Court of Appeal confirms "pay up, recover down" principle in relation to subrogated recoveries

In Royal & Sun Alliance & Ors v Textainer Group Holdings Limited & Ors [2024] EWCA Civ 542, the Court of Appeal considered whether insurers are entitled to a proportionate share of any recoveries made by an insured after the settlement of an insurance claim or whether those recoveries should first be applied to uninsured losses following the "top down" principle established by the House of Lords in Lord Napier and Ettrick v Hunter [1993] AC 713.

BACKGROUND

The respondents (Textainer) are companies in the Textainer group, one of the largest container lessors in the world.

In 2016, one of Textainer's lessees, Hanjin Shipping Co Limited (Hanjin) went bankrupt. At that date, Textainer had around 113,000 containers on lease to Hanjin and incurred an overall loss of approximately $100m as a result of Hanjin's default under operating and finance leases.

Textainer benefitted from a container lessee default insurance programme (the Programme) that consisted of:

• A retention of US$5m;
• A primary policy of US$5m (in excess the US$5m retention);
• Five excess policies providing cover up to US$80m in excess of the retention;
• Losses over US$85m were uninsured.

Hanjin's default was an event entitling Textainer to an indemnity under the Programme, and insurers subscribing to the Programme (the Insurers) paid US$75.1m to Textainer, leaving approximately US$21m (in addition to the US$5m retention) of uninsured loss.

During the course of the liquidation proceedings, Textainer recovered approximately $15m in relation to the operating leases (the Hanjin Settlement). Insurers brought proceedings seeking to recover 39.3% of the sums received by Textainer under the Hanjin Settlement.

The claim was dismissed by David Railton KC sitting as a deputy High Court Judge and the Insurers appealed.

COURT OF APPEAL'S DECISION

The Court of Appeal found in favour of Textainer and, contrary to Insurers' case, confirmed that the "top down" principle established in Napier was the correct approach.

In reaching this conclusion, the Court found that "recoveries from the Hanjin Settlement had the effect of reducing Textainer's total losses, but those losses nevertheless remained well above the upper limit of the cover provided by the Insurers… This mirrors the position as it would have been if the recoveries had been made before Textainer had claimed under the Policies: the recoveries would have reduced Textainer's losses, but however those recoveries were allocated, losses would still have exceeded the cover under the Policies when a claim was made."

The Court was not persuaded by Insurers' arguments that the policies in Napier should be distinguishable from the Programme.  According to Insurers, the High Court in this case had failed to recognise the fundamental distinction between the case of a single or unitary loss (as in Napier) and the case of multiple losses, such as the present case. They argued that "[i]n the former case, it was plain that subsequent recoveries would reduce that single loss "top down", but where there were multiple losses of different items of property at different times, recoveries in respect of those specific items not only could but must be allocated to the insurer who had indemnified against their loss".

The Court of Appeal agreed with the High Court's decision that the true nature of the cover being provided by the Programme was against particular layers of loss, and that the manner in which losses were determined and aggregated in that context was not an important factor. It was noted that if recoveries were not applied "top down" but proportionately to the insured layers as well as to the uninsured losses, Textainer would be in a worse position than if the recoveries had been made before the Programme had paid up. This was contrary to the observation approved by Dillon LJ in the Court of Appeal in Napier that the principle "must be exactly the same whether the underwriters have or have not already paid the amount for which they are liable by the time the recovery is achieved".

COMMENT

The Court's approach in preventing insurers to overturn the "top-down" principle should be welcomed by policyholders. This decision confirms the existing case law set out in Napier, but also Kuwait Airways Corporation v Kuwait Insurance Co SAK [2000] 1 Lloyd's Rep 252 and provides clarity that the principle should also apply to aggregate losses and not only single losses.