Teal Assurance Co Ltd v W R Berkley Insurance Europe Ltd & Anor

This is a trial of certain preliminary issues in relation to disputes arising between the claimant (“Teal”) and its defendant reinsurers (the “Reinsurers”). In essence, the questions concern the time at which, and therefore the order in which, insured losses were suffered for the purpose of a programme of professional indemnity insurance and reinsurance.

For the purpose of these preliminary issues, the parties have agreed a Statement of Facts. The following summary is taken largely from that document.

Teal is an insurance company incorporated in the Cayman Islands. It is wholly owned by the Black and Veatch Holding Company and is one of the Black & Veatch group of companies. The Reinsurers are reinsurers of the Top & Drop layer of Black and Veatch's professional indemnity insurance as further described below.

Black and Veatch Corporation (“BVC”) is another corporation in the same group of corporations and is incorporated in Delaware. BVC is a major engineering company providing professional advice and services and carrying out engineering, procurement and construction contracts in various parts of the world either by itself or through subsidiary or associate companies and either on its own or in joint venture with others. All references below to “BVC” are to all Black & Veatch group companies, as the context requires.

Teal is a captive insurer i.e. its sole business is the insurance and reinsurance of the interests of members of the Black & Veatch group of corporations.

During the relevant period i.e. 1 November 2007 to 1 November 2008 (the “policy period”), BVC's professional indemnity insurance programme for the policy period comprised of 5 layers, as follows.

The bottom layer of the programme was a contract of insurance of BVC underwritten by Lexington Insurance Corporation and contained in or evidenced by policy no. 0101085 (the “Lexington policy” or “Primary policy”). The Lexington policy provided professional indemnity insurance to BVC subject to a per claim deductible of US$100,000, a per claim self-insured retention of US$10 million and an aggregate self-insured retention per policy period of US$20 million. The limit under the Lexington policy was US$5 million per claim and in the aggregate.

The Lexington policy provided in material part as follows:

The next 3 layers were contracts of insurance of BVC underwritten by Teal (together the “tower policies”). The 3 layers were as follows:

By policy No. 2007-009, a contract of insurance subject to a limit of US$5 million in aggregate, excess of US$15 million in aggregate (i.e. excess of the Lexington policy).

By policy No. 2007-010, a contract of insurance subject to a limit of US$30 million in aggregate, excess of US$20 million in aggregate (i.e. excess of the first tower policy).

By policy No. 2007-011, a contract of insurance subject to a limit of US$20 million per in aggregate, excess of US$50 million in aggregate (i.e. excess of the second tower policy).

The 5^th layer comprised a contract of “top and drop” insurance, which was underwritten by Teal (the “Top and Drop policy”). The Top and Drop policy was contained in or evidenced by policy document no. 2007-012. In essence, it provided insurance to BVC subject to (i) a limit of GB£10 million or its equivalent in other currencies, excess of the Lexington policy and the tower policies; and (ii) an exclusion in respect of claims emanating from or brought in the USA or Canada.

All these upper layers i.e. the tower policies and the Top and Drop policy were, in effect, on terms substantially similar to the terms of the Lexington policy.

By a contract of reinsurance contained in or evidenced by a slip policy No. Y0050790U (the “contract of reinsurance” or the “Excess Policy”), the Reinsurers agreed to reinsure Teal in respect of its liability under the Top and Drop policy. Like the Top and Drop policy, the contract of reinsurance was subject to a per claim limit of GB£10 million or its equivalent in other currencies. The contract of reinsurance was subject to the same terms and conditions as the Top and Drop policy in relation to coverage, including the exclusion in respect of claims emanating from or brought in the USA or Canada.

During the policy period, BVC faced a number of claims, as follows:

PPGPL: This is a substantial non-USA claim arising from BVC's design, procurement and construction of an expansion project at a gas processing plant in Trinidad.

Providence, Water One and City of Clovis: These are small US based claims.

