Royal & Sun Alliance Insurance PLC & Ors v Textainer Group Holdings Ltd & Ors

Factual and Procedural Background

The respondents ("Textainer") are companies within the Textainer group, a major intermodal container lessor. Starting 1 October 2015, Textainer was covered by a container lessee default insurance programme comprising a US$5 million retention, a primary policy covering losses in excess of this retention up to US$5 million, and five excess of loss policies providing cover up to US$80 million beyond the retention ("the Policies"). The insurers subscribing to the primary and first to third excess policies are collectively referred to as "the Insurers".

On 31 August 2016, a lessee of Textainer, Hanjin Shipping Co. Ltd ("Hanjin"), applied for receivership, triggering entitlement under the Policies for indemnity relating to container losses, uncollected rental, and recovery costs. At that time, Hanjin held approximately 113,000 containers leased from Textainer under operating and finance leases. Hanjin was declared bankrupt on 17 February 2017, with Textainer's losses initially assessed at approximately US$117.7 million, later revised to an agreed total loss of US$101,856,624. A net sum of US$478,265 was recovered from the Hanjin Bankruptcy Trustee in early 2019.

The primary and first to fourth excess policies paid out in full. The fifth excess policy claim was settled for US$25.1 million on 31 December 2018, leaving total payments to Textainer of US$75.1 million and uninsured losses around US$21 million plus the US$5 million retention. Subrogation rights under the fifth and fourth excess policies were transferred to Textainer as part of settlement agreements.

In May 2019, Textainer submitted a claim against Hanjin and reached a settlement agreement on 28 October 2019 for US$25,886,647.60 relating only to operating leases ("the Hanjin Settlement"). Partial payments totaling US$14,706,880.84 were made by Hanjin's Bankruptcy Trustee between November and December 2019.

The Insurers claimed entitlement to 39.3% of sums received by Textainer under the Hanjin Settlement, proportionate to their coverage of US$40 million of Textainer's total loss. Textainer disputed this, arguing it was entitled to retain all recoveries up to US$56,378,359, representing its net loss after deducting insured amounts and retention.

The Insurers’ claim was dismissed by a deputy High Court judge ("the Judge") on 5 October 2022. The Judge held that recoveries should be applied on a "top down" basis, not proportionately; that the Insurers failed to prove recoveries related proportionately to insured losses; and that the case did not involve under-insurance under section 81 of the Marine Insurance Act 1906, so the principle of averaging did not apply. The Insurers were granted permission to appeal, challenging these findings. Textainer opposed the appeal and further argued that even if averaging applied, recoveries should still be applied top down between insurance layers, and since subrogation rights for top layers had transferred to Textainer, the Judge’s dismissal was correct.

Legal Issues Presented

1. Whether insurers who have paid out under excess of loss policies are entitled to a proportionate share of recoveries subsequently made by the insured, or whether such recoveries should be applied first to uninsured losses following the "top down" approach established in Lord Napier and Ettrick v Hunter [1993] AC 713.
2. Whether the factual circumstances support applying recoveries proportionately across insurance layers or require application on a top down basis.
3. Whether section 81 of the Marine Insurance Act 1906 and the principle of averaging apply to the Policies, given the alleged under-insurance.

Arguments of the Parties

Insurers' Arguments

• The Policies differ from stop loss policies in that they cover individual container losses over time rather than a single aggregate loss, so recoveries should be allocated to the specific insured losses they relate to, supporting a proportionate (averaging) approach.
• The Hanjin Settlement was a pro rata settlement of operating lease losses, and it should be inferred losses under operating and finance leases were suffered evenly over time, justifying proportional allocation of recoveries.
• The Policies constitute marine insurance engaging section 81 of the Marine Insurance Act 1906, so under-insurance applies, requiring proportional sharing of recoveries as established in The Commonwealth [1907] P 216.
• The Judge failed to recognize the distinction between unitary and multiple losses, and that recoveries should be applied to the insurer indemnifying the relevant loss.
• The Judge speculated on the timing of losses without evidence and should have presumed equality and regularity of losses.

Textainer's Arguments

• Recoveries reduce total losses but do not affect the insured layers once paid, so the "top down" approach applies as per Napier and Kuwait Airways Corporation v Kuwait Insurance Co S.A.K.
• The Policies provide cover for defined layers of loss; therefore, recoveries must be applied sequentially from the top layer downward to preserve the nature of excess of loss cover.
• There is no presumption that losses occurred evenly or regularly; detailed loss data exists but was not used by the Insurers, who bear the burden of proof.
• The principle of averaging does not apply to excess of loss insurance because the cover matches the value of the insured layer, not the entire risk.
• Subrogation rights for the top insurance layers have been transferred to Textainer, further supporting the dismissal of the Insurers’ claim.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by affirming the established legal principle that subrogation entitles insurers who have indemnified the insured to benefit from recoveries made by the insured to reduce the loss indemnified. The central issue was whether recoveries should be applied proportionately across insurance layers or on a "top down" basis, consistent with the nature of excess of loss insurance.

The court examined the Policies’ structure, which provided defined layers of coverage above a retention, and noted the inclusion of "no drop down" clauses restricting coverage strictly to specified layers. The court found the differences between the present Policies and the stop loss policies in Napier were not material to the application of the top down approach.

Relying on Napier and Kuwait Airways, the court emphasized that the top down approach respects the nature of excess of loss insurance by applying recoveries first to the highest layer of loss insured, then downward, ensuring the insured receives full indemnity for covered losses without the effective limit of coverage being eroded by recoveries in a manner dependent on timing or identification of specific losses.

The court rejected the Insurers’ argument that recoveries should be connected to specific losses indemnified under particular policies, finding this approach overly formalistic and inconsistent with the commercial reality and policy terms. It also rejected the Insurers’ factual argument that losses under operating and finance leases occurred evenly and regularly, noting the Insurers failed to adduce evidence from available detailed spreadsheets and that no presumption of such a pattern exists.

Regarding the application of section 81 of the Marine Insurance Act 1906 and the principle of averaging, the court held that these do not apply to excess of loss insurance covering specific layers of loss. The concept of under-insurance is inapplicable because the insurance matches the value of the insured layer, not the entire risk, and the Insurers had paid in full under their Policies.

The court concluded that the judge below correctly applied the top down approach and properly rejected the Insurers’ factual and legal challenges, including the application of averaging.

Holding and Implications

The court's final decision is to DISMISS THE APPEAL.

The direct effect of this ruling is that recoveries made by the insured under the Hanjin Settlement are to be applied on a top down basis against losses covered by the excess of loss Policies, rather than proportionately shared with the Insurers. The Insurers are not entitled to a proportionate share of the recoveries. No broader precedent altering established insurance law principles was set; rather, the decision affirms the application of the top down approach in excess of loss insurance contexts and clarifies that section 81 Marine Insurance Act 1906 averaging principles do not apply to such layered insurance.