John Fellas ()
While it may sound like the title of a novel by Robert Ludlum, the Bermuda Form is in fact an excess liability insurance policy. The Bermuda Form, so called because it was introduced by two Bermuda-based companies, ACE Insurance Company, Ltd. and XL Insurance Company, Ltd., emerged in the wake of the crisis in the liability insurance market in the United States in the mid-1980s, a crisis that saw premiums rise dramatically and the withdrawal of coverage for certain types of liability. It typically provides that it is governed by a modified version of New York law and requires that disputes be resolved by arbitration in London under the English Arbitration Act. This article discusses the origins of the Bermuda Form, some of its key provisions, and some considerations that bear on the arbitration of Bermuda Form disputes.
Origins of the Bermuda Form
One reason for the crisis in excess liability insurance market in the 1980s played a role in shaping the content of the Bermuda Form—the many decisions of the U.S. courts interpreting liability policies in a manner that exposed insurers to large indemnity obligations in mass tort cases. While U.S. courts did not all take the same approach, the leading case of Keene Corp. v. Insurance Company of North America, 667 F.2d 1034 (D.C. Cir. 1981), is illustrative.
Keene involved a dispute about coverage for injuries caused by exposure to asbestos under an occurrence-based policy. In most cases an injury first manifests itself at the same time as, or close to the time of, the event that causes the injury (e.g., an injury caused by a car accident), such that it is straightforward to identify the pertinent injury that triggers coverage and to assign it to a particular policy period. Matters are not so straightforward, however, where there is a long passage of time between exposure to or use of a harmful product and the development of symptoms of an injury. In the case of asbestos, for example, there can be a delay of years or decades between the first exposure to an asbestos product and the first manifestation of any disease such as mesothelioma or lung cancer.
Rather than trying to identify the pertinent injury for the purposes of triggering insurance coverage by reference to one particular point, the Keene court adopted what has become known as a “continuous” trigger approach to occurrences under a liability policy. “We conclude that each insurer on the risk between the initial exposure and the manifestation of the disease is liable to Keene for indemnification and defense costs.” Id. at 1041. The effect of Keene and other decisions of U.S. courts was to leave insurers exposed to large liabilities under each of many annual policies going back several decades.
The Bermuda Form was designed to limit the exposure of insurers to large, long-tail liabilities. Thus, it explicitly excludes coverage for certain mass torts, including claims for injuries with respect to asbestos, and is typically characterized by the following features:
• A single contract, rather than a series of annual contracts and an occurrence is triggered upon the first report of a claim by the policyholder;
• A particular approach to mass tort claims; and
• The governing law is that of New York, but with some explicit modifications.
As noted above, two related features of the standard occurrence liability policy at issue in cases such as Keene proved to be particularly problematic for insurers. One feature was that each annual policy was a separate contract, each with its own set of policy limits. The other was the adoption by the courts of doctrinal approaches—such as the “continuous” trigger—holding that injuries arising over a long period of time triggered coverage under each of those annual policies, from first exposure to the harmful substance to the manifestation of the injury.
The Bermuda Form is structured and drafted in such a way as to avoid this type of potentially far-reaching liability for insurers. Thus, while, typically, commercial insurance coverage written in the United States is structured as a series of annual contracts, each with its own set of policy limits, all of which may come into play if a continuous trigger is found, the Bermuda Form is structured as a single, continuing contract. The second feature that distinguishes the Bermuda Form from the traditional occurrence policy is that, while it is necessary for the occurrence to take place during the policy period for coverage to be triggered, it is not sufficient. It is also necessary that the policyholder report the occurrence to the insurer during either the same policy period in which the occurrence took place or in a subsequent “discovery period.”
Mass Tort Claims
The Bermuda Form contains the concept of an “integrated occurrence,” which is likely to come into play in the mass tort context and enables a policyholder to integrate multiple claims into a single occurrence. Specifically, an injury “to two or more persons or properties” can be treated as a single occurrence if the injury (i) “commences over a period longer than 30 consecutive days,” and (ii) “is attributable directly, indirectly or allegedly to the same actual or alleged event, condition, cause, defect, hazard and/or failure to warn of such.” The policyholder has to give a specific notice of integrated occurrence in order for multiple claims to be encompassed within a single occurrence.
The benefit to the policyholder in giving a notice of integrated occurrence stems from the fact that the Bermuda Form has a high per occurrence retention, with the possibility that any individual claim alone may never exceed that retention. By permitting the policyholder to give a notice of integrated occurrence, and thus add together claims that individually would not exhaust the high per occurrence retention under the policy, the policyholder obtains the potential for coverage where otherwise there might be none. From the standpoint of the insurer, the benefit to encompassing multiple claims in a single occurrence is that all the claims are collectively subject to one per occurrence limit.
Another feature of the term “integrated occurrence” in the Bermuda Form is that it is defined to exclude any injury that is “expected or intended.” The Bermuda Form typically provides that an occurrence is expected or intended when an insured has “historically experienced a level or rate of actual or alleged Personal Injury or Property Damage,” except when that injury or damage is “fundamentally different in nature or at a level or rate vastly greater in order of magnitude.” This is a rather circuitous way of dealing with the fact that a policyholder may know in advance that one of its products will likely cause some number of injuries.