FRP: This is one of two US based claims that arise from contracts between BVC and a company known as AEP or its subsidiaries to design, procure and install wet flue gas desulphurisation systems at AEP's power stations. Fibre Reinforced Thermostat Plastic failed as a result of a design defect, namely a lack of support.

Ajman: This is the second non-USA claim and arises out of the failure of a waste water treatment plant to process sewage to its contractual specification.

JBR Internals: This is the second AEP, and therefore US based, claim and the largest of the claims, arising out of failure of jet bubble reactors in the USA.

Thereafter, BVC paid out various sums on remedial works in respect of these claims details of which were summarised in a Schedule attached to the Statement of Facts setting out the amount of such payments and the month in which they were incurred. At this stage, the Reinsurers make no admissions as to the accuracy of this Schedule but it is to be presumed accurate for the purposes of these preliminary issues.

These proceedings were originally commenced in 2010. At that time, Teal contended as its primary case that it was entitled, under the insurances, so to order its claims as to enable the non-USA claims, namely PPGPL and Ajman, to fall within the Top and Drop policy.

That question was tried by Andrew Smith J as long ago as 2011 as the First Preliminary Issue. In essence, he found for the Reinsurers and held that the contracts of insurance within BVC’s professional indemnity insurance programme responded to claims by reference to the order in which the original assured (i.e. BVC) suffered insured loss: see [2011] EWHC 91(Comm). The Order made by the Judge following that Judgment and dated 31 January 2011 is in material part in the following terms:

The decision of Andrew Smith J was upheld by the Court of Appeal: see [2011] EWCA Civ 1570; and the Supreme Court: see [2013] UKSC 57.

In light of those judgments, Teal revised its case. As already noted, the Schedule sets out BVC’s expenditure on remedial works as it occurred on a monthly basis. The left-hand columns of the Schedule set out the claims and the amounts paid out by BVC by month. The right hand columns show the resulting exhaustion of the deductibles, self-insured retention, the tower policies and finally the Top & Drop policy on the basis that exhaustion of the insurances occurs as BVC incurs expenditure.

BVC were part of a consortium which constructed a sewage system for the emirate of Ajman. BVC were responsible for process, design and construction of the waste water treatment plant (less the civil engineering work). The plant was required by the construction contract to achieve a standard of effluent known as 10/10. It did not achieve that standard. Ajman alleged breach of this standard.

BVC reached a settlement with its contracting party i.e. Ajman Sewerage (Private) Company Limited (“ASPCL”) in December 2010. Part of that settlement required BVC to place a net amount of US$13,460,531 (i.e. US$14 million less US$539,469) into escrow (the “escrow payment”) on terms set out in an Escrow Agreement dated 10 December 2010 which provided in material part as follows:

US$1,400,000 (…) less US$539,469 within 21 days of BVGL receiving written confirmation from ASPCL of the award of the New Contract.

US$1,262,000 (…) within 52 days of BVGL receiving written instructions from ASPCL for the new contractor to commence the works under the New Contract.

An amount not to exceed US$ 11,340,000, payable in instalments, such instalments to occur not more frequently than monthly, each instalment subject to independent certification by ASPCL’s consulting engineer (Halcrow International Partnership) that the requested instalment amount does not exceed the value of the work performed in the instalment period; each such instalment due within 21 days of BVGL receiving the relevant certifications.”

Pursuant to the Escrow Agreement, BVC paid into escrow on 15 December 2010, the sum of US$13,460,531, credit being given to BVC for US$539,469. Subject to the addition of some late allocations of minor project costs, the escrow monies were thereafter drawn down from time to time as set out in the far right-hand column of the Schedule.

