Insured entitled to indemnity under insurance policy as and when settlement monies were drawn down from escrow account

Teal Assurance Co Ltd v (1) W R Berkley Insurance Europe Ltd (2) Aspen Insurance UK Ltd [2015] EWHC 1000 (Comm)

Mr Justice Eder, 25 April 2015

Summary

The court was asked to decide a preliminary issue as to whether liability to pay settlement monies arose when monies were paid into an escrow account, or when those monies were to be drawn down.  

Background

Teal is a captive insurance company, incorporated in the Cayman Islands. It insured Black and Veatch Corporation ("BVC") and the wider BVC group which operates a global engineering and construction business.

During the period 1 November 2007 to 1 November 2008 (the "Policy Period"), BVC's professional indemnity insurance programme comprised the 'Lexington Policy', three Tower policies and a final "Top and Drop" policy.  W R Berkley Insurance Europe Ltd and Aspen Insurance UK Ltd ("Defendant Reinsurers") agreed to reinsure Teal in respect of the Top and Drop policy (the "Reinsurance Contract"), subject to a per claim limit of £10 million or its equivalent in other currencies.

Teal faced a number of claims brought by BVC during the Policy Period and in 2010 Teal commenced proceedings against Defendant Reinsurers in relation to their liability under the Reinsurance Contract. Following a first round of preliminary issues before Mr Justice Andrew in 2011¹, the court found in favour of the Defendant Reinsurers, finding that the insurance policy responded to claims "by reference to the order and timing of the establishment and ascertainment of BVC's liability" and not when the claims were paid. 

Preliminary Issue

Teal revised its case in light of Andrew J's ruling.  A second round of preliminary issues subsequently flowed from a settlement that BVC reached with a contracting party on terms which required BVC to pay in excess of US $13 million into an escrow account in accordance with the terms of an escrow agreement. Mr Justice Eder was asked to decide when BVC suffered a loss for the purpose of its entitlement to an indemnity under its insurance policies - was it: (i) when the monies were paid into the escrow account; or (ii) as and when the contracting party drew down on those funds in accordance with the escrow agreement? 

It was Teal's case that the establishment and ascertainment of liability arose when the settlement counterparty became entitled to draw down the monies in the escrow account. This was important because, applying the various dates of drawdown, rather than the date of payment into the escrow, was financially advantageous to Teal because over $11 million in respect of the claim would then be payable by Teal to BVC under the Top and Drop policy and Defendant Reinsurers would then be liable to indemnify Teal under the Reinsurance Contract.  However, if the Defendant Reinsurers were right, and the liability arose when the monies were paid into the escrow, then no payment would be due to Teal under the Reinsurance Contract.

Teal's Submissions

Teal argued that liability is not "established and ascertained" unless and until (i) the insured is liable for some wrongdoing, (ii) the amount of the insured's liability is quantified, and (iii) the time for payment of the ascertained amount has arisen. Teal argued that the agreement to pay money into the escrow account did not meet this criteria: as (i) the payment into the account was not a payment to the counterparty; (ii) the drawing down of the monies by the counterparty was conditional not absolute; and (iii) the exact liability would not be known until a future time when evidence of the cost of the remedial work was provided and, even then, any surplus left in the account after the costs had been met would be returnable to BVC. 

Teal relied on the principle in Post Office v Norwich Union²in which Lord Denning held "the right to sue for these moneys does not arise until liability of the wrongdoer is established and the amount ascertained" and Bradley v Eagle Star³in which Lord Brandon held that "…under a policy of insurance against liability to third parties the insured person cannot sue for an indemnity from the insurers unless and until the existence and amount of his liability to a third party has been established by action, arbitration or agreement, is unassailably correct."  Teal also relied on subsequent cases relying on the aforementioned, including Burns v Shuttlehurst Ltd, as well as Andrew J's findings in the first round of preliminary issues and those of the Court of Appeal.

Defendant Reinsurers' Submissions

The Defendant Reinsurers' argued that liability arose when the monies were paid into the account. They relied heavily on Cox v Bankside Members Agency Ltd⁴in relation to interim orders in which Philips J concluded that a court order to make an interim payment to a claimant ascertained liability in the amount of, and at the time of, the interim payment for the purpose of the liability policy. The Defendant Reinsurers argued that there was no material difference between an interim payment order for damages and the settlement in this case as the recipient of an interim payment order would still have to overcome hurdles of proving liability and quantum before being entitled to retain the payment.

Conclusion

The Judge found that the interim payment in Cox was distinguishable to this case for two reasons:

• First, an interim payment order was a legal liability to pay damages, and would only be awarded if the court was satisfied that the claimant would obtain judgment for substantial damages from the defendant (of at least the amount of the interim award). The amount of the interim order would necessarily involve a determination by the court of the likely amount of damages that the defendant would ultimately be liable to pay. Whereas in this case, the payment into the escrow account was not an agreement to pay damages, but rather was voluntary, there were no terms as to the assessment of the likely amount to be paid, and the amount that could be drawn down was conditional upon the fulfilling of the terms of the escrow agreement.  
• Second, the policy reason in Cox that an insured could be made insolvent off the back of an interim order if it could not call on its underwriters to indemnify it did not apply. The settlement was consensual and the payment into escrow was security for future payments, it was not compelled to do so by court order and there was no policy reason why it should be indemnified for the payments made into escrow before it became legally liable to pay them, which was when the funds could be drawn down pursuant to the escrow agreement.

Accordingly, the Judge found for Teal and against Defendant Reinsurers on the basis that BVC suffered a loss for the purpose of its entitlement to an indemnity in respect of the US$13m settlement as and when the settlement counterparty drew down the money from the escrow account, not when BVC paid the money into the account.