The recent decision of Flaux J in AstraZeneca Insurance Company Limited v (1) XL Insurance (Bermuda) Ltd and (2) ACE Bermuda Insurance Ltd ( EWHC 349 (Comm)) marks the first occasion that issues of construction of liability insurance written on the so-called "Bermuda Form" have come before the Commercial Court in England, albeit in the unusual situation of a wording governed by English law rather than the standard New York law. In short, the court found (1) that properly construed, the policy in question required the insured to demonstrate that it was subject to an actual legal liability in order to establish entitlement to an indemnity, and (2) that the policy offered no free-standing indemnity for defence costs incurred by the insured.
The factual background to the dispute can be shortly stated. The Claimant was the captive insurer of the AstraZeneca pharmaceutical group. It provided liability cover to, amongst others, US and Canadian AstraZeneca group companies for the period 1 January 2001 to 31 December 2003 (the "Policy"). The Policy covered a layer of £133,333,333 excess of £365 million. No wording was issued for the Policy, but it was understood to have been written on the previous expiring wording: Bermuda Form XL004 as amended by a number of endorsements. Each of the Defendants reinsured the Claimant for a 50% share in respect of the insurance provided by the Policy (subject in the case of ACE to a per occurrence limit of USD 100 million).
On 28 August 2003, a class action lawsuit was filed against AstraZeneca in Florida, alleging that its drug Seroquel (used in the treatment of schizophrenia and bipolar disorder) caused personal injury, was defective and that AstraZeneca had failed to provide adequate warnings in relation to its use. The Complaint in the class action was notified to AstaZeneca on or around 11 September 2003, and notice was given to the Claimant pursuant to the Policy by a letter dated 1 December 2003.
Following the initial Complaint, further proceedings were brought against AstraZeneca in the US. By 31 October 2012, it had paid out substantial sums in respect of the legal costs of defending the claims ("Defense Costs") and in settlements with the underlying plaintiffs, of which some £83.5 million was said to fall for cover under the Policy.
In what Flaux J described as a "striking feature" of the case, the Claimant did not assert that it would, on the balance of probabilities, have been liable for the claims it had settled. Rather, it contended that it was entitled to an indemnity under the Policy in respect of the settlement of arguable liabilities. The Defendants did not accept this contention, suggesting that cover under the Policy would lie only where the underlying insured was subject to an actual legal liability. The Defendants further contended that there was no cover for Defense Costs absent such liability.
Two preliminary issues therefore arose for determination:
- whether the entitlement to indemnity under the Policy against sums paid out in settlement of claims was dependent on the insured being, on a balance of probabilities, liable for the claims in question (assuming the correct application of the law governing the claims to the evidence properly analysed); and
- whether (other than in cases where the insured’s liability was determined by a Court of competent jurisdiction) entitlement to indemnity under the Policy in respect of Defense Costs was dependent on the same criterion.
The standard Bermuda Form policy provides for disputes to be resolved by London arbitration but on the basis that the governing law of the policy is New York law. In the present case, however, the Policy was amended by endorsement (Endorsement 14) as follows:
"This Policy, and any dispute, controversy or claim arising out of or relating to this Policy, shall be governed by and construed in accordance with the internal laws of England and Wales, except insofar as:
(1) such laws may prohibit payment in respect or punitive damages hereunder;
(2) the law of another jurisdiction must apply pursuant to any directive of the Council of the European Community relating to non-life insurance;
(3) such laws are inconsistent with any provision of this Policy;
Provided, however, that the provisions, stipulations, exclusions and conditions of this Policy are to be construed in an evenhanded fashion as between the Insured and the Company; without limitation, where the language of this Policy is deemed to be ambiguous or otherwise unclear, the issue shall be resolved in the manner most consistent with the relevant provisions, stipulations, exclusions and conditions (without regard to authorship of the language, without any presumption or arbitrary interpretation or construction in favour of either the Insured or the Company or reference to the "reasonable expectations" of either thereof or to contra proferentem and without reference to parole or other extrinsic evidence)."
Accordingly, the Policy was governed by English law. Unusually, the parties agreed to waive the arbitration provisions in the Policy, and conferred jurisdiction on the Commercial Court.
As a preliminary point, the Claimants argued that the matrix of fact which should be admissible to inform the construction of the Policy included the origins of the Bermuda Form, and hence "the traditions and practices of the US [insurance] market." They contended that under New York law (as would typically govern the Bermuda Form) the insured would not be required to establish that it was actually liable in respect of the subject matter of the claim, provided that liability had been established by settlement or by determination at trial.
