AstraZeneca Ins. Co. v. XL Ins. (Bermuda) Ltd., [2013] EWHC 349 (Comm), available at http://www.bailii.org/ew/cases/EWHC/Comm/2013/349.html.

In a helpful decision for reinsurers, the English High Court has decided that, under a Bermuda form policy, coverage was granted for settlements and defence costs only if it is established that the insured faced actual liability.

The AstraZeneca group (“AZ”) was insured by its captive insurer, AstraZeneca Insurance Co. Ltd. (“AZI”). AZ faced lawsuits regarding its anti-psychotic drug Seroquel. It defended the lawsuits and incurred substantial defence costs which were reimbursed by AZI. AZI also reimbursed 50% of settlements made by AZ. Only one case was litigated through to a full trial, and this resulted in a verdict for AZ.  

AZI was reinsured by XL and ACE. The reinsurance policy was written on the Bermuda form, with certain amendments: it was governed by English law (rather than the standard provision for New York law); it conferred jurisdiction on the English courts (rather than the standard provision for arbitration); and it provided coverage for defence costs by adding words to that effect into the definition of “damages.”

Mr. Justice Flaux had to decide two preliminary issues:

  1. To recover the settlements under the reinsurance, was it necessary (as the reinsurers argued) for AZI to prove that AZ was under an actual liability (or was it sufficient, as AZI argued, to establish that AZ had settled an arguable liability)?
  2. To recover the defence costs under the reinsurance, was it necessary (as the reinsurers argued) for AZI to prove that AZ would actually have had liability to the claimants (or was there, as AZI argued, a freestanding entitlement to indemnity for defence costs irrespective of whether AZ would have had liability)?

In relation to the first issue, the judge found that there is a consistent and well-established line of English authority in favour of the reinsurers’ position. In the absence of clear contrary wording in the policy, an insured is required to establish that it was under actual legal liability, not just an alleged liability, to the third party before it is entitled to an indemnity. The ascertainment of loss by a judgment or settlement does not automatically establish the existence of such actual legal liability (although it may be strong evidence), and it remains open to the insurer to challenge the existence of an actual legal liability. The judge concluded that there was nothing in the policy wording which changed that position.

AZI sought to rely on New York insurance law, which extends coverage to bona fide settlements, irrespective of whether there was an actual legal liability. The judge held that the policy was governed by English law and that New York law was not to be taken into account.

In relation to the second issue, the judge noted that coverage for defence costs was granted by adding the words “and shall include the defence costs” into the definition of damages. This demonstrated that defence costs were intended to be recoverable only in circumstances where what might be described as “traditional damages” (i.e., other losses) were recoverable, and there was not intended to be some freestanding coverage for defence costs regardless of the merits of the claims asserted against the insured. In relation to the first issue, the judge had decided that traditional damages were recoverable under the policy only if the insured had actual legal liability, and it followed that defence costs would also be recoverable only if there was actual legal liability.

This decision reaffirms the long line of authority that reinsurers are entitled to take a strict approach and require the cedant to prove that the insured was actually under a liability in order to make any recovery under their reinsurance. The decision also prevented the cedant from recovering payments for defence costs, on the basis that the insured would not have had liability. In the light of this decision, cedants (and insurers) may wish to consider including “follow settlements” clauses and review clauses providing coverage for defence costs.