Issues in Reinsurance 2011

This year, the courts have provided clarity in relation to various issues in the context of reinsurance, such as challenging an arbitral award and claiming litigation privilege over documents. However, equally, certain questions have been left open for future consideration. The most interesting of these is whether an insured or reinsured may present losses in a way that maximises the available cover under an insurance programme, which is likely to be the subject of further debate in the future.

CAN AN INSURED MANIPULATE THE ORDER IN WHICH IT PRESENTS LOSSES TO MAXIMISE THE AVAILABLITY COVER?

In December 2011, the England and Wales Court of Appeal delivered its decision in Teal Assurance Company Ltd v WR Berkley (Europe) Insurance Ltd & Anor [2011] EWCA CIV 1570. The case related to the allocation of liability claims against a "tower" of underlying insurance policies and an excess "top and drop" policy. The issue was whether the losses to the insured could be ordered in a way that maximised the cover available to the insured. The reinsurers were successful at first instance and on appeal.

Teal Assurance Company Ltd (Teal) was the captive insurer of Black & Veatch Corporation (BV). Teal and another insurer provided US$60 million of cover (tower), subject to a self-insured retention by BV of US$10 million on any one claim (with an annual aggregate of US$20 million). On top of the tower, Teal issued a further "top and drop" policy to BV with a limit of US$10 million on each and every claim (with no aggregate limit) for liability in excess of the tower (the top layer), which it reinsured with WR Berkley and Aspen (reinsurers). The tower covered both US and non-US claims, but the top layer covered only non-US claims. Liability to pay under the top layer only attached once the insurers of the tower had paid, admitted liability or been held liable to pay the full amount of their indemnity.

A difficulty arose because of the fact that the tower provided worldwide cover, but the top layer excluded US claims. Four large claims were made against BV in the relevant policy period: two in the US and two outside the US. All four claims fell within the scope of the tower, but the US claims were not covered by the top layer. If the US claims (which were large enough to exhaust the tower) were presented first, BV would have a smaller uninsured loss. Teal argued that BV can choose the order in which it presents claims to Teal and that Teal can choose the order...