Supreme Court confirms order in which insurance losses should be prioritised

Losses under a programme of excess liability insurance are sometimes prioritised in order to maximise the potential insurance recoveries under the programme. On 31 July 2013, the Supreme Court confirmed the order in which such losses should be prioritised.

The Supreme Court has dealt with the prioritisation of losses under the standard form of wording for a typical programme of excess layer liability insurance. Mills & Reeve’s briefing note of 5 January 2012 discussed the Court of Appeal’s earlier decision in Teal Assurance Company Ltd v W R Berkley Insurance (Europe) Ltd.

The Supreme Court unanimously rejected Teal’s appeal because: (1) cover is burned through the layers sequentially in the order in which the liability of the original insured to the complainant third party is ascertained by agreement, judgment or arbitration award; (2) cover is not burned through the layers according to when the insurers pay or admit liability for a claim; (3) liability under the excess layer only attaches as and when the primary insurers pay or admit or are held liable to pay the original insured’s ascertained liability, which exhausts the primary policy; (4) on ‘payment’ by the primary insurers of such ascertained liability, the first excess layer policy ‘drops down’ to continue in force as the primary policy (on the same terms as the primary policy); and (5) the same position applies successively under each excess layer as each is exhausted in turn…

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