Teal Assurance Co. Ltd. v. W R Berkley Ins. (Europe) Ltd. and Aspen,  UKSC 57 (31 July 2013).
The Supreme Court of England and Wales has affirmed a lower court’s ruling that an insured cannot choose the order in which it presents claims to its insurers in order to avoid exclusions in certain layers and maximize its own recovery. In this dispute, the insured had arranged a tower of insurance for worldwide claims, with the primary layer written by an unaffiliated insurer and the excess layers written by the insured’s captive. A final “top and drop” layer, which became the primary lawyer upon exhaustion of all lower layers, sat above the captive’s intermediate layers. That uppermost layer was also written by the insured’s captive, but then reinsured with unaffiliated reinsurers.
The dispute arose because of exclusions in the “top and drop” layer. While the primary and intermediary excess layers covered claims arising from all jurisdictions, the “top and drop” layer excluded claims arising from the United States and Canada. The insured found itself faced with significant U.S. and non-U.S. claims. If the non-U.S. claims were settled first, the U.S. claims would be excluded from coverage under the “top and drop layer.” Conversely, if the insured could allocate its U.S. claims to the primary and intermediate excess layers, the non-U.S. claims would be fully covered by the “top and drop” layer.
In upholding the Court of Appeals’ decision against the insured, the Supreme Court reaffirmed the principle that an insured’s claims exhaust the primary and successive excess layers in the chronological order in which the losses are ascertained, not based on the insured’s decision to change the order in which it pays claims in order to maximize available insurance. The Court noted that the insured’s captive, which wrote the “top and drop” layer in the first instance before ceding those liabilities to third party reinsurers, was only arguing that in favor of a maximization of its own insurance liabilities because it was affiliated with the insured and was then ceding liabilities to reinsurers. It would not have been commercially reasonable for an independent insurer to take such a position.