Actual or Alleged Liability?
The 'Bermuda Form' under English Law
In a Judgment handed down on 28 February 2013, legal precedent has for the first been been set by
the English Commercial Court on points of construction concerning the 'Bermuda Form' insurance
Specifically, when considering two preliminary issues of construction, the Commercial Court held
that as a matter of English law, absent specific language to the contrary in the policy, in order to
obtain indemnity under a liability policy, an insured must demonstrate an actual legal liability
ramifications of the Judgment will undoubtedly cause insureds concern.The 'Bermuda Form'
The Bermuda Form liability insurance policy was introduced in the 1980s by the then newly-formed
Bermudian insurance companies, SL and ACE. The form was originally created to ensure the
availability of high level liability cover for multinational corporations which faced exposure to large
product liability claims. The corporations that required the cover themselves contributed capital to
fund the original Bermuda Form insurers.
The Bermuda Form wording is unique. One of its distinctive features is that whilst the insurance
policy is governed by New York law, it provides for the resolution of disputes through arbitration
seated in London. For this reason, until now, the English Commercial Court has never been called
upon to address issues of construction relating to the Bermuda Form.
In this case, the parties amended the standard Bermuda Form wording by endorsement, such that
policy was governed by English, and not New York, law.The Seroquel Litigation
Since 2003, when the first putative class action was filed in the US, it is believed that AstraZeneca
(or rather, certain of its group companies) has paid out in the region of US$786m in legal costs
compared with US$63.7m in settlements in relation to third party claims for personal injury,
defective product, and failure to warn in the US and elsewhere relating to its anti-psychotic drug
Seroquel. In this period, only one Seroquel claim has been litigated through to a full trial, where
AstraZeneca was successful in its defence. Other claims have been dismissed summarily.The Dispute
AstraZeneca Insurance Company Limited (the pharmaceutical company's captive insurer)
indemnified the group companies for the totality of legal costs incurred as well as for roughly half
of the third-party claims presented to it under its liability insurance policy - the XL004 Bermuda
Form wording (the Policy).
Critical to the decision in this case (and in addition to other amendments) the parties agreed that the
Policy would be governed by English law instead of New York law.
Having settled its insured's claim under the Policy, the captive turned to its reinsurers, XL Insurance
(Bermuda) Ltd and Ace Bermuda Insurance Ltd, for reimbursement.
Both reinsurers refused to indemnify the captive on grounds that an actual legal liability has not
been proven. By contrast, AstraZeneca's captive maintained that:
1. The Policy provided indemnity not only for an actual legal liability, but also in circumstances
where there had been a settlement on an arguable liability; and
2. The indemnity for Defence Costs (as defined in the Policy) constituted a free standing
entitlement irrespective of whether any actual legal liability could be shown.
The captive and both reinsurers agreed to waive the arbitration clause in their policies and instead
agreed that their dispute should be subject to the jurisdiction of, and determined by, the English
Court, by way of a preliminary issues trial of the two points set out above.Judgement on the Preliminary Issues
In respect of the first preliminary issues, Flaux J. held that the insured is only entitled to an
indemnity where it demonstrates an actual legal liability on its part. This means that, where the
insured has entered into a settlement, it must show shat on the balance of probabilities it would have
been legally liable.
Similarly, as regards the second preliminary issue, Flaux J. held that the insured is only entitled to
an indemnity for defence costs where it establishes that it was, or would have been, legally liable
for the third-party claims in issue.
Whilst this Judgment has disposed of the preliminary issues - an appeal cannot be ruled out - the
case remains ongoing.Ramifications
Given that this is the first time that construction issues relating to the Bermuda Form have been
considered by the English Commercial Court, the case has, unsurprisingly, prompted much interest
in the insurance market. However, beyond that, it is worth considering the potential ramifications
for insureds, who spend millions of dollars in premium purchasing this cover.The balance of probabilities:
The Judgment places a higher burden on the insured to show that,
absent wording to the contrary in the policy, it owes an actual legal liability to a third party rather
than an alleged legal liability. It is important to note that Flaux J. describes actual legal liability as
something to be demonstrated "on the balance of probabilities" (i.e. 51% : 49%) and therefore,
whilst this may still present difficulties for policyholders who are, for example, preparing strategies
to deal with mass tort litigation in the US, the situation may perhaps not be quite as bleak for all
insureds seeking to settle claims (as some headlines would suggest).Unintended Consequences:
Whilst this Judgment will be disappointment to insureds, it once
again demonstrates that parties must be wary and carefully think through the unintended potential
consequences of amendments or endorsements to their policies. In this context, New York law is
generally regarded s more "policyholder friendly" and it is worth noting the apparent consensus
that, had the governing law clause remained unamended, under New York law is would have been
sufficient in this case to establish liability by means of a reasonable settlement.Defence Costs:
Perhaps surprisingly, given that insureds may believe they are buying
straightforward cover for "defence costs", the Judgment suggests that under English law an insured
can only be certain that it will recover defence costs if an actual liability can be shown. If it
remains the case that insurers' liability for defence costs follows their overalll liability, a nonsensical
result ensues: an insured may incur costs in successfully defending underlying third-party claim(s)
against it, thus saving insurers from substantial indemnity payments, yet that same policyholder
risks being left out of pocket for its trouble, despute having purchased cover for so-called defence
costs. This may be particularly acute in the context of underlying claims in the US, where the
problem is exacerbated by the absence of a "loser pays" rule.Extrinsic Evidence:
It is also worth noting that the claimant, in presenting its position on the
preliminary issues (and with a view to demonstrating the reasonableness of its underlying
settlements) sought to introduce expert evidence on the difficulties for companies facing US mass
tort litigation, jury trials and the spectre of punitive damages. However, as a matter of English law,
Flaux J. held that expert evidence on the reasonableness of an insured's settlements with third
parties constitutes extrinsic evidence pursuant to Article VI O of the XL004 Bermuda Form
wording, and such evidence was therefore inadmissible and wouild not be considered as an aid to
construction of the Policy.
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