Teal Assurance Co Ltd V (1) W R Berkley Insurance Europe Ltd; (2) Aspen Insurance Ltd  EWCA Civ 25,  Lloyd’s Rep. I.R. 259
Teal insured Black & Veatch Corporation (“BVC”). As part of a settlement with a third party, BVC was obliged to pay monies into escrow which the third party later became entitled to draw down. In ongoing litigation between Teal and its reinsurers, Eder J had determined that liability was established and ascertained on the original policy as and when the third party became entitled to draw down the escrow monies under the terms of the settlement agreement, not on the date when the sums were in fact paid into escrow. Reinsurers appealed. The Court of Appeal’s decision is considered by George Spalton and Hannah Daly of 4 New Square.
Alison Padfield from 4 New Square appeared on behalf of reinsurers.
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 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 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 ( 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 under a Payment Deed and associated Escrow Agreement. 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 into escrow 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  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  2 QB 363 and Bradley v Eagle Star  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  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 Court of Appeal upheld the first instance decision of Eder J, in which he 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.
The reinsurers had argued that:
- An insured will have suffered loss if an established liability requires him to part with a sum of money; and,
- Liability would become ascertained when a quantified loss was sustained by the insured which was caused by the established liability.
Reinsurers further contended that the payment of a fixed sum by BVC into escrow was akin to an award of damages and constituted loss. They relied on Cox v Bankside, drawing an analogy between an obligation to make an interim payment pursuant to a court order and BVC’s payment of money into escrow [see paragraphs 7 and 8].
Giving the sole judgment, Sir Stephen Tomlinson (Arnold J and Lewison LJ agreeing), rejected both the argument that the Defendant had suffered any ascertained loss and rejected the analogy with interim payments because, inter alia:
- The settlement did not require BVC to part with its money. The settlement set up a procedure whereby BVC would deposit sums in escrow which would only be paid out in circumstances defined in the Payment Deed. While payments out of the fund would represent sums payable as compensatory damages, mere payment of money into escrow itself could not be so characterised;
- The sum deposited in escrow represented the maximum amount of BVC’s as yet unascertained liability, in contrast to an interim payment order under which a court determines the likely minimum extent of the Defendant’s ultimate liability. Moreover, since there was no ascertainment of liability when the payment into escrow was made, there could be no ascertained loss [see paragraphs 9 and 10].
The Court of Appeal further distinguished Cox on the basis that the decision in that case that liability insurers would be bound to respond to an interim payment order was a pragmatic solution to protect the insured from insolvency. By contrast, this case involved a voluntary arrangement undertaken by a solvent insured [see paragraph 13].
The decision confirms that the determination of the date when an insurer becomes liable to make payment under a PII policy will turn largely on the construction of specific terms of the policy and associated agreements.
The Court attached particular importance in this case to terms of the settlement which distinguished between delivery of funds into the escrow account for the purpose of security and payments out. Since a payment out would only be made upon the ascertainment of liability, it was only at that point that a loss was suffered. The Court further relied on the terms stipulating that money deposited would only be released conditionally and entitling the insurer to receive interest on the money pending its distribution in reaching its conclusion that the mere deposition of funds into escrow did not trigger liability for an ascertained loss.
In rejecting the analogy with interim payments, the Court suggested that a better analogy would be a judgment for damages to be assessed. It was therefore unnecessary to disturb the judgment in Cox v Bankside.