Since the “coronavirus” was first identified in Wuhan, Hubei Province, China, the World Health Organization (“WHO”) has confirmed that more than 63 million people have been infected with the SARS-CoV-2 virus and nearly 1.5 million people have died from COVID-19. 1
As SARS-CoV-2 has spread, there have been suspensions and disruptions of factory operations and supply lines; cancellations of and restrictions on conferences, concerts and music festivals, sporting events, theater shows, attractions, and restaurants; and closings of businesses and schools. The economic losses are projected to be at least in the hundreds of billions of dollars with disruptions potentially lasting for two years.
As many insureds around the world have turned to their insurers for reimbursement under pertinent insurance policies, their insurers have largely rejected such claims.2 In the United States, the University of Pennsylvania’s Covid Coverage Litigation Tracker has tracked the filing of nearly 1,300 pandemic-related insurance coverage lawsuits.3
In addition to the many lawsuits filed in the US, it is also anticipated that there will be a significant and parallel uptick in the number of pandemic insurance and reinsurance arbitrations.4 It is particularly likely that many of these disputes will take place under socalled “Bermuda Form” arbitration clauses given the many business interruption policies sold to US insureds by the London and Bermuda-based insurers.
According to the UK Supreme Court, “The Bermuda Form policy was created in the 1980s to provide high excess commercial general liability insurance to companies in the United States after the market for such insurance collapsed.”5 As it relates to arbitration, Bermuda Form policies usually contain an arbitration clause providing for ad hoc arbitration not subject to the rules of an arbitral institution.6 Although the policies typically provide that the insurance is to be interpreted in accordance with New York law (with modifications), they require arbitration in London, England before a tribunal of three arbitrators.7 And, if the two arbitrators selected by the parties are unable to agree on the third, the High Court in London has the right to appoint the third arbitrator.8
A recent UK Supreme Court decision, Halliburton v. Chubb, highlights some of the issues US insureds can expect when arbitrating insurance disputes, pandemic or otherwise, under the Bermuda Form.
The Deepwater Horizon Explosion and the Initiation of Arbitration
In 2010, as a crew on the “Deepwater Horizon” drilling rig worked to close up an exploratory oil well deep under the Gulf of Mexico, a pulse of gas shot up into the drill rig and triggered an explosion.9 In addition to killing 11 crewmembers, the explosion caused more than 300 Olympic-sized swimming pools of oil to leak into the Gulf.10 Given the damages, private party/class action litigation ensued and the United States Environmental Protection Agency (EPA) initiated a parallel enforcement action.11 The EPA settled with several of the defendants in the action, including a settlement with BP Exploration & Production (BP) for an unprecedented $5.5 billion in relation to the Clean Water Act and up to $8.8 billion in natural resource damages.12
While the various private and Government parties sought to recover from BP (as lessee on the rig) and Transocean Holdings LLC (Transocean)(as owner of the rig), they also sought to recover from Halliburton Company.13 Halliburton provided cementing and well-monitoring services to BP in relation to the temporary abandonment and plugging of the well.14
Following a $1.1B settlement of private claims for damages against it, Halliburton sought recovery from its liability insurers including Chubb.15 Chubb denied Halliburton’s claim. Transocean made similar claims against its liability insurers, including Chubb, and Chubb contested the claim on substantially the same grounds as it did Halliburton.16
Both Halliburton and Transocean had Bermuda Form policies with Chubb and both contained similar arbitration clauses.17 After Chubb refused to pay, both insureds invoked arbitration procedures.
Without going too far into the procedural history of the three arbitrations, which can be found in ¶¶ 12-39 of the UK Supreme Court’s decision, a few salient facts are worth noting.18
After Halliburton and Chubb’s two party-appointed arbitrators were unable to select a third arbitrator in the Halliburton Arbitration, the High Court selected Mr. Kenneth Rokison QC, a third arbitrator who had been proposed by Chubb. Chubb served its statement of defense in the arbitration on December 11, 2015.
Also in December 2015, although the exact date is unclear from the decision, Mr. Rokison accepted an arbitral appointment by Chubb in a parallel arbitration initiated by Transocean (Transocean Arbitration). Prior to accepting appointment in the Transocean Arbitration, Mr. Rokison disclosed his involvement in the Halliburton Arbitration to Transocean but failed to disclose his involvement in the Transocean Arbitration to Halliburton.
In August 2016, Mr. Rokison accepted appointment in a third arbitration arising out of the Deepwater Horizon insurance claim in a matter involving Transocean. This third appointment was not disclosed to Halliburton.
In November 2016, when Halliburton learned of Mr. Rokison’s appointment in the other arbitrations, they raised their concerns about his failure to disclose the appointments. Following back and forth with Mr. Rokison and the parties regarding his potential resignation, Halliburton sought judicial relief to have Mr. Rokison removed.
