AstraZeneca Insurance Company Limited v XL Insurance (Bermuda) Limited and Ace Bermuda Insurance Limited1

The English Court of Appeal has confirmed that, under a Bermuda form policy governed by English law, coverage is granted for settlements and defense costs only if the insured establishes that it faced actual liability.

AstraZeneca group (AZ) was insured by its captive insurer, AstraZeneca Insurance Company Limited (AZI).  AZ faced lawsuits regarding its anti-psychotic drug Seroquel.  It defended the lawsuits, and incurred substantial defense costs which were reimbursed by AZI.  AZI also reimbursed 50% of settlements made by AZ.  Only one case was litigated through trial, resulting in a verdict in AZ’s favor.

AZI was reinsured by XL and ACE.  The reinsurance policy was written on the Bermuda form, which provided coverage for defense costs as part of the definition of damages, with certain amendments: it was governed by English law (rather than the standard provision for New York law); and it conferred jurisdiction on the English courts (rather than the standard provision for arbitration).

In the High Court, Mr. Justice Flaux had decided two preliminary issues in favor of reinsurers:

  • That to recover the settlements under the reinsurance, it was necessary for AZI to prove, on the balance of probabilities and assuming a correct application of the law governing the claim in question to the evidence properly analyzed, that AZ was under an actual liability; and
  • That to recover its defense costs under the reinsurance, it was necessary for AZI to prove that AZ would actually have had liability to the claimants (on the same test of balance of probabilities and correct application of law to the evidence). 

AZ appealed on both of these decisions, but the Court of Appeal unanimously upheld Mr. Justice Flaux’s decision.

In relation to the first issue, the Court of Appeal agreed with the judge that there is a consistent and well-established line of English authority in favor of the reinsurers’ position.  In the absence of clear contrary wording in the policy, an insured is required to establish that it was underactual legal liability, not just an alleged liability, to the third party before it is entitled to indemnity.  A judgment or settlement does not automatically establish the existence of actual legal liability (there was no “follow the settlements” clause), and it remains open to the reinsurer to challenge the existence of actual legal liability.

In relation to the second issue, the policy’s coverage for defense costs was granted by the words “and shall include the defense costs” which were part of the definition of damages.  This demonstrated that defense costs were intended to be recoverable only in circumstances where there was some other liability imposed by law (i.e. other losses), and there was not intended to be freestanding coverage for defense costs regardless of the merits of the claims asserted against the insured.  As damages were recoverable under the policy only if the insured had actual legal liability, it followed that defense costs would also be recoverable only if there was actual legal liability.  The Court of Appeal observed that this meant that AZ could not recover its defense costs under the insurance if it successfully defended the claim.  Lord Justice Clarke commented that this situation is “surprising, but not unheard of.”

The Court of Appeal decision reaffirms that reinsurers are entitled to take a strict approach and require the insurer to prove that the insured was actually under a liability in order to make any reinsurance recovery.  The decision also prevented the insurer from recovering payments for defense costs, on the basis that the insured would not have had liability for the claims giving rise to those costs.