TEAL ASSURANCE CO LTD V WR BERKLEY INSURANCE (EUROPE) LTD AND ANOTHER

[2013] UKSC 57, Supreme Court, Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption and Lord Toulson, 31 July 2013

Reinsurance - Allocation of liabilities to underlying policies - Effect on reinsurance

Black & Veatch was insured against professional indemnity liabilities above a self-insured retention of $US10 million. The primary layer of US$5 million was with Lexington. Above that layer was the "PI Tower", consisting of three excess layers insured by Teal, the captive insurer within the BV Group. The layers were, in respect of any one claim, for US$5 million, US$30 million and US$20 million respectively. Finally, there was a top layer, consisting of a "top and drop" policy of US$10 million. The primary and excess layers provided worldwide cover, but the top and drop policy excluded any claims emanating from the US and Canada. The PI Tower was reinsured with various reinsurers, and the top and drop policy was reinsured with Berkley and Aspen each for 50 per cent. The reinsurance followed the underlying cover issued by Teal. Four claims were brought against BV: (1) in respect of the Ajman Sewerage Plant in the United Arab Emirates - BV had paid US$20.5 million and had settled for a further US$14 million; (2) in respect of the Phoenix Park Gas Processing facility in Trinidad, liabilities amounting to some US$9.5 million; (3) in respect of liability to American Electric Power, the sum paid being US$10.5 million; and (4) in respect of further potential liability to AEP, potentially up to US$240 million. Claims (3) and (4) fell outside the reinsurance coverage provided by the top and drop policy, but all four claims were within the other policies. Teal claimed that the AEP claims exhausted the IP Tower, so that the Ajman and PPGP claims fell within the top and drop policy and thus the reinsurance, so that Teal had two claims of up to £10 million. The reinsurers asserted that the Ajman and PPGP claims were covered by the IP Tower, and that the only claims falling within the top and drop were the two AEP claims, both of which were excluded from the reinsurance.