In the case of certain pharmaceutical products, for example, while the vast majority of users typically will suffer no serious adverse reactions or side effects, a small percentage of users inevitably will. The Bermuda Form does not cover claims by those who have suffered such adverse reactions when the nature, level or rate of such reactions is in line with historical experience. However, if those adverse reactions are “fundamentally different in nature or at a level or rate vastly greater in order of magnitude” than those historically experienced, they are not excluded from coverage as “expected or intended.” This concept is often referred to as the “maintenance deductible.”
‘Modified’ New York Law
When, as is common, the Bermuda Form provides for arbitration in London, English law provides the procedural law for the arbitration. However, the Bermuda Form typically provides that the policy itself is governed by a modified version of New York law. This is essentially New York law with a few exceptions, some specific, some vague. An example of a specific exception relates to punitive damages; while New York law prohibits coverage for punitive damages, that prohibition does not apply under the Bermuda Form.
An example of a vague exception is the requirement that the policy be construed “in an evenhanded fashion as between the Insured and the Insurer.” While the policy goes on to provide some examples of what this means—a prohibition on the use of extrinsic evidence to interpret an ambiguous provision, the elimination of the contra proferentem rule, and the rejection of any presumption in favor of the insurer or the insured when it comes to construction of policy language—these examples are explicitly designated to be “without limitation.”
One of the central features of the Bermuda Form is to take the resolution of coverage disputes out of the hands of the U.S. courts and to have them instead resolved by arbitration in London. As a result, Bermuda Form arbitrations inevitably involve a mix of American and English legal cultures, often with a combination of English barristers and experienced New York litigators serving on the arbitral tribunal or acting as advocates, or both. It is essential for a U.S. lawyer acting as an advocate in Bermuda Form proceedings to be sensitive to this mix of legal cultures both when selecting an arbitrator and presenting her case.
Arbitrators with different legal backgrounds come to a case with different assumptions about the law. An arbitrator’s assumptions about the law stand in relation to her training and experience in a particular legal culture much as a person’s accent stands in relation to the country in which she grew up. Spend long enough growing up somewhere, and it becomes virtually impossible to lose your accent. But while you might never lose it, exposure to other cultures teaches you that your manner of speaking is not neutral.
An arbitrator who has practiced long enough in one culture will never unlearn what she knows. But a good advocate can ensure that the arbitrator who comes to a case with certain assumptions based on her legal background understands that those assumptions are not some neutral approach to an issue, but one of many, and that the approach she finds most familiar is not the appropriate one in the particular case. But the advocate cannot do this without some understanding of how an arbitrator might typically approach an issue based on her legal background.
When it comes to Bermuda Form arbitrations, a U.S. advocate must be aware of two critical issues: first, English law differs dramatically from New York law on the question of what a policyholder must show in order to recover sums paid over to settle claims; second, the particular risks posed by, and the settlement dynamics of, mass tort litigation in the U.S. are quite particular to the U.S. and unlikely to be familiar to a non-U.S. lawyer.
With respect to the first issue, under New York law, it is not necessary for a policyholder to prove actual liability in order to be able to recover under a policy for the settlement of claims; it is sufficient that it demonstrate potential liability on the facts known to exist at the time of any settlement. Luria Bros & Co. v. Alliance Assurance & Co., 780 F.2d 1082, 1091 (2d Cir. 1986). English law, by contrast, requires that the policyholder meet a higher hurdle to recover from its insurer, namely, to establish actual liability. AstraZeneca Insurance Company, Ltd. v. (1) XL Insurance (Bermuda) Ltd. (2) ACE Bermuda Insurance Ltd.,  1.C.L.C. 478 (Comm).
Given this difference in the law, it is conventional wisdom, often reflected in reality, that, when it comes to the selection of arbitrators, experienced English barristers are a better choice for insurers and experienced New York lawyers a better one for policyholders. In particular, it is often viewed as essential for a policyholder that at least one member of the tribunal be well-versed in New York law so that she can make certain that it is understood by all members of the tribunal. Similarly, it is important for the advocate presenting her case to be aware that the English lawyers on the tribunal might come to the case with different background assumptions about the law and to take care to stress aspects of New York law that it might be unnecessary to highlight if all the members of the tribunal were U.S. lawyers.
This brings us to a second consideration a U.S. advocate needs to take into account in selecting arbitrators and presenting her case in a Bermuda Form arbitration. Where the arbitration involves the question of whether the policyholder is entitled to recover from the insurer the amount paid to settle mass tort claims asserted in litigation in the United States, the decisive question under New York law is whether the settlement was “reasonable in view of the size of possible recovery and degree or probability of claimant’s success against the insured.” Luria, 780 F.2d at 1091. This requires knowledge not simply of New York law, but also an understanding of the particular risks of U.S. litigation as compared to other countries.
While many non-U.S. lawyers are familiar with several distinctive aspects of the U.S. legal system—such as jury trials, class actions, punitive damages—the advocate cannot assume that a non-U.S. arbitrator will be familiar with the very particular risks posed by, and the settlement dynamics of, mass tort litigation in the United States. Again this makes a difference to the selection of arbitrators and effective advocacy in a Bermuda Form proceeding. From the standpoint of the policyholder, it is important that at least one member of a tribunal understand the particularities of mass tort litigation in the United States and that the advocate take particular care to bring these features to life when presenting her case.
John Fellas is a partner at Hughes Hubbard & Reed. He is a member of the New York bar and a solicitor of the Supreme Court of England and Wales (non-practicing).