The JBR Internals claim is the second substantial US claim and the largest claim of all. The claim concerns the design specification of BVC's subcontractor of pultruded fibreglass known as “Composolite” to be used as decking material within the JBRs and the failure of that decking material. BVC’s contracting party (“AEP”) asserted that BVC was in breach of contract by reason of these failures. By a series of agreements made in writing dated 30 July 2010, which took the form of amendments to the underlying contracts for the procurement of the wet flue gas desulphurisation systems at the various plants, BVC agreed with AEP to settle the JBR claim on terms that BVC would replace at its expense the JBR Internals and certain other components. BVC’s case is that it would have been obvious as at 30 July 2010 to any informed observer who sought to put a figure on the costs of the work promised by the 30 July 2010 agreement that this would greatly exceed the remaining cover available under the tower policies. To this end, BVC’s case is that (i) by early 2010, a detailed estimate for repair had been prepared in the sum of US$231,678,275; (ii) by 30 July 2010 it had entered into sub-contracts which committed it to spending US$65,881,367.96 in total, of which US$13,729,371.49 was already incurred liability and US$52,151,996.14 would fall due in the future; and (iii) in the event, after contribution from AEP for certain enhancements, the actual cost of the remedial work to BVC was in excess of US$111 million plus US$2.3 million of legal costs. None of these allegations is admitted by the Reinsurers but, as I understand, they are to be assumed to be correct for the purposes of the preliminary issues.

The preliminary issues are as follows:

Issue 1.1:

Issue 1.2:

Issue 1.3:

Standing back, the primary issue for consideration is Issue 1.1 which is, in summary, whether BVC, as the insured, was entitled to an indemnity in respect of the escrow payment i.e. the net sum of US$13,460,531 (i.e. US$14 million less a credit of US$539,469) which was paid into the Escrow Account pursuant to the terms of the Escrow Agreement in respect of the Ajman claim. In essence, it is common ground that following the judgment of the Supreme Court on the First Preliminary Issue, the underlying policies respond as stipulated in the Order of Andrew Smith J set out above. However, it is Teal’s case that pursuant to that Order, the establishment and ascertainment of liability arose not when the escrow payment was paid into the Escrow Account but only at a later stage i.e. as and when ASPCL, the employer in relation to the Ajman works, became entitled to draw down on the escrow account monies. Applying the various dates of drawdown out of the Escrow Account rather than the date of the payment into the Escrow Account is financially advantageous to Teal because it means that a total of US$11,386.706.25 in respect of the Ajman sewage claim is payable by Teal to BVC under the Top and Drop policy and that the Reinsurers are liable to indemnify Teal under the contract of reinsurance. However, if the Reinsurers are right i.e. the liability is established and ascertained when the money was paid into the Escrow Account, no payment is due to Teal.

In support of Teal’s case, Mr Butcher QC submitted that liability is not “established and ascertained” unless and until (i) the insured is in fact liable for some wrongdoing and is held so liable by a judgment or award or compromises a dispute about such liability; (ii) the amount of the insured’s liability is quantified by judgment or award or agreement; and (iii) the time for payment of the ascertained amount to the liability claimant has arisen.

As to (i), Mr Butcher referred to the general principles on proof of liability as summarised by Clarke LJ in Astrazeneca Insurance v XL [2014] Lloyd’s Rep. 509 at paras 16-23. However, he accepted and it was, as I understood, common ground that (i) by the July 2010 JBR settlement, BVC compromised existing disputes on terms that it would carry out the remedial work; and (ii) by the December 2010 Ajman settlement, BVC’s liability was established because, pursuant to the relevant agreements, ASPCL became entitled to draw down on the escrow payment on the basis that it entered into a contract for the remedial works and had those works carried out on the terms set out. To this extent, there is (at least for the moment) no issue on actual liability.

