Court of Appeal considers trigger for liability coverage when settlement is agreed by payment of monies into escrow account

In (1) WR Berkley Insurance (Europe) Limited and (2) Aspen Insurance UK Limited v Teal Assurance Company Limited [2017] EWCA Civ 25, a defendant in a construction dispute settled the dispute and paid a sum into an escrow account from which the claimant could, under certain circumstances, draw down sums to pay for remedial works. At that stage was the liability ascertained? The Court of Appeal held that the defendant's liability under the settlement agreement was quantified (and the defendant was accordingly entitled to claim an indemnity under its professional indemnity policy) only when the claimant drew down sums from the escrow account, not when the defendant paid the sum into the account.

Background

This is the latest instalment in the long-running litigation between Teal Assurance Co Ltd ("Teal") as claimant and W R Berkley Insurance (Europe) Limited and Aspen Insurance UK Limited (together the "Reinsurers") as defendants. Teal is the captive insurer of Black & Veatch Group ("BV"), an engineering firm. BV's professional indemnity insurance programme for the period from 1 November 2007 to 1 November 2008 (the "Programme") was structured as a "tower" of policies. The first four layers (the first underwritten by Lexington Corporation, the second, third and fourth underwritten by Teal) provided cover of USD60 million excess of BV's self-insured retention and deductible. Teal also underwrote a fifth layer (the "Top and Drop Layer") providing cover of £10 million excess of the first four layers. The Top and Drop Layer was reinsured with the Reinsurers. The Top and Drop Layer and contract of reinsurance both excluded claims emanating from, or brought in, the USA or Canada.

The settlement of the Ajman Claim

A number of claims were brought against BV during the policy period. Two substantial, and several smaller, claims were brought in the US and would not fall to be indemnified under the Top and Drop Layer. One non-US claim was brought by Ajman Sewerage Private Company Limited ("ASPCL"). The claim arose out of BV's process, design and construction of a waste water treatment plant for the emirate of Ajman (the "Ajman Claim"). In December 2010, BV agreed, with Teal's consent, to settle the Ajman Claim. As part of the settlement agreement, BV paid approximately USD13 million into an escrow account pursuant to an escrow agreement ("Escrow Agreement"). The settlement agreement provided that ASPCL could draw down the following sums to cover the costs of remedial work, subject to certain contingencies:

• US$1.4 million within 21 days of award of a new contract for the remedial work (if the contract for remedial works were not awarded by a certain date, the money in the escrow account would be distributed to BV);
• a further US$1.2 million within 52 days of commencement of work by the new contractor; and
• further amounts on completion of instalments of the remedial work (subject to independent verification of the value of the work performed and various time limits).

The settlement agreement also provided that interest accruing in the escrow account would be for BV's account and paid to BV. Any remaining funds would be distributed to BV.  

First instance decision

It is well established that an insurer's liability to indemnify the insured under a professional indemnity policy arises only when the insured's liability is established and ascertained.  Teal and the Reinsurers agreed that the settlement established BV's liability. The question before the High Court and Court of Appeal was whether BV's payment into escrow ascertained, or quantified, BV's liability to ASPCL, thereby triggering the relevant insurer's obligation to indemnify under the Programme.

Teal argued that the payment into escrow did not ascertain BV's liability to ASPCL. This was significant because the order in which BV's liabilities were ascertained affected BV's total recovery under the Programme. Put simply, if the US claims were ascertained before the Ajman Claim, they would fall to be indemnified under the layers below the Top and Drop Policy. If non-US claims were ascertained before the US claims and eroded the tower, the US claims would not fall to be indemnified under the Programme. The practical consequence was that if Teal's arguments were correct around US$11 million in respect of the Ajman Claim was payable by Teal under the Top and Drop Policy (and crucially Reinsurers would be liable to indemnify Teal under its reinsurance).

Eder J, the judge at first instance, held that it was not automatic that all, or indeed any, of the funds paid into escrow would be paid to ASPCL and the settlement agreement did not quantify BV's liability. Although there were two quantified payments which would be paid in certain circumstances, ASPCL could not draw down further sums until the new contractor performed remedial work and the value of that work had been subject to independent certification.

