Readers of our blog will recall that we and our clients Textainer Group scored a notable victory in the London’s Commercial Court on 27 July 2022. The judgment concerned a substantial claim brought by the Textainer Group’s container lessee default insurers led by Royal & Sun Alliance. The full judgment can be viewed by clicking this link, along with our blog article setting out the case in more detail. This case was a very rare judgement on container lessee default insurance.
In summary, the dispute concerned a container lessee default insurance programme that Textainer entered into with various insurers under a programme of excess of loss insurance comprising a primary and five excess policies. The key issues in dispute between Textainer and the claimant insurers were, firstly, did rights of subrogation in relation to the insurance programme operate on a top down basis or on a proportionate basis; secondly, was Textainer entitled to make good its full loss above the insurance programme limits, before the insurers’ rights of subrogation apply, and; thirdly, was the fifth excess layer settlement agreement effective to transfer those insurers’ rights of subrogation to Textainer.
Deputy Judge David Railton QC (now KC) found in favour of Textainer on all three of the above key issues in dispute. As a result, the insurers’ claim failed in its entirety and they recovered nothing at all. The judgment reaffirmed 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, it applied and reaffirmed the key decisions of the House of Lords (now the Supreme Court) in Lord Napier and Ettrick v Hunter  AC 713 and of the Court of Appeal in Kuwait Airways Corp. v Kuwait Insurance Co SAK  1 Lloyd’s Rep 252.
Following the decision of Deputy Judge David Railton KC, the claimant insurers applied for permission to appeal the first of the three issues listed. The Court of Appeal granted the insurers permission to appeal and the appeal was heard in the Court of Appeal on 22 and 23 November 2023. Partner David McInnes and solicitor Joshua Geesing acted for the Textainer Group instructing Christopher Smith KC of Essex Court Chambers.
On appeal, the appellant insurers claim that they are entitled to a 39.3% share of the recoveries made by Textainer in the Hanjin Bankruptcy Estate, that is, a maximum of approximately US$10.2 million of the estimated recovery of US$26 million. This percentage represents the value of the primary to third excess layer as a proportion of the loss sustained by Textainer in the sum of US$101 million.
The appellant insurers advanced three arguments in support of their appeal.
- Firstly, that the top-down approach laid down by Lord Napier and Ettrick v Hunter and Kuwait Airways Corp. v Kuwait Insurance Co SAK does not apply to the facts of the case. The appellant insurers have sought to argue that, unlike the Lord Napier and Ettrick v Hunter case which should be considered a unitary loss, the losses sustained by Textainer are in fact individual in nature as each individual container is the loss. It follows that as and when each of the individual container losses were suffered by Textainer, each loss eroded the insured and uninsured layers in the chronological order they were suffered from the ground up. In other words, each individual loss was indemnified by a particular insured layer or fell within the uninsured layer. As such, any and all recoveries should be shared proportionally across the insurance programme and the uninsured loss above the programme.
- Secondly, that it should be inferred from the facts that the losses sustained by Textainer were suffered evenly. This issue arose because the settlement with the Hanjin Bankruptcy Estate only covered losses in relation to operating leases, but not finance leases and so the order in which losses arose would impact on which policy the recovery applied to. In order to support the first argument, the appellant insurers have argued that the losses suffered by Textainer occurred evenly and regularly over time, such that each loss eroded the layers of insurance evenly and regularly. They have invited the Court of Appeal to draw an inference that such losses were suffered in this way because there was no evidence to the contrary.
- Thirdly, that the principle of averaging should apply. Under section 81 of the Marine Insurance Act 1906, which is applied by the insurance programme, averaging applies if the insured is under-assured. As the cover of the insurance programme was less than the value of loss sustained by Textainer, the insurers argued that the loss borne by the appellant insurers and Textainer are to be shared proportionally, as applied in The Commonwealth  P 216, 223.
The hearing can be viewed on the Court of Appeal livestream. Should the insurers succeed on appeal and thereby distinguishing the Lord Napier and Ettrick and Kuwait Airways cases, this would certainly be one of the most important (and in our view surprising) decisions on the English law of insurance subrogation.
The parties are currently waiting for judgment to be handed down. We will update our readers once it is released.