Allocation of losses

The allocation by the reinsured of its losses under direct policies to its reinsurance protection so as to maximise its reinsurance recoveries is a complex issue on which there is little English authority. The cases to date indicate that allocation is not something which is in the discretion of the reinsured but which has to be carried out by reference to the reinsured’s liability. Thus, if the reinsured has incurred direct losses in two or more different years of reinsurance protection, the losses must be allocated to those two years by reference to when they occurred, and it is not, therefore, open to the reinsured to treat the losses as having occurred in a single year so that it bears only one annual aggregate deductible. Teal Assurance Co Ltd v W R Berkley Insurance (Europe) Ltd [2011] EWHC 91 (Comm) raised the difficult issue of exactly when underlying losses are treated as having occurred. In the case of property insurance, the answer is relatively straightforward: the date of the loss is the date of the casualty. In Teal the point arose in the context of direct claims made liability covers, where identifying the point of loss is potentially more complex. This was a trial of preliminary issues, and the precise chronology of the events in question was not before the court. The issues were thus of principle.

Teal: the insurance cover

Teal, a company incorporated in the Cayman Islands, was the captive insurer within the Black & Veatch group of companies and covered, amongst other things, BV’s professional indemnity liability. BV’s cover was subject to a per claim deductible of US$100,000, and a deductible of US$250,000 for costs and expenses incurred in rectifying design defects in construction or engineering works. Above the deductible, BV had a ‘Self-Insured Retention’ of US$10m for any occurrence, and an annual aggregate limit of US$20m. The next US$5m of cover was insured on a ‘claims made and reported’ basis with Lexington. Over and above the deductible and the Lexington policy, Teal had further insured BV for US$30m in excess of the underlying US$20m, and then a further US$20m in excess of the underlying US$50m. The Teal policies were written on the same terms as the Lexington layer, and covered both liability cover and also mitigation costs cover.