Flaux J firmly rejected those submissions. He found that to the extent the Claimant suggested "that the approach the English court should adopt to a contract of insurance expressly governed by English law should be influenced by how New York law would construe the contract because, if the parties had not amended [the Policy] by Endorsement No 14, it would have been governed by New York law, that contention is wholly misconceived and… heretical as an approach to construction." Rather, in agreeing Endorsement 14 the parties should be taken objectively to have intended that the Policy be governed by English law in place of New York law. Moreover, Flaux J found that the principle relied on by the Claimant was a substantive rule of law derived from insurers’ duty to defend under New York law. It had no impact on how a court (whether in England or New York) would approach the construction of the Policy. Thus, the Claimant could have derived no assistance from the principle in any event.
The judge also rejected expert evidence directed at the commercial background to product liability litigation problems faced by entities in the USA as "precisely the sort of extrinsic evidence as to the "reasonable expectations" of the parties which is prohibited by the proviso [to Endorsement 14]" and in any event, irrelevant to the proper construction of the Policy. Similarly, considerations of commercial unfairness or unreasonableness in the Policy failing to respond to commercially sensible settlements were considered to be irrelevant to construction. Flaux J noted that cover for settlements regardless of liability is available to insureds should they consider it necessary (for example as provided by the QC clause typically included in professional indemnity policies written in England) but had not been included in the Policy.
First preliminary issue
The heart of the First Preliminary Issue was whether a liability policy will respond only to actual legal liability to a third party, or whether it is sufficient for the insured to be subject to an arguable liability, in relation to which it has paid out a settlement. Flaux J extensively reviewed the English authorities on the point, and concluded that "there is a consistent and well-established line of authority that, in the absence of clear contrary wording in the contract of liability insurance, under English law (i) the insured has to establish that it was under an actual legal liability, not just an alleged liability, to the third party before it is entitled to an indemnity under the contract and (ii) the ascertainment of loss by a judgment or settlement does not automatically establish such actual legal liability (although a judgment against the insured may be strong evidence of such liability). It is still open to the insurer to challenge that there was an actual legal liability, in which case it is for the insured to prove that there was."
The judge cited with approval the judgment of Christopher Clarke J in Omega Proteins v Aspen Insurance, which sets out the basis for the principle (in relation to liabilities ascertained by judgment, although the reasoning applies equally to settlements):
"If A successfully sues B to judgment the basis upon which he succeeds will be apparent from the judgment. It will not be open to C to say that A succeeded on another basis. To do so would be to rewrite history. But if A succeeds in suing B and B then claims against C, it is open to C to claim that in truth B was not liable to A (either at all or to the same extent), or that, if liable, it was not on the basis decided by the judge or not only on that basis. Unless B and C have by contract agreed something different, a judgment given in proceedings between A and B is neither binding on, nor enforceable by, C in subsequent proceedings between B and C."
Having established the rule, Flaux J went on to consider whether the Policy, properly construed, contained the necessary "clear wording" indicating that the parties intended to depart from the usual position. The insuring clause of the policy provided that the Claimant was to "indemnify the Insured for Ultimate Net Loss the Insured pays by reason of liability: (a) imposed by law… for Damages on account of: (i) Personal Injury… encompassed by an Occurrence."
The Policy defined Damages as "all forms of compensatory damages, monetary damages and statutory damages… which the Insured shall be obligated to pay by reason of judgment or settlement for liability… and shall include Defense Costs."
Flaux J considered that the critical point was that the Policy indemnity was provided for sums paid out by the insured by reason of liability imposed by law. This wording required a "clear causal link" between payment and an actual legal liability. Accordingly, the words used in the insuring clause strongly suggested that the parties intended the usual rule to apply, and the insured was required to demonstrate an actual legal liability.
The Claimants sought to invoke what they characterised as the broader scope of various definitions and other covers provided by the Policy to suggest that the insuring clause should be construed more broadly. Flaux J rejected those arguments (noting that in general terms, words used in policy definitions were inapt to amend the scope of the clear words of the insuring clause). In relation to the definition of Damages, he considered that the reference to the insured’s obligation to pay by reason of settlement was qualified by the words "for liability". This, combined with the use of the words "obligated to pay" were an indication that even where the insured had settled a claim, such settlement had to have been made in respect of an actual liability.