As to (ii) and (iii), Mr Butcher relied upon the language used in the leading authorities. Thus, in Post Office v. Norwich Union[1967] 2 QB 363, Lord Denning MR held at p.375: “the right to sue for these moneys does not arise until the liability of the wrongdoer is established and the amount ascertained”(emphasis added); and in Bradley v. Eagle Star [1989] 2 AC 957, Lord Brandon held at p. 966: “In my opinion the reasoning of Lord Denning M.R. and Salmon L.J. contained in the passages from their respective judgments in the Post Officecase set out above, on the basis of which they concluded that, under a policy of insurance against liability to third parties the insured person cannot sue for an indemnity from the insurers unless and until the existence and amount of his liability to a third party has been established by action, arbitration or agreement, is unassailably correct” (emphasis added). Further, Mr Butcher submitted that these words have been cited in many subsequent authorities including Burns v. Shuttlehurst Ltd [1999] 1 WLR 1449, in which the Court of Appeal held that a plaintiff who obtained judgment against an insolvent defendant for damages to be assessed had no cause of action against the defendant’s insurers under the Third Party (Rights Against Insurers) Act 1930 until the claim was quantified: see paragraph 35 per Stuart Smith LJ; that this is clear authority for the proposition that no insured loss is suffered until liability is both: (i) established in principle; and (ii) quantified, i.e. ascertained as to its amount; and that these points are also supported by the prior Judgments in the present case:

Andrew Smith J’s judgment at paragraph 30(ii) [p62] cites the principle that: “Subject to any relevant terms of the (re)insurance contract, the right of an insured to an indemnity arises when an insured loss is suffered. In the case of liability cover the application of this principle is that a loss is suffered when liability is established and the amount of liability has been ascertained, whether by action or arbitration or by settlement, and not earlier” (emphasis added).

Longmore LJ held at paragraph 2 of the Court of Appeal’s judgment that: “In general terms in English law a liability insurer’s liability only arises when (and does not arise until) the liability of the insured to the third party is established (whether by agreement, judgment or award) … Thus Lexington will be liable to Black and Veatch, subject to any express tem of the insurance contract to the contrary and any defence Lexington may have, when Black and Veatch agree to pay any sumto the third party to whom they are liable or when the third party obtains a judgment or award against them” (emphasis added).

As to Issue 1.1, Mr Butcher submitted that the agreement to pay money into escrow under the Ajman settlement agreement did not meet these criteria for liability to be “established and ascertained”, in particular because (i) the payment into escrow was not a payment to ASPCL; (ii) the money in escrow was subject to conditions which meant that it might never be paid to ASPCL; and (iii) the amount of BVC’s liability was not ascertained until ASPCL submitted certificates which proved the cost of work which had been done, save for the first 2 instalments which were payable 21 days after signing a new contract and 52 days after commencing the work respectively.

As to (i), Mr Butcher relied on the terms of the Escrow Agreement, in particular Recital D and clauses 1.1, 2.1 and 3.2, as well as the Appendix containing the payment schedule (which I have already quoted above). In essence, he submitted that the Escrow Agreement provides for a two stage process: (i) payment of the US$13.46m into escrow; and (ii) payment to ASPCL out of this fund as and when and if the remedial work has been performed by a new contractor; and that ASPCL has no entitlement to anything, and BVC has no liability to make any payment to it, until stage (ii).

As to (ii), Mr Butcher submitted that under the terms of the Escrow Agreement, it was not automatic that all, or even any part, of the fund paid into escrow would ever be paid over to ASPCL. In particular, he relied upon the following points:

The entire obligation to make the Payment (as defined) would become null and void if the New Contract (i.e. appointing a replacement contractor to carry out the remedial work) was not signed by 2 May 2011. In that event, all of the money in escrow would come back to BVC: Appendix 1 paragraph (a) and Clause 3.4(ii).

The agreement envisaged that the amount in escrow might be more than the sum required to carry out the remedial work. Clause 3.4(i) states that the remainder of the fund was to be distributed to BVC in these circumstances.

There was also a long stop date of 31 July 2013. Any money still in the Escrow Account then would also revert to BVC: Clause 3.4(ii).

For the avoidance of doubt, Mr Butcher accepted that the New Contract was signed shortly after the Escrow Agreement, that the 21 day and 52 day payments were triggered and that all of the money paid into escrow was drawn down on the dates shown in the Schedule as and when they were made. However, he submitted that it was wrong to treat these payments as made as at 15 December 2010, when BVC paid the US$13.46m into escrow: ASPCL did not receive, and was not entitled to receive, anything then.

