Allocation of losses

The Court of Appeal has, in a short judgment in Teal Assurance Co Ltd v W R Berkley Insurance (Europe) Ltd [2011] EWCA Civ 1570, upheld the first instance judgment of Andrew Smith J, [2011] EWHC 91 (Comm), discussed in the August 2011 issue of Insurance Law Monthly. The case turned on the construction of specific contract clauses, but nevertheless raises more general questions as to the allocation by the reinsured of its losses under direct policies to different reinsurance agreements. The question raised by Teal is whether a reinsured is entitled to allocate in a way which maximises reinsurance recoveries. The answer given by Andrew Smith J and the Court of Appeal is that for allocation purposes losses are to be treated in the order in which they occur and not in an order which is more beneficial to the reinsured. The case does not deal with the possibility of losses that cannot be properly sequenced or dated. That issue must await future determination.

Teal: the insurance cover

Teal, a Cayman Island company, was the captive insurer of the Black & Veatch (‘BV’) group of companies whose practice consisted of providing architect services. The case concerned BV’s professional indemnity cover placed with Teal. The insurance was in layers. BV bore 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 primary layer Lexington policy, Teal insured BV under two excess layers. The Teal policies were written on the same terms as the Lexington layer, and covered both liability cover and also mitigation costs cover. These so-called ‘intermediate policies’, which provided total cover of US$60m in excess of US$10m, formed the ‘PI Tower’.