The Claimant also highlighted that the definitions in the Policy provided that there would be an Occurrence where "actual or alleged" Personal Injury occurred during the policy period. Accordingly, they submitted, an Occurrence could encompass alleged as well as actual liability. However, Flaux J did not consider that the Claimant could derive any assistance from that construction, as an Occurrence was a necessary but not sufficient condition for indemnity. Further, he noted that: "The insured who becomes aware from complaints or claims that a particular product is being alleged to cause injury to people needs to be in a position to give a Notice of Occurrence… at the time a decision has to be taken whether to serve such a Notice, inevitably the third party claims may only be at the stage of allegations." The Occurrence provisions simply allowed the insured to bring potential losses within the temporal scope of the Policy depending on when claims were alleged, rather than extending the terms of the indemnity.
Accordingly, on the first preliminary issue, Flaux J found that there was no wording which extended or displaced the usual coverage under a liability policy, and therefore the insured was entitled to indemnity only where it would have been under an actual liability for the third party claim.
Second preliminary issue
The second preliminary issue was whether the insured was able to recover Defense Costs under the Policy in the absence of a legal liability to the third party plaintiffs.
Flaux J noted as the starting point of his analysis that under English law, in non-marine insurance there is no entitlement to an indemnity against defence costs (even where defence of a claim reduces insurers' exposure), unless the policy in question expressly provides such an indemnity. The intial question for the court, therefore, was whether on proper construction, the Policy provided a freestanding indemnity for Defense Costs.
Flaux J noted that Defense Costs were included in the Policy as an adjunct to the definition of Damages. His view was that there was no basis to divide the part of the definition referring to Defense Costs so as to separate them entirely from Damages and so to construe the Policy as providing separate covers. Even if it were possible to sever the definition, both Damages and Defence Costs would only be recoverable under the insuring clause to the extent they were incurred by reason of liability imposed by law. Accordingly, he found that "the parties have expressed the intention that defence costs should only be recoverable in circumstances where what might be described as "traditional" damages are recoverable, not that there should be free-standing coverage for such defence costs. In relation to the first preliminary issue, I have decided that traditional damages are only recoverable where there is an actual legal liability. In those circumstances, it is difficult to see how Defense Costs, which are expressly made recoverable as part of Damages… can be recoverable even where no actual legal liability is established. That conclusion involves a subversion of language."
Accordingly, defence costs could only be claimed by the insured where it was established that it was subject to an actual liability imposed by law, and were not otherwise recoverable.
As is well known to the London legal market, the Bermuda Form has been the source of a considerable volume of dispute work over recent years. Substantial sums are covered on complex wording, the clarity of the drafting of parts of which Flaux J did not hesitate to criticise. The insurance is traditionally governed by New York law with disputes to be resolved by arbitration with seat in London. This means that, in the absence of any ability to appeal a decision on a foreign law under the Arbitration Act, there is a dearth of public authority on the wording. The decision of Flaux J is likely to generate considerable interest for that reason alone. That said, we suspect that the decision will have relatively little practical impact going forward given the different approach adopted by New York law, and the existence of few policies amended to be governed by English law (in our experience at least).
The findings of Flaux J in relation to coverage for settlements as a matter of English law are unsurprising and follow a significant body of authorities. The findings in relation to Defense Costs are of greater interest, and we are aware of different views previously on the English law position. It will no doubt come as some surprise to the insured to discover it has no cover for the costs of mounting a successful defence.
More generally, the position under English law as to both underlying settlements and English judgments is clear. Neither are binding on an insurer/reinsurer absent express wording in the insurance/reinsurance (such as a "follow the settlements" clause) or other conduct binding the insurer/reinsurer (such as via the conduct of the defence). The position in relation to foreign judgments is however less clear. Potter LJ suggested obiter in Commercial Union v NRG Victory ( 2 Lloyd's Rep 600) that foreign judgments would be binding on a reinsurer by virtue of an implied term in the reinsurance and provided certain criteria were satisfied (such as the reinsured taking proper defences). Aikens J suggested, again in obiter dicta, in Enterprise Oil v Strand ( EWHC 58 (Comm)) that the same analysis applied in relation to contracts of insurance. On the other hand, it is difficult to see why the test of necessity for the implication of a term, and particularly one of such complexity, is satisfied. In obiter comments in AstraZeneca, Flaux J pointed to misgivings of Lord Mance in Wasa v Lexington on the implication of such a term, and felt the better view was that no term should be implied. The binding nature of foreign judgments is, of course, of far greater importance than an English judgment, which the English Court would very likely follow in any event. Flaux J's comments strengthen the view that a Court required actually to decide the point will refuse to imply a term.