Finally, Mr Butcher submitted that the Escrow Agreement did not determine that BVC was liable to pay US$13.46m to ASPCL. The only sums that were quantified by the agreement itself were the payments due 21 days after ASPCL confirmed the award of the New Contract and 52 days after BVC received written instructions from ASPCL for the new contractor to commence works under the New Contract: Appendix 1, payment terms 1 and 2. As to the balance, the effect of payment term 3 was that BVC had no liability to pay any sum to ASPCL unless and until work to that value had been performed and this was certified by Halcrow. For the avoidance of doubt, Mr Butcher accepted that BVC might eventually be liable to pay up to US$13.46m (as proved to be the case) but that was not determined by this agreement, a point which was, submitted Mr Butcher, underlined by the provision in clause 3.4 for the balance of funds to be returned to BVC if not exhausted by the cost of the remedial work or by the longstop date.

These submissions overlap to some extent. Taking these points in turn, I am unpersuaded that the first point i.e. no payment to ASPCL is of much, if any, weight. In truth, it rests upon the sentence quoted above from paragraph 2 of the Judgment of Longmore LJ in the Court of Appeal in the present case to the effect (as submitted by Mr Butcher) that there must be a liability to pay the liability claimant not to make some other payment. However, I am very doubtful that Longmore LJ had in mind at that time the particular question that now arises still less that he intended his words to be taken as creating a universal rule. However, the other two points (i.e. “conditionality” and amount of liability not ascertained) do, in my view, point strongly in favour of the case advanced by Mr Butcher in respect of issue 1.1 i.e. that BVC did not suffer a loss for the purpose of its entitlement to an indemnity on 15 December 2010 but only as and when ASPCL drew down the money paid into the escrow account. I turn then to consider the counter-arguments advanced by Mr Edelman QC on behalf of the Reinsurers.

First, Mr Edelman submitted that Teal’s case involved the “startling proposition” that BVC were not entitled to any indemnity notwithstanding the fact that it had undertaken a legal obligation to make and duly did make the escrow payment; and that it is impossible to envisage any insured, without the ulterior motive that Teal and BVC have in this case, tolerating, let alone advocating, the withholding of an indemnity in these circumstances. I agree that the arguments which arise in the present context are unusual and possibly unique; but I am not sure I would agree that Teal’s case involves any “startling proposition” given that the escrow payment was not made pursuant to any judgment or order but rather pursuant to the settlement agreement undertaken voluntarily with the characteristics referred to above. However, whether “startling” or not, it is necessary to consider the various arguments and counter-arguments on their merits.

Second, Mr Edelman emphasised that the arguments advanced by Mr Butcher were “new”, the underlying suggestion being that they must necessarily lack merit for that reason alone. There is no doubt that these arguments are “new” but absent any estoppel (which is not raised), they must again be considered on their merits.

Third, in support of his general submission that the obligation to make the escrow payment pursuant to the December 2010 settlement rather than the later drawing down of moneys from the escrow account by ASPCL ascertained BVC’s liability to ASPCL at the date of the agreement for the purposes of the response of the insurance programme and the Ajman claim therefore falls within the PI Tower and not to the Excess Policy, Mr Edelman relied heavily on (i) the Judgment of Phillips J in Cox v Bankside Members Agency Ltd [1995] 2 Lloyd’s Rep 437 in relation to interim payment orders and (ii) the Judgment of Lord Mance in the Supreme Court on the First Preliminary Issue. I take these in turn.

In Cox v Bankside, Phillips J had to consider a number of issues. For present purposes, of main interest is his conclusion that a Court order to make an interim payment to a claimant ascertained liability in the amount of, and at the time of, the interim payment for the purpose of a liability policy. His reasoning appears at pp451-453. Given the importance of this passage, I quote the relevant part verbatim:

I derive the following five main points from this passage:

The subject matter of an interim payment ordered under what was then RSC O. 29, r. 11 can properly and naturally be described as damages and, in that case, fell within the meaning of “damages” in the insuring clause of the policy in that case (“… all sums which the Assured shall become legally liable to pay as damages …”) because it was “… ordered on account of and in anticipation of an eventual award of damages.”

