Liability insurance: ascertainment of insured loss

The Court of Appeal has provided a useful reminder of the requirements to establish an insured loss under a programme of liability insurance, holding that a loss was not triggered at the point that a party paid a sum of money into an escrow account.

Background

Engineering firm Black & Veatch Group Limited (BVGL) faced a number of claims relating to the 2007-8 policy year. BVGL had the protection of a tower of insurances of which the fifth layer, but not the first four, excluded claims emanating from or brought in the USA or Canada. The fifth layer was reinsured by the two insurance company appellants in this case, which had no exposure to lower layers. Cumulatively, the claims for that policy year exhausted the first four layers and breached the fifth. Two of those claims were US-based. The order in which losses occurred was therefore determinative of the appellants’ liability – if the US claims resulted in losses prior to a number of other claims, the fifth layer of insurance would respond to the later non-US claims, but if losses from the US claims occurred after those in the non-US claims, the exclusion would bite and the appellant reinsurers would not be liable to indemnify the BVGL insurers in respect of those claims.

Issue

BVGL entered into a compromise agreement with a claimant customer on 15 December 2010 whereby US$13.46 million in cleared funds was deposited into an escrow account on the same day as the execution of a payment deed. The question before the court was whether either the execution of that payment agreement or the deposit of the escrow sum generated an immediately enforceable obligation on insurers to indemnify BVGL on the basis that the insuring clause, which stipulated cover when BVGL had ‘become legally obligated to pay as Damages’, had been triggered by either the deed or the payment into escrow.

Decision

It is long-established that claims exhaust an insurance programme by reference to the order and timing of the establishment and ascertainment of the original insured’s liability and that this does not happen until the liability of the insured to a third party is established and quantified by judgment, arbitration award or settlement.

The court agreed with the reinsurers’ argument that the key timing is the date a loss is suffered by the insured, rather than (if different) the date that a gain is secured by the claimant. However, it judged that BVGL’s deposit of a sum into the escrow account which represented the maximum extent of the as yet unascertained liability did not itself constitute a payment, but only an arrangement for depositing a sum from which future compensatory damages might be paid.

The sum paid into escrow was not irrevocably paid away, but was paid as security which might under certain circumstances be returned in whole or part to BVGL. Interest on the escrow sum was payable to BVGL rather than the claimant. The court found that ‘payment’ of damages to the claimant would occur only on payment out of the escrow account, not by the deposit of funds into the account.

The court distinguished this situation from that where an interim order is granted since, although that may later be varied or altered on appeal, an interim payment order generally reflects the minimum rather than the maximum extent of the defendant’s likely ultimate liability.

Comment

The decision does not represent new law but is a useful reminder that an insured does not suffer a loss until its legal liability to pay a particular sum is established. The provision of funds to meet an obligation once it has been fully quantified is insufficient to trigger insurers’ liability to indemnify the insured for loss.

Further reading: (1) W R Berkley Insurance (Europe) Limited (2) Aspen Insurance UK Limited v Teal Assurance Company [2017] EWCA Civ 25