April 23, 2015

In Teal Assurance Co Ltd v (1) WR Berkley Insurance Europe Ltd; (2) Aspen Insurance Ltd [2015] EWHC 1000 (Comm), in the context of ongoing litigation between Teal (the claimant insurer) and the defendant reinsurers, Eder J was asked to decide as a preliminary issue when certain losses were suffered for the purpose of a company’s entitlement to an indemnity under its professional indemnity insurance policy.

Eder J’s decision is considered by George Spalton and Peter Morcos of 4 New Square

Alison Padfield from 4 New Square appeared on behalf of reinsurers.

THE FACTS

Teal, an insurance company incorporated in the Cayman Islands, was wholly owned by Black & Veatch Holding Company, one of the Black & Veatch group of companies which also included Black & Veatch Corporation (“BVC”). BVC operated a global engineering and construction business. Teal was the captive insurer for the group – i.e. its sole business is the insurance and reinsurance of the interests of members of members of the Black & Veatch group of corporations. Its professional indemnity insurance programme for the period 1 November 2007 to 1 November 2008 comprised of five layers.

The primary policy was issued by Lexington Insurance Corporation, for US$5m in excess of US$10m self-insured retention. In addition there were three policies written by Teal in a total sum of US$55m (“the tower policies”) and a top and drop policy also written by Teal for £10m in excess of the Lexington and tower policies. All the policies were in essentially the same terms as the Lexington policy, which included the following wording:

“The Company will indemnify the Insured all sums … which the Insured shall become legally obligated to pay as Damages if such legal liability arises out of the performance of professional services in the Insured’s capacity as an architect or engineer…

The Insured shall not settle any Claim without the informed consent of the Company, such consent not to be unreasonably withheld.

No action shall lie against the Company … until the amount of the Insured’s obligation to pay shall have been finally determined either by judgment against the Insured at the actual trial, arbitration or by written agreement of the Insured and the claimant, to which agreement the Company has consented.”

Various claims arose and the first issue to reach the Court concerned the extent to which Teal was entitled to order its claims so as to enable certain claims to fall within the top and drop policy. The Supreme Court ([2013] UKSC 57) held that on a correct construction of the policy, they responded to the order and timing of the establishment and ascertainment of BVC’s liability.

That issue having been determined in Teal’s favour, the next issue before the Court concerned the ascertainment of the date on which BVC’s liability for certain claims had been established and ascertained.

In particular, a claim was brought against BVC in relation to a project in the emirate of Ajman where BVC had constructed a sewage system as part of a consortium for Ajman Sewerage (Private) Company Limited (“Ajman”). The dispute resulted in a settlement whereby BVC paid approximately US$13.5million into escrow against the cost of future remedial works. Thereafter, the escrow monies were drawn down by Ajman pursuant to the settlement agreement at various times.

Teal contended that BVC’s liability was established and ascertained as and when Ajman became entitled to draw down on the escrow monies under the terms of the settlement agreement, not on the date when the sums were in fact paid into escrow. That contention would have resulted in the majority of the claim being covered by the top and drop policy and indemnified by the reinsurers. However, the defendants contended that BVC’s liability was ascertained when the initial payment was made.

In support of its position, Teal contended that liability is not “established and ascertained” unless and until (i) the insured is in fact liable for some wrongdoing and is held so liable by a judgment or award or compromises a dispute about such liability (relying on general principles on proof of liability as summarised by Clark LJ in Astrazeneca Insurance v XL [2014] Lloyd’s Rep 509); (ii) the amount of the insured’s liability is quantified by judgment or award or agreement; and (iii) the time for payment of the ascertained amount to the liability claimant has arisen (relying in respect of both (ii) and (iii) on language in Post Office v Norwich Union [1967] 2 QB 363 and Bradley v Eagle Star [1989] 2 AC 957).

The reinsurers submitted that: (i) Teal’s case involved the ‘startling proposition’ that BVC were not entitled to any indemnity despite the fact that it had undertaken a legal obligation to make the escrow payment; (ii) the arguments were ‘new’ (a point the Court readily rejected on the basis that there was no estoppel); and (iii) the payment into escrow was sufficient to ascertain and establish a legal liability by way of analogy to  the judgment of Philips J in Cox v Bankside Members Agency Ltd [1995] 2 Lloyd’s Rep 437, in which it was held that a Court order to make an interim payment to a claimant ascertained liability in the amount of (and at the time of) the interim payment for the purposes of a liability policy.

THE DECISION

Eder J found in favour of Teal and held that BVC suffered a loss for the purpose of its entitlement to an indemnity under its professional indemnity insurance policy programme when Ajman drew down the money paid into escrow and not when the money was first paid by BVC into escrow.

In particular, he rejected the reinsurers’ argument that the obligation to make an interim payment pursuant to Court order (per Cox v Bankside) was akin to BVC’s obligation in this case to pay money into escrow for two main reasons:

(i) an order for an interim payment involves a finding that the defendant is liable to pay damages to the claimant and also involves a finding as to the likely minimum amount of the liability, whereas an agreement to pay money into escrow was not an agreement to pay damages (especially in light of the terms of the escrow agreement which only entitled Ajamn to draw down sums upon the fulfilment of certain conditions (see [33] and [43]) and it did not establish any minimum level of liability to Ajman (per Eder J at [41]); and

(ii) the decision in Cox v Bankside was essentially one of policy “viz that an insured would be liable to be rendered insolvent by an order for an interim payment if it could not call on its E&O underwriters to indemnify it (p 453, first full paragraph of Cox)” (per Eder J at [44]).

Finally, Eder J held that the principle that an insured must be “held harmless” by an insurer did not assist. The facts in this case did not allow a finding that there was any obligation on the insurers to make a payment when the payment was made by BVC into the escrow account (per Eder J at [51]).

COMMENTARY

Whilst Eder J’s decision turns, to a certain extent, on the specific terms on which Ajman was entitled to draw down sums from the escrow account set up by BVC, the case is important in establishing the date when an insurer becomes liable to make a payment under a PII policy.

Eder J’s decision rests on two main points. First, a conditional payment must be made in respect of a likely minimum liability in order for that payment to ascertain any liability. Secondly, there is only a policy reason in favour of deeming a conditional payment as having ascertained liability where that payment is involuntary rather than voluntary.

It is also notable that Teal argued that Cox was wrongly decided. Eder J was able to distinguish Cox on its facts and so did not need to decide whether Cox was wrong in law following Post Office v Norwich Union and Bradley v Eagle Star. This point may therefore arise in future litigation.

Eder J’s judgment in Teal is under appeal, and will be heard by the Court of Appeal in November 2016.

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