Insurance: Allocation Of Losses

The Court of Appeal recently confirmed the rule that as soon as the insured's liability is established then its insurer also becomes liable.

A tower of insurance contracts provided Black and Veatch (a group of engineers) with worldwide cover of US$60 million in excess of the deductible and self insured retention. Lexington wrote the primary layer, whilst B&V's captive insurer, Teal, wrote the next three layers in the tower.

A top and drop insurance provided further cover of £10 million upon the exhaustion of the tower. This insurance was also written by Teal, but was different in that it excluded US and Canadian claims. Teal's participation in the top and drop insurance was reinsured by WR Berkley.

In its December 2011 Judgment, the Court of Appeal considered the order in which losses would be allocated to the tower of insurance and the top and drop insurance. The dispute between Teal and WR Berkley concerned whether the tower was exhausted (1) once claims which amounted to US$60 million were settled by B&V; or (2) only when the liability of the insurers in the tower had been determined whether by agreement, award or judgment.

The dispute arose when (1) the retention and primary layer were both exhausted; (2) B&V had incurred US$30 million in losses in respect of two non-US claims which had not yet been presented to Teal; and (3) B&V faced a US claim, which was expected to exhaust the tower.

Teal argued that B&V could choose the order in which they presented claims to Teal and Teal could choose the order in which the claims were settled. If correct this would mean that Teal (with B&V) could settle the US claims first and postpone the settlement of the non-US claims, thereby settling the latter under the top and drop insurance.

This case turned on the wording found in the top and drop insurance. Lord Justice Longmore stated that the key provision provided: "that once the indemnity provided by the underlying policies is exhausted, then "this policy shall continue in force as Underlying policy"...The insurance in excess of $60 million "drops down" and...