A 'Bermuda Triangle' in Insurance Choice of Law
Both in-house and outside counsel are rightly skeptical of forms and contractual boilerplate. Lawyers, after all, are expected to customize language to provide their clients or employers with the highest possible degree of protection. Sometimes, however, it is best to leave the form alone. A captive insurer recently learned this lesson the hard way when a simple amendment to the choice of law provision in an insurance policy on the commonly used Bermuda Form ended up costing it nearly $200 million. And a $200 million mistake is something no in-house lawyer would welcome explaining to the CEO.
The Bermuda Form is the product of collaboration between various stakeholders, including lawyers, brokers, bankers, and large U.S. manufacturing companies who sought to stabilize the excess casualty insurance market after its collapse in the mid 1980s. Generally, the Bermuda Form provides that the insurance contract is governed by New York law, but that disputes are to be arbitrated in London. As the English Court of Appeal once explained, the rationale for this division of forum and substantive law was to strike a balance between the interests of insureds and insurers by using the more developed and neutral New York law, while avoiding New York juries known at the time for large damages awards.
In AstraZeneca Insurance Co v XL & Ace (2013) EWHC 349 (Comm), a recent decision of the English Commercial Court, a captive insurer of the AstraZeneca pharmaceuticals group (AZ), had provided liability cover to AZ under excess-of-loss policies on the Bermuda Form. For reasons that are unclear from the decision, AZ amended the standard Bermuda Form and made it subject to English law instead of New York law. Among other things, this policy covered AZ for personal injury to consumers of its products. The captive insurer reinsured that risk with two Bermudan reinsurers, following the form of the underlying policy.
A class action and several other lawsuits were filed in the U.S. against AZ for personal injury allegedly caused by an antipsychotic drug called Seroquel. AZ incurred $786 million in legal costs defending the claim and paid $63.7 million in settlements (an average of about $20,000 per plaintiff). The captive insurer indemnified AZ for those costs and then sought to recover the appropriate share under its excess of loss reinsurance.
What the AstraZeneca court called the “striking feature” of the case was that the captive insurer did not argue that AZ would, on the balance of probabilities, have been liable for the claims in question had they not been settled. Instead, AZ simply asserted that the liability had been alleged on a basis that was covered by the reinsurance. Under English law, that assertion was not enough. The court held that arguable or alleged liability under the insurance did not suffice to prove that the reinsurer was liable and that the reinsured plaintiff would have had to prove actual liability on the settled claim, which it could not do. In reaching its holding, the court restated the well-settled English law principle that the reinsured must prove actual liability under the underlying insurance contract to be indemnified for settled claims.
Under New York law the outcome would have been different because, as long as the insurer has notice of a claim, generally, the insured need only show that it made a reasonable good faith settlement in the face of potential liability, not that actual liability would have been found but for the settlement. In other words, if the insurer has notice of the claim, under New York law, the insurer is bound by reasonable good faith settlements made by the insured.
The contractual wording itself is of primary importance in ensuring coverage for risk, but the choice of law is also of vital importance because that will determine how such wording is interpreted and applied. Had the captured insurer not agreed to change the choice of law provision in the Bermuda Form from New York to London, it likely would have collected the limits of its reinsurance instead of nothing.
At a minimum, in-house counsel should understand what law has been chosen to govern its policies and the impact of those choices of law. Depending on the complexity of the insurance program, such an understanding may require examining policies at each excess layer of coverage to make certain there are no circumstances under which English law might become applicable. Such a task may be most easily and efficiently completed by an insurance professional such as in-house or external coverage counsel.
Mason Simpson, a partner in Brown Rudnick’s New York office, represents clients in commercial litigation across multiple industries including insurance and reinsurance. Roger Kennell is a litigation associate in Brown Rudnick’s London office, specializing in commercial litigation and arbitration, with experience in, among other industries, insurance and reinsurance.