An interim payment order satisfies the requirements laid down in Post Office v Norwich Union so far as ascertainment is concerned because it ascertains a quantified sum which is due and payable by way of damagesalbeit on a “provisional basis”.

The fact that the interim payment order was “provisional” and did not finally establish the amount of the assured’s liability is irrelevant.

Whilst the possibility that the order might ultimately be varied raised practical problems as to the operation of the cover, such problems did not differ in principle from those inherent in the fact that a first instance judgment in favour of a claimant might be reversed or varied on appeal.

There are strong commercial reasons supporting the foregoing.

Mr Edelman submitted that there is no material difference between the policy wording in the present case and that which existed in Cox v Bankside; nor between the nature of an interim payment order that was considered in Cox v Bankside and the Ajman settlement agreement in the present case. Further, he submitted that a commercially sensible application of a liability policy requires the policy to respond in these circumstances; that the December 2010 settlement similarly quantifies the sum payable by BVC to ASPCL by way of damages albeit on a provisional basis; that the beneficiary of a pre-judgment interim payment order would still have to overcome the hurdles of proving liability and quantum before being entitled to retain the interim payment or withdraw it from Court if the interim payment was ordered to be paid into Court; and that in this case, the satisfaction of the conditions for drawdown was entirely under ASPCL’s control and therefore presented far less of a hurdle than that faced by the beneficiary of an interim payment order.

For his part, Mr Butcher submitted that it was “questionable” whether Phillips J’s characterisation of an interim payment was correct in light of Bradley v Eagle Star and Post Office v Norwich Union;and, insofar as may be necessary, he reserved the right to contend that it was wrong. However, in my judgment, the obligation to make an interim payment pursuant to Court order is distinguishable from BVC’s obligation to pay money into escrow in the present case for the two main reasons which Mr Butcher summarised in his skeleton argument as follows.

First, the primary ground of Phillips J’s reasoning was that an interim payment is a legal liability to pay “damages” (p452, applied at bottom p452 - top p453: “an interim payment order ascertains a quantified sum which is due and payable by way of damages”). However, as submitted by Mr Butcher, it seems to me that this is true (if at all) because, and only because, a Court will only order an interim payment if satisfied that the claimant will obtain judgment for substantial damages from the defendant. The amount of the interim payment must be less than the amount of damages which the Court holds is likely to be recovered at trial (RSC. Ord. 29, set out at p452 col.1, now CPR 25.7). Accordingly, an order for an interim payment involves a determination by the Court: (i) that the defendant is liable to pay damages to the claimant; and (ii) of the likely minimum amount of the liability. In contrast, the agreement to pay money into escrow was not an agreement to pay damages to ASPCL (the “damages” were payable only as ASPCL became entitled to draw down on the fund). Nor did the Escrow Agreement contain any equivalent assessment of the likely amount of BVC’s liability. For the avoidance of doubt, I should emphasise that there is nothing in the Agreed Statement of Facts to that effect or which might justify such inference.

In response and at the risk of repetition, the main point advanced by Mr Edelman in this context was that Mr Butcher’s argument ignores the view expressed by Phillips J i.e. that an interim payment ordered under Order 29 r11 can properly and naturally be described as “damages” because it is “on account of and in anticipation of an eventual award of damages”; and that exactly the same can be said of the payment into the Escrow Account i.e. it was on account of and in anticipation of an award of damages. I was initially much impressed by this argument. However, as it seems to me, the main difficulty with such argument is the one already referred to above viz unlike the exercise that is performed when the Court is considering whether or not to make an order for an interim payment and, if so, in what amount, the agreed facts fall short of any finding of any minimum amount of likely liability.

