TEAL ASSURANCE CO LTD V W R BERKLEY INSURANCE (EUROPE) LTD

[2011] EWHC 91 (Comm), Queen's Bench Division, Commercial Court, Mr Justice Andrew Smith, 31 January 2011

Reinsurance - Allocation of liabilities to underlying policies - Effect on reinsurance

Teal, the captive insurer within the Black & Veatch group, issued a number of policies (the PI Tower) covering the professional indemnity liabilities of BV. BV had a "Self-Insured Retention" of US$10 million for any occurrence, and an annual aggregate limit of US$20 million Over and above the retention, the next US$5 million was insured on a "claims made and reported" basis with Lexington. Teal further insured BV for US$30 million in excess of the underlying US$20 million, and then a further US$20 million in excess of the underlying US$50 million. The Teal policies were written on the same terms as the Lexington layer, and covered both liability cover and also mitigation costs cover. Clause 1 of the policies stated that: "Liability to pay under this Policy shall not attach unless and until the Underwriters of the Underlying Policy/ies shall have paid or admitted liability or have been held liable to pay, the full amount of their indemnity inclusive of costs and expenses ..." There was also a "Drop Clause" which provided that: "If by reason of the payment of any claim or claims or legal costs and expenses by the Underwriters of the Underlying Policy/ies during the period of this Insurance, the amount of indemnity provided by such Underlying Policy/ies is: (a) Partially reduced, then this Policy shall apply in excess of the reduced amount of the Underlying Policy/ies for the remainder of the period of insurance; (b) Totally exhausted, then this Policy shall continue in force as Underlying Policy until expiry hereof ..." In excess of all of this cover was an "Original Policy" written by Teal, which insured BV for £10 million per claim in excess of losses in the PI Tower. The Original Policy was reinsured by Teal with the defendant reinsurers under the "Excess Policy". Four claims were brought against BV: (1) in respect of the Ajman Sewerage Plant in the United Arab Emirates - BV had paid US$20.5 million and had settled for a further US$14 million; (2) in respect of the Phoenix Park Gas Processing facility in Trinidad, liabilities amounting to some US$9.5 million; (3) in respect of liability to American Electric Power, the sum paid being US$10.5 million; and (4) in respect of further potential liability to AEP, potentially up to US$240 million. Claims (3) and (4) fell outside the reinsurance coverage provided by the Excess Policy, but all four claims were within the direct General Policy. Teal claimed that the AEP claims exhausted the IP Tower, so that the Amjan and PPGP claims fell within the General Policy and thus the reinsurance provided by the Excess Policy, so that Teal had two claims of up to £10 million. The reinsurers asserted that the Amjan and PPGP claims were covered by the IP Tower, and that the only claims falling within the General Policy were the two AEP claims, both of which were excluded from the reinsurance of the General Policy by the Excess Policy. Andrew Smith J, on a trial of preliminary issues, held as follows.