Can an insured – and/or its captive insurer – manipulate the order in which claims are presented – or paid – to its best advantage? No, said the Supreme Court in Teal Assurance Company Limited v WR Berkley Insurance (Europe) Limited (2103), holding that, under a standard market excess layer wording, losses attached to a ‘tower’ of liability insurance contracts in the order in which they were ascertained by agreement, judgment or award. The insured and its captive were not entitled to choose which claims to meet from the primary and/or lower excess layers so that the remaining claims could be met out of the top layer and passed on to reinsurers.
The captive insurer subsequently amended its case so that, rather than arguing it was entitled to settle the underlying claims in whatever order it liked, the insured’s liability to the claimants was established and ascertained in an order which meant that certain claims hit the top layer. They have now been back to court to determine whether the establishment and ascertainment of the insured’s liability to a third party arose when the insured paid into an escrow account pursuant to a settlement agreement or instead when the third party became entitled to draw down monies from that account. The Court of Appeal agreed with the Commercial Court that a payment of money into escrow did not constitute an insured loss. The escrow account was a fund from which money might be drawn down in future, to make payments which would represent sums payable as compensatory damages. Those payments would ascertain the insured’s liability but the payment into escrow did not.
This does not mean there is no scope for a captive, working with its insured, to manage the order in which claims attach to the insurance. Given that the key factor is ascertainment, part of which is the agreement by the insured of the third party claim, there may be scope for considering the timing of such agreements, which may then maximise ultimate insurance recoveries.