The English courts have, for the first time, set a legal precedent on the construction of a “Bermuda Form” policy, albeit that in this case, unusually, an endorsement had been agreed by the parties for the policy to be governed by English law, rather than New York law as is standard in the Bermuda Form. Because of a lack of English court authority on the type of issues that arise on the Bermuda Form wording, this case will be of interest in the market.
The recent decision in AstraZeneca Insurance Company Ltd v XL Insurance (Bermuda) Ltd and Ace Bermuda confirmed the presumption that a liability policy would only respond when the insured has established actual legal liability. Disputes which arise under the Bermuda Form are typically settled through arbitration. In this case, the parties agreed to waive the arbitration clause and confer jurisdiction on the Commercial Court.
A claim was brought by AstraZeneca Insurance Company Ltd (“AIC”), the captive insurer of the AstraZeneca worldwide pharmaceutical group, in respect of over US$800 million that it had paid to defend and settle (without an admission of liability) personal injury claims in relation to one of its products, an antipsychotic drug named Seroquel. AIC sought an indemnity from its reinsurers, XL and ACE, under a US$200 excess of loss layer of liability cover which had been refused on the ground that there had been no actual finding of legal liability of AstraZeneca.
Although the parties to the proceedings were insurers and reinsurers, the issues before the court concerned the insurance, not reinsurance, policy. The court considered two preliminary issues in respect of the construction of the underlying policy between AstraZeneca and AIC:
- whether AstraZeneca’s entitlement to indemnity under the policy against sums, which it paid in settlement of claims, depended on whether it would, on a balance of probabilities, have been legally liable for the claims in question; and
- other than in cases where AstraZeneca’s relevant liability was established by judgment of a court of competent jurisdiction, whether AstraZeneca’s entitlement to indemnity under the policy in respect of defence costs depended on whether it would, on a balance of probabilities, have been liable for the claims in question.
In respect of the first issue AIC contended that it was only necessary to demonstrate that AstraZeneca settled an arguable liability for the insured’s entitlement to indemnity to arise. This was rejected firmly by Flaux J, who said there was a consistent and well established line of authority under English law that the demonstration of actual legal liability on the balance of probabilities was required for the insured to be entitled to an indemnity. The case of Enterprise Oil v Strand  EWHC 58 (Comm) was relied upon by Flaux J as one of the authorities which posed “serious obstacles to the arguments advanced on behalf of the claimant”. In that case, Aitkens J found that, despite a provision within the policy which required a pro-insured interpretation of the entire policy, the insuring clause still required that the insured demonstrate actual legal liability.
Additionally, the court found that it would be open to a liability insurer or reinsurer to challenge the findings of liability in an underlying judgment in proceedings to which it was not a party, in order to question whether in fact the insured is under a liability. A judgment ascertaining the loss itself would not necessarily establish the legal liability of the insurer/reinsured.
In respect of the second issue regarding defence costs, the words “and shall include Defense Costs” were appended to the definition of damages. Flaux J held that this was an expression of intention by the parties that defence costs should only be recoverable in circumstances where “traditional” damages were recoverable. The wording in the policy did not give coverage for free-standing defence costs. Therefore, if the insured was not under an actual legal liability, defence costs would not be recoverable on their own.
AIC also sought to contend that, in construing the policy, the court should take account of the fact that the Bermuda Form is usually governed by New York law, under which coverage for liability would be established by a reasonable bona fide settlement or by judgment irrespective of there being an actual legal liability. Flaux J was wholly unconvinced by this submission, stating that the endorsement was agreed by the parties who would have appreciated the differences between New York and English law, and yet deliberately chose the latter.
Whilst this case deals with a specific policy wording, it is an interesting consideration by the Commercial Court of the alleged/actual liability debate which frequently arises in reinsurance arbitrations and also gives a helpful summary of the defence costs position commonly arising in liability policies. The judgment will be welcomed by insurers and reinsurers as it continues the line of authorities (such as Enterprise Oil and Omega Proteins v Aspen Insurance) in putting the onus onto the insured to establish a clear and tangible liability under a policy in order to receive an indemnity. It also serves as a useful reminder to insureds of the difficulties faced under English law in relation to proving liability for settled claims.
This case brings back into sharp focus the commercial dilemma that insurers/reinsureds face when contemplating the settlement of claims. They must either choose to settle, thus potentially mitigating their and their reinsurers’ liability but facing a challenge from reinsurers on the outwards policy if reinsurers are not on board with the settlement in advance, or consider whether they stand a better chance of recovery on the outwards policy if they take the matter to trial instead of settling.
With regard to the defence costs strand of the decision, insureds should take note that their liability policies will not necessarily cover their costs of successfully mounting a defence and they should check their policies carefully, obtaining the relevant prior consent from insurers if the wording so provides.