In this context, Mr Butcher also raised a further point by reference to Clause 1 of the Lexington policy which provided for an indemnity for all sums “which the Insured shall become legally obligated to pay as Damages”.“Damages” is defined in Clause IV.D as “compensatory damages” [Clause IV.D at p1]. On this basis, Mr Butcher submitted that the payment into escrow was certainly not a payment by way of “compensatory damages”, since compensation necessarily involves a payment to, or to the order of, an injured party; that the payment into escrow was not such a payment; and that whereas an interim payment might well be regarded as an obligation to pay“Damages” within the meaning of Clause 1, the obligation voluntarily undertaken to pay money into escrow to await future events cannot be so characterized. At one stage, it seemed to me that this argument was similar to the one rejected by Phillips J as resting on “semantics” and that it should be rejected for that reason. However, for the reasons already stated, there is, in my view, a real and significant distinction between, on the one hand, the interim payment ordered by the Court and considered by Phillips J in Cox v Bankside and, on the other hand, the payment into the Escrow Agreement voluntarily undertaken by BVC in the present circumstances. By way of further elaboration, Mr Edelman emphasised the fact that an interim payment could also be made voluntarily without a court order: see RSC Order 29 r17 and, now, CPR25.8. That is true. However, it is, to say the least, far from clear to me that the decision of Phillips J in Cox v Bankside would necessarily have been the same if the interim payment had been made voluntarily rather than pursuant to Court order.

Second, Phillips J’s secondary reason for his decision was one of policy viz that an insured would be liable to be rendered insolvent by an order for an interim payment if it could not call on its E&O underwriters to indemnify it (p.453, first full paragraph). As submitted by Mr Butcher, this point is of no application to the present case. The Escrow Agreement is a consensual arrangement for security for future payments to be provided by way of payment into escrow. BVC did not have to enter into this arrangement. An insolvent defendant could not have done so. It is quite different from a Court order compelling payment. There is no policy reason why BVC’s insurance programme should indemnify it for the payment into escrow which it chose to agree to, rather than the draw downs from the escrow account. The latter, but not the former, were payments to ASPCL that BVC was legally liable to make.

I should mention that Mr Butcher also advanced a further third reason why, in his submission, the payment into escrow was distinguishable from an interim payment pursuant to Court order as in Cox v Bankside vizit was not a payment to ASPCL. In particular, he submitted that whereas an interim payment is made to the liability claimant, the funds in escrow remained BVC’s funds; that this is why BVC received the interest on the account; and that the Reinsurers’ contention depends on their mischaracterization of the payment into escrow as a payment to ASPCL which it was not. Mr Butcher is plainly right in saying that the payment of the money into escrow was not a payment to ASPCL. However, if this point stood alone, I am doubtful that it would be sufficient to determine Issue 1.1 in favour of Teal. As submitted by Mr Edelman: (i) whilst an interim payment made pursuant to a Court order would usually be made to the plaintiff, the Court could order that it be paid into Court rather than to the plaintiff (see RSC Order 29r13 and now CPR 3.1(3) and the White Book para 15-124 (Vol 2 p3446)); and (ii) that BVC was entitled to the interest on the account is equally consistent with the fact that ASPCL’s entitlement to draw down the escrow payment was subject to conditions. As pointed out by Mr Edelman, I also accept that when the Court gives permission for money to be taken out of Court pursuant to CPR 37.3, it will generally include a direction for the payment of any money including accrued interest and that this may be a relevant consideration. At best, it seems to me that this further argument advanced by Mr Butcher may lend possible further support to his two main arguments as summarised above; but it is unnecessary to say more.

For all these reasons, I am unpersuaded that the decision of Phillips J in Cox v Bankside ultimately assists the Reinsurers in the present case.

