In a judgment handed down by Deputy Judge David Railton QC of London’s Commercial Court on 27 July 2022, BDM Law LLP and its clients the Textainer Group scored a notable victory in a substantial claim brought by the Textainer Group’s container lessee default insurers led by Royal & Sun Alliance. Partner David McInnes and solicitor Joshua Geesing acted for the Textainer Group instructing Christopher Smith QC of Essex Court Chambers. The judgment is a very rare decision on container lessee default insurance. The full judgment can be viewed by clicking this link.
The judgment reaffirms English insurance law principles that in excess of loss insurance programmes the insurers’ rights of subrogation operate on a “top down” basis, but only apply once the assured has made good its full loss in excess of the insurance programme’s policy limits. As such the decision applied and affirmed the decision of the House of Lords (now the Supreme Court) in Lord Napier and Ettrick v Hunter [1993] AC 713 and of the Court of Appeal in Kuwait Airways Corp. v Kuwait Insurance Co SAK [2000] 1 Lloyd’s Rep 252.
Background and the Facts
The Textainer Group are one of the largest container lessors in the World. Textainer leased over 113,000 containers to one of the then largest container shipping companies in the World, Hanjin Shipping Co of South Korea (“Hanjin”). On 31 August 2016 Hanjin applied to the Court in Seoul for receivership and subsequently it was put into liquidation.
At that time Textainer maintained a container lessee default insurance programme with various insurers. Subject to a US$5 million retainer, the insurance programme consisted of a primary layer and five excess of loss layers covering claims up to a principal sum of US$85 million. Textainer made claims against the insurers of the insurance programme in respect of Hanjin’s default. Textainer maintained that its losses exceeded the upper limit of the insurance programme of US$85 million.
The insurers of the primary and first to fourth excess layers of the insurance programme settled Textainer’s claims and paid up to their policy limits. However, the insurers of the fifth excess layer disputed substantial elements of the claim. This dispute was eventually compromised and a settlement agreement was entered into between Textainer and the insurers of the fifth excess layer whereby the parties settled any claim or counterclaim against each other and the insurers waived their rights of subrogation in favour of Textainer.
Subsequently, Textainer arrested a vessel operated by Hanjin and made some recoveries from Hanjin for rentals for use of the containers after Hanjin’s default. The fifth excess layer of the insurance programme specifically did not cover any claim for rentals after default of a lessee. As such Textainer understood that it had to account for its recoveries to the insurers of the fourth excess layer of the insurance programme. It approached the insurers of the fourth excess layer while making clear that it sought settlement of the rights of all of the insurers. Settlement was then agreed with the insurers of the fourth excess layer in similar but not identical terms to the settlement with the fifth excess layer of the insurance programme.
In the meantime, Textainer had put in a claim in the bankruptcy of Hanjin. As a general creditor it expected to make little or no recovery. However, to Textainer’s surprise some months later Hanjin’s Bankruptcy Trustee agreed to pay Textainer a sum of nearly US$26 million of which to date a sum of nearly US$15 million has been paid.
The Dispute and Key Issues
Textainer’s understanding and the legal advice it received was that, in the words used in the Lord Napier and Ettrick case, in an excess of loss insurance programme, the insurance “paid up” in terms of claims and “recovered down” in terms of the insurers’ rights of subrogation. As such, having agreed settlements with the insurers of the fifth and fourth excess layers of the insurance programme covering the top US$40 million of any claim, whereby their rights of subrogation were waived in favour of Textainer, the monies paid and to be paid by Hanjin’s Bankruptcy Trustee were Textainer’s, not the insurers.
However, to Textainer’s considerable surprise the insurers of primary and the first to third excess layer of the insurance programme presented a claim against Textainer asserting that the monies paid and to be paid by Hanjin’s Bankruptcy Trustee were in fact the insurers’ and not Textainer’s. The basis of the claim changed over time, but it was said by the insurers that as a matter of the general law of insurance / subrogation and/or as a matter of construction of the policies of the insurance programme, rights of subrogation in fact operated on a proportionate basis across the insurance programme. Furthermore, it was argued that the settlement agreement between Textainer and the insurers of the fifth excess layer was not effective to transfer the insurers’ rights of subrogation to Textainer.
By the time of the final hearing there were three key issues in dispute between Textainer and the claimant insurers. Firstly, did rights of subrogation in relation to the insurance programme as a matter of law or on the terms of the insurance policies operate on a “top down” basis as argued by Textainer, or on a “proportionate” basis as argued by the insurers. Secondly, was Textainer entitled to make good its full loss above the limits of the insurance programme of US$85 million before the insurers rights of subrogation apply as maintained by Textainer, or did the insurers have first call on any recovery made. Thirdly, was the settlement agreement between Textainer and the insurers of the fifth excess layer effective to transfer those insurers rights of subrogation to Textainer as was Textainer’s case, or did it not have that effect.
In his judgment Deputy Judge David Railton QC found in favour of Textainer on all three of the above key issues in dispute. Furthermore, the Deputy Judge held that even if he was wrong regarding rights of subrogation not operating on a proportionate basis, the insurers in any event had failed to establish their case on the basis of that principle as a matter of fact, even though the relevant details and evidence were available to them. Consequently, the insurers’ claim also failed on that basis. As a result, the insurers’ claim failed in its entirety and they recovered nothing at all.
The case was accordingly a clear and decisive victory for Textainer and its legal team. It also marks a very rare decision indeed on the specific class of container lessee default insurance.
David McInnes
Partner
Joshua Geesing
Associate
