In a decision that may greatly impact the jurisdictional defenses of non-U.S.-based insurers, the U.S. Court of Appeals for the Fourth Circuit held on July 9, 2012, in ESAB Group v. Zurich Insurance, that the federal district court (sitting in South Carolina) properly exercised jurisdiction over an Ireland-based insurer. The insurer had assumed responsibility for a series of policies offering “worldwide coverage” to a Norway-based company, whose American subsidiary had sought a defense and indemnity for U.S.-based products liability claims.
ESAB Group is a South Carolina–based manufacturer of welding materials and equipment. Between 1989 and 1996, Trygg-Hansa of Sweden issued seven global liability policies to ESAB Group's Swedish parent, ESAB AB. Under these policies, Trygg-Hansa agreed to provide “worldwide” coverage to ESAB AB and its subsidiaries. Special endorsements in the Trygg-Hansa policies specifically extended coverage to ESAB Group. In 1998, Trygg-Hansa transferred its obligations in the seven policies to another insurer. In 2005, the obligations under the seven policies were transferred to Zurich Insurance, plc (ZIP), an Ireland-based company.
ESAB Group was named as a defendant in numerous federal and state products liability lawsuits throughout the United States arising from the plaintiffs' alleged exposure to welding fumes and other “consumables.” It incurred millions of dollars in defense costs and adverse verdicts. When ESAB Group sought coverage from ZIP (and other insurers) for these products liability claims, ZIP denied coverage and ESAB Group brought litigation in its home state of South Carolina against ZIP.
Federal District Court Decision
ZIP argued that the federal court in South Carolina could not exercise jurisdiction over it because it did not have minimum contacts with the state to support personal jurisdiction. Specifically, ZIP noted that it had no employees, agents, offices or property in South Carolina; was not licensed as an insurer by South Carolina; and did not regularly conduct business in South Carolina. It also noted that the insurance policies at issue were negotiated, drafted and executed in Sweden between two Swedish companies, ESAB AB and Trygg-Hansa, and that the policies designated Swedish law for the resolution of any and all disputes. The South Carolina federal district court rejected ZIP’s arguments, however, and the appeal to the Fourth Circuit ensued.
Fourth Circuit Appeal
Focusing on traditional tests for “long-arm” jurisdiction under the Due Process Clause, the Fourth Circuit focused on (1) whether ZIP purposefully availed itself of the privilege of conducting activities in South Carolina and (2) whether exercising personal jurisdiction over ZIP was constitutionally reasonable.
With respect to the first analysis, the Fourth Circuit identified certain “unique aspects” of the business of insurance; that is, because litigation is a “necessary part” of the liability insurance business, an insurer by necessity indicates its willingness to be brought into court in a nation when it agrees to insure its policyholder in a geographical area that includes that nation. Moreover, the Fourth Circuit found that these potential contacts with the insured’s country of domicile are not fortuitous or incidental. Instead, the Court deemed these potential contacts to be “targeted” and expected, especially where the insurer offers broad geographical coverage to induce customers to buy its policies and pay a higher premium for such elevated levels of insurance protection.
Bringing its analysis to the facts before it, the Fourth Circuit noted that South Carolina was obviously within the policies’ scope of “worldwide coverage” and that the policies specifically covered ESAB Group and its predecessors, companies based in South Carolina. Inferring that ZIP charged a higher premium for providing such worldwide coverage, the Fourth Circuit concluded that these facts demonstrated that ZIP had “purposefully availed itself of the privilege of conducting business under South Carolina law.”
Turning to the issue of the constitutional reasonableness of the District Court’s exercise of jurisdiction, the Fourth Circuit rejected the notion that litigating in South Carolina would be unduly burdensome to ZIP, particularly when compared to the interests of South Carolina and of ESAB Group. The Fourth Circuit noted that South Carolina had a manifest interest in providing an effective means of redress for its residents when insurers refuse to pay their claims and that ESAB Group had a substantial interest in the convenience of litigating in its home state of South Carolina. Although agreeing that requiring a party to defend itself in the jurisdiction and legal system where the insured has its headquarters imposes “unique burdens” that call for special scrutiny, the Fourth Circuit concluded that ZIP had signaled that the burden of appearing in a forum such as South Carolina was “not exceedingly onerous” when it took over the obligations in the policies to defend ESAB Group worldwide.
The Fourth Circuit’s decision is binding within the federal district courts of the Fourth Circuit (Maryland, Virginia, West Virginia, North Carolina and South Carolina) and may be considered persuasive, though not binding, in all other federal district courts. It will, therefore, be important to see whether other circuit courts across the United States adopt the Fourth Circuit’s reasoning. [We are, at this juncture, unaware whether ZIP plans to seek review in the United States Supreme Court.] Nevertheless, a non-U.S.-based insurer offering worldwide coverage to insureds – and previously secure in the notion that an American court could never exercise jurisdiction over it in any future coverage litigation because of its perceived lack of “minimal contacts” – would be well advised to reassess its position in light of the Fourth Circuit’s opinion.
The Fourth Circuit’s decision in ESAB Group also dealt with other issues before it. For example, despite finding jurisdiction over the foreign insurer, the Court upheld the arbitration requirement in several of the policies. Requiring arbitration to resolve any coverage disputes and stipulating with its insured that the law of the insurer’s own country will govern any dispute over the policy (via a Choice of Law provision, for example) remain two ways that a non-U.S. insurer may protect its interests, even if jurisdiction over it is now more likely.