By: Peter Leman, Charles Henley and Caitlin Barclay
Royal & Sun Alliance Insurance PLC v Textainer Group Holdings Ltd
The recent England and Wales Court of Appeal decision in Royal & Sun Alliance Insurance PLC v Textainer Group Holdings Ltd reinforces the current position of New Zealand law on subrogated recoveries. The Court of Appeal rejected the insurers’ attempt to avoid applying the general “top-down” approach to the distribution of recovery funds.
Case summary
Textainer Group Holdings Limited leased a large number of shipping containers to Hanjin Shipping Co Limited. Hanjin went into receivership in 2016 and at the time had around 113,000 of Textainer’s containers.
Textainer made a claim against its default insurance programme, which comprised the following layers:
- USD $5 million excess
- primary policy of USD $5 million, and
- five excess of loss policies providing cover up to USD $80 million over the excess.
Accordingly, any losses exceeding USD $85 million were uninsured.
The parties agreed that Textainer’s losses were approximately USD $101 million. The primary policy and the first to fourth excess policies were paid out in full and the fifth policy was settled for USD $25.1 million. This brought the total sum paid to Textainer by insurers to USD $75.1 million, leaving the uninsured losses at approximately USD $21 million (in addition to the USD $5 million excess).
In 2019, Textainer brought a claim against Hanjin. Hanjin agreed to pay just under USD $26 million in settlement.
The dispute in this case arose over the distribution of the settlement sum. Insurers claimed they were entitled to a proportionate share. Textainer argued for the usual “top-down” approach so that its uninsured losses would be paid first. Textainer relied on the House of Lords decision in Lord Napier and Ettrick v Hunter [1993]. The Court accepted this approach was correct.
Recovery funds were distributed treating the uninsured layer above USD $85 million as the top layer of cover. This meant the first part of the settlement sum was paid to Textainer for its uninsured loss of USD $21 million. That left USD $4 million for the other insurers, all of which was paid to the fifth excess layer insurer. The Court held if a proportionate approach had been applied, Textainer would not be indemnified to the extent the policy provided for and would therefore be in a worse position than it would have been if recovery had occurred prior to payment under the policies.
It is worth noting that the policy contained a “Recoveries” clause which stated that any sums recovered as payment towards the amount indemnified were to be allocated first to insurers until the amount paid under the policy had been recovered. The Court did not appear to consider that this altered the established legal position that the “top-down” approach applies.
Implications for recoveries in New Zealand
The Court of Appeal’s decision reinforces the existing position of New Zealand law on subrogated recoveries where the policy wording is silent. The “top-down” approach is the general position, building on existing case law in Lord Napier and Kuwait Airways Corporation v Kuwait Insurance CO SAK [2000]. How a New Zealand court would deal with an express policy provision requiring a different payment priority remains to be seen.