The Reinsurers argued that the payment into escrow was analogous to an interim payment of damages. The Reinsurers cited Cox v Bankside Members Agency Ltd [1995] 2 Lloyd's Rep 437, in which Philips J held that "an interim payment order ascertains a quantified sum which is due and payable by way of damages". Eder J rejected this argument and distinguished Cox. First, an interim payment order assessed the likely minimum amount of the defendant's liability. There was no such assessment here. Secondly, there was no policy reason why the Programme should indemnify BV for a payment into escrow to which it agreed, rather than for draw downs from the escrow account.

Court of Appeal decision

The Court of Appeal upheld the judgment of Eder J and dismissed the appeal. The decision turned on construction of the settlement agreement and associated agreements.

First, the settlement agreement did not require BV to part irrevocably with its money.

• The payment into the escrow account was not a loss to BV. The money in the account had to be dealt with according to the terms of the Escrow Agreement. BV stood to benefit from any interest accruing on the money in the escrow account. The Court of Appeal accorded more weight than Eder J to the fact that the money was paid into escrow, rather than to ASPCL.
• The deposit was described as "delivery of funds" into the Escrow Agreement and was paid as security. Under certain circumstances, the sums paid into the escrow account would be released or repaid to BV. Payments out of the escrow account constitute compensatory damages, but the payment into the escrow account did not in itself compensate ASPCL.

Secondly, the sum deposited was the maximum amount of BV's liability (in contrast to an interim payment order which is based on the likely minimum extent of the defendant's ultimate liability).

• BV and ASPCL did not agree that the amount paid into escrow was the amount of BV's liability, or the minimum amount of BV's liability. Payment out of the escrow account occurred on ascertainment of the extent of BV's liability, and it was this which constituted a loss to BV. The settlement agreement did not identify a specific sum which BV was, without more, required to pay ASPCL.
• This was analogous to judgment for damages to be assessed. The timing and extent of payment to ASPCL from the escrow account depended upon ASPCL's entry into a new contract for remedial work, performance of work under that contract, and certification of that work as provided for in the agreement.
• The Court did not consider that an analogy could be drawn between an order for an interim payment and payment under the settlement agreement, which was of a "fundamentally different character". Under the settlement agreement, payment would not be paid to ASPCL without more.

Case law also supported this conclusion:

In Burns v Shuttlehurst Limited [1999] 1 WLR 1449, the Court of Appeal held that a judgment for liability with damages to be assessed does not ascertain the amount of damages and is therefore not sufficient to generate a right to indemnity under a typical liability policy.

In Enterprise Oil Limited v Standard Insurance Co Limited [2007] Lloyd's Rep IR 186, the High Court held that an insured could not demonstrate loss under a liability policy if it could not show the amount of liability to a third party by judgment, award or settlement.

The Court of Appeal considered insurers' consent to the settlement agreement irrelevant. The insurers did not agree to fund the payment into the escrow account, nor that the payment into the escrow account entitled BV to an indemnity in like amount.

It was clear from the wording of the settlement agreement that Cox did not apply to this case. The Court of Appeal therefore did not have to determine whether Cox was correctly decided. The court indicated, however, that Cox did not intend to suggest that an interim payment was paid "as damages". Instead, an interim payment is a payment on account of and in anticipation of an award of damages. In any event, under the Programme the insurer's obligation only arose on "final determination" of liability. It was questionable whether an order for an interim payment constituted "final determination" of liability. If the policy in Cox had been subject to such a condition, the Court of Appeal said it was questionable whether Philips J would have reached the same conclusion.

Comment

Ultimately this case was one of contractual construction and turned on its unusual facts. For ascertainment purposes the Court of Appeal compared the escrow arrangement in this case to a judgment with damages to be assessed, but payments into court, interim payments on account of damages, and different settlement structures may be treated differently.

It should not be assumed that all structures will be treated in the same way when it comes to ascertainment and hence policy response, and each structure should be considered in light of the particular facts and the case law.