Mr Edelman submitted that the Reinsurers’ case was supported by the analysis of the Supreme Court on the First Preliminary Issue. In particular, he drew attention to the passage at paragraph 14 where, having referred at paragraph 13 to the conclusion in Cox v Bankside that an insurer’s liability under the policy arose on the ascertainment of the insured’s third party liability, Lord Mance stated:

Further and in any event, Mr Edelman submitted that the Reinsurers’ case based on Cox v Bankside and the decision of the Supreme Court on the First Preliminary Issue was supported by the “hold harmless” principle. In particular, he relied upon Firma C-Trade SA v Newcastle Protection and Indemnity Association (The “Fanti”)[1991] 2 AC 1, HL, where Lord Goff said (at 35-36) that equity had intervened in relation to contracts of indemnity, the remedies available at law being inadequate, to give effect to the principle that indemnity means that the party being indemnified should never be called upon to pay; and where Lord Brandon, similarly, described (at 28) the remedies available at common law and in equity and said that in equity an ordinary contract of indemnity could be specifically performed by ordering that the indemnifier should pay the amount concerned directly to the third party to whom the liability was owed or in some cases to the party to be indemnified and that there was no doubt that, since the passing of the Supreme Court of Judicature Acts 1873 and 1875, the equitable remedy had prevailed over the remedy at law.

In addition, Mr Edelman relied on a passage from the Judgment of Hirst J in Ventouris v Mountain (The “Italia Express”) No 2 [1992] 2 Lloyd’s Rep 281, at 291, col 2 to 292, col 1):

Further, Mr Edelman referred me to Callaghan v Dominion Insurance Co Ltd [1997] 2 Lloyd’s Rep 541 where Sir Peter Webster re-visited The “Italia Express” and the authorities reviewed by Hirst J and, in relation to the observation by His Honour Judge Kershaw QC in Transthene Packaging Co Ltd v Royal Insurance (UK) Ltd[1996] LRLR 32 at 41, col 1 that what Lord Goff in The Fanti and Hirst J were saying was that the insurers under a policy of property insurance contract that the relevant contingencies will not occur, said (at 544, col 2):

The significance of these authorities in the context of liability insurance is, submitted Mr Edelman, that they show that the insurer is obliged to step in and make payment so that the insured is never called upon to pay; that applying these principles to the Ajman claim, BVC was entitled to be held harmless by Teal against its loss, that loss being the obligation to make the escrow payment under the December 2010 agreements; and that BVC was therefore entitled to call upon Teal under the policy to step in and to make the escrow payment in BVC’s place. In broad terms, I accept, of course, the general thrust of the “hold harmless” principle. However, in my view, there are insufficient facts to enable Mr Edelman to say that there was any obligation on the insurers here to make any payment when the payment was made into the escrow account. The determination of that question turns on the proper resolution of the earlier questions which I have already considered. If I am right in the conclusions which I reached in relation to those earlier questions, I do not consider that the “hold harmless” principle provides the Reinsurers with a separate or discrete road to success.

I should mention that in the course of the hearing, Mr Butcher raised a new point for the first time seeking to rely (insofar as may be necessary) on Article VI of the Lexington policy which I have already quoted above. In particular, he submitted that as a matter of language the effect of Article VI is that there is no right of indemnity unless and until liability has been finally, rather than provisionally, established and ascertained. Following the hearing, I invited the parties to put in written submissions on this point. In essence, Mr Edelman submitted that Article VI was of no assistance in the circumstances of the present case in particular because (i) the issue was determined in favour of the Reinsurers by the Supreme Court on the First Preliminary Issue; and/or (ii) in any event, Article VI does not affect the accrual of the cause of action but, at most, only bars the right to sue which was, he submitted, irrelevant for present purposes. Both these points were disputed by Mr Butcher. However, given my earlier conclusions, it is unnecessary to engage in this further debate.

For all these reasons, I would answer Issue 1.1 by saying (b) i.e. that in respect of the Ajman claim, BVC suffered a loss for the purpose of its entitlement to an indemnity under its professional indemnity insurance programme in respect of the sum of US$13,460,531 as and when ASPCL drew down the money paid into the escrow account. In light of this answer, Issue 1.2 and Issue 1.3 do not arise. Accordingly, Counsel are requested to seek to agree a draft order for my approval. Failing agreement, I will deal with any outstanding issues.