Law Report: Underwriters can recoup from names: Lord Napier and Ettrick and another v R F Kershaw Ltd and others. Court of Appeal (Lord Justice Dillon, Lord Justice Staughton and Lord Justice Nolan), 9 July 1992

Where an insurance agreement provided that the assured would bear the 'excess' or first layer of loss (layer A), and that the underwriter would indemnify him for any further loss up to a specified limit (layer B), any yet further loss being borne by the assured (layer C), and where the loss actually sustained by the assured reached into layer C, so that the underwriter became liable to pay the whole of layer B, but the assured then obtained partial recovery for his loss from another source (such as an award of damages), the underwriter was entitled to recoupment by way of subrogation on the 'top-down' basis, so that any recovery was applied first to layer C, then to layer B, and only then, if any remained, to the initial layer or 'excess'.

The alternative, so-called 'sandwich' method, by which the assured received the benefit first, the underwriter's layer of liability being the last cleared, would give the assured a degree of cover for which, having agreed to an 'excess', he had neither bargained nor paid.

The Court of Appeal allowed in part an appeal by R F Kershaw Ltd, and nine other representatives of Lloyd's syndicates which had written stop loss insurance for 1982, from a ruling by Mr Justice Saville on 12 June 1992, in proceedings brought by the plaintiffs, Lord Napier and Ettrick, representing an association of 987 Lloyd's names, and their solicitors, Richards Butler.

The names belonged to the Outhwaite syndicate and formed an association to sue R H M Outhwaite Underwriting Agencies Ltd and members' agents to recover losses attributable to allegedly negligent underwriting.

Under a settlement reached in March 1992, a total of pounds 116m was paid to Richards Butler on behalf of the plaintiffs, of which pounds 80m was attributable to past paid and notified cash calls in respect of the Outhwaite syndicate's losses, particularly for the year 1982.

The stop loss insurers, having duly paid up under policies effected with individual names for 1982, now sought to recoup by way of subrogation from each name an appropriate portion of what the name had recovered in the settlement.

David Donaldson QC, and Michael Swainston (Clyde & Co, and Waltons & Morse) for the stop loss insurers; Anthony Boswood QC, and Brian Green (Richards Butler) for the names.

LORD JUSTICE DILLON said that a typical sample of the stop loss policies provided that 'the underwriters shall indemnify the assured for the amount by which the assured's overall ascertained net underwriting loss . . . exceeds the amount stated as 'excess' in the schedule'. It then provided that the underwriters' liability should not exceed the amount stated as 'limit' in the schedule.

The names contended, and the judge agreed, that they were entitled to the amount of the excess from the recovery moneys before anything fell to be paid to the stop loss insurers by way of subrogation.

But that was inconsistent with the agreement in the policies that an excess was to be borne by the names.

His Lordship preferred the stop loss insurers' argument that the recovery should be applied from the top down, leaving the excess last to be recouped.

LORD JUSTICE STAUGHTON and LORD JUSTICE NOLAN gave concurring judgments.