…putting money aside which can then be used for the purpose of making compensatory payments is not paying damages pursuant to a legal obligation. [In making the Deposit]…[t]here was…no loss to the insured…There was no ascertainment of the insured’s liability, whether as to its minimum or as to its entirety, and thus no ascertained loss.

Comment

This decision reminds us that sums paid to a third party in settlement of a claim will usually only be recoverable under a liability insurance policy if the insured can demonstrate that:

  • the settlement establishes a legal liability to the third party;
  • the quantum of that liability is quantified; and
  • the liability is of the kind covered by the insuring clause.

Authored by Stephanie Young, Senior Associate, Melbourne


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