The Rokison Removal Litigation
Following decisions by the lower courts, the case reached the UK Supreme Court. While the Supreme Court recognized that there is a duty of disclosure under English law, and that disclosure probably should have been made, the Supreme Court rejected the notion of any “real possibility of bias” warranting removal. In doing so, the Supreme Court pointed to the following five factors:
(1)It was not clear that there was a legal duty of disclosure at the time disclosure was likely warranted;
(2) The Transocean arbitrations commenced several months after the Halliburton Arbitration;
(3) The absence of any advantage to Chubb;
(4) The absence of any secret financial benefit to Mr. Rokison; and
(5) The absence of any unconscious ill will on his part.
Notable Comments Regarding the Bermuda Form and Takeaways
The Supreme Court explained that multiple appointments “must be disclosed in the context of Bermuda Form arbitrations in the absence of an agreement to the contrary between parties to whom disclosure would otherwise be made.”19 The Supreme Court noted that unlike other arbitrations, there is no custom or practice in Bermuda Form arbitrations where an arbitrator may take on multiple appointments without disclosure and “[t]his is unsurprising as the claimant in such an arbitration may often not be a repeat player while an insurance company is much more likely to be.”20
The Supreme Court’s last comment gets to the heart of what insureds need to understand about Bermuda Form arbitration. Insurers may have large numbers of arbitrations annually under such clauses whereas an insured may only have one over many years. As such, and particularly for US insureds, this raises a number of concerns.
“There’s No Place Like Home”
London is a global center for the insurance industry. The available arbitrators in this rarified world are often those who regularly work for insurers. As noted in the Halliburton opinion, Halliburton’s objections to the umpire candidates proposed by Chubb – including Mr. Rokison – were that they were English lawyers and the policy was governed by New York law, and “insurers had a practice of repeatedly appointing retired judges or QCs known to them.”21 The Supreme Court opinion includes reference to Mr. Rokison’s “long established reputation for integrity and impartiality,” and the trial judge commented that Mr. Rokison’s “experience and reputation for integrity would enable him to act in accordance with the usual practice of London arbitrators…”22 The trial judge also noted that Mr. Rokison dealt with the challenge “in a courteous, temperate and fair way which demonstrated his even-handedness” despite a “grossly offensive” suggestion.23
Professor William W. Park, Halliburton’s party-appointed arbitrator, took the rare step of refusing to join in the award against Halliburton as a result of his “profound disquiet about the arbitration’s fairness.”24
For US insureds, this world can be navigated but it requires an experienced team, and one that may include friendly English counsel as part of the team.
Ties Do Not Go to the Runner
Although Bermuda Form policies generally provide that the policy is to be interpreted in accordance with New York law, they may modify that by changing the rules of interpretation.
Under New York law, for example, insurance policies must be interpreted according to the “common speech” and “consistent with the reasonable expectations of the average insured.” Cragg v. Allstate Indem. Corp., 17 N.Y. 3d 118, 122 (2011); accord Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377, 383 (2003). If there is any ambiguity in the language, it must be resolved against the insurer and in favor of coverage. Id.; MDW Enters., Inc. v. CNA Ins. Co., 4 A.D.3d 338, 340–41 (2d Dep’t 2004).
And, “[t]o negate coverage by virtue of an exclusion, an insurer must establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case.” Westview Assocs. v. Guar. Nat’l Ins. Co., 95 N.Y. 2d 334, 340 (2000).
XL Insurance (Bermuda) Form XS004, however, provides as follows:
[T]he 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 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 favor of either the Insured or the Company or reference to the “reasonable expectations” or either thereof or to contra proferentum and without reference to parol or other extrinsic evidence) . . . .25
In other words, the Bermuda Form may alter the rules of interpretation designed to address the power imbalance between, and relative bargaining power of, insureds and insurers. And it is left to a select group of arbitrators, as discussed above, to determine the meaning.
Costs Follow the Event
In (American) English, this means that the tribunal will follow the English rule and, as part of the award, require the losing party to pay the prevailing party’s legal fees and costs. In addition, the tribunal will require the losing party to pay the fees and costs of the arbitrators and the arbitration. There is some wiggle room in the event of a mixed decision – some wins for either side – but this can mean that one party has to pay all of what can be significant amounts in addition to losing the arbitration.
As noted above, it isn’t all bad for insureds. With the help of experienced counsel well-versed in this world, insureds can prevail in Bermuda Form arbitration. And, because costs follow the event, this means that the losing insurer will have to pay the insured’s legal fees and costs as well as the arbitrator and arbitration fees and costs.