Supreme Court reaffirms principle of chronological ordering of ascertained losses
A firm with several layers of professional indemnity insurance cannot re-arrange the order in which its claims are met, the Supreme Court has held.
US engineering firm, the Black and Veatch Group’s (BV) professional indemnity programme for 2007-08 was structured as a tower of insurance contracts. The primary policy was underwritten by Lexington Insurance Co Ltd, and there were three further excess layers of cover underwritten by Teal Assurance Co, an associate of BV. Teal also underwrote an additional “top and drop” layer which covered up to £10m in excess of the tower, which was reinsured by WR Berkley and Aspen. The “top and drop” policy did not include claims from the US or Canada.
BV notified claims made against it in the US, Canada and elsewhere with a total value in excess of the cover available under the tower. The main issue of the case was whether BV and/or Teal are entitled to choose which claims to meet from the primary and lower excess layers so that any US and Canadian claims are kept out of the “top and drop” layer, in Teal Assurance v WR Berkley [2013] UKSC 57.
Teal argued that a party is entitled to exercise contractual rights as best suits it, and submitted that, while liability typically arises when loss is ascertained against the insured, it is only when the claim is met by the insurer that the policy cover is exhausted. Until then, the insured is free to choose which is paid first regardless of when the loss was ascertained.
Rejecting this argument, however, Lord Mance said: “The ascertainment, by agreement, judgment or award, of the insured’s liability gives rise to the claim under the insurance, which exhausts the insurance either entirely or pro tanto.”
He added: “The policy thus serves the purpose of meeting each ascertained loss when and in the order in which it occurs.”
Robert Goodlad, associate, and Jacquetta Castle, consultant, at DWF Fishburns, say the decision gave “certainty” to the insurance market: “Layers of liability insurance are indeed eroded from the ‘bottom up’ as liability is chronologically established against the insured party.”
James Roberts, partner at Clyde & Co, who acted for WR Berkley, says: “The unanimous decision reaffirms the principle of chronological ordering of ascertained losses for the purposes of determining exhaustion of primary and successive excess layers.”
