The commercial insurance programs of many multi-national and United States businesses include “Bermuda Form” policies, a special policy form developed in Bermuda in the mid-1980s that includes unique provisions and provides for arbitration of disputes, usually in London under the substantive law of New York. These provisions provide challenges for United States policyholders and “stack the deck” in favor of the insurance companies that are repeat players in “Bermuda Form arbitrations.” Policyholders should carefully consider purchase of Bermuda Form policies and ensure that they are structured as favorably as possible for the policyholder. Presentation of claims under Bermuda Form policies can present special challenges. Therefore, if claims arise, policyholders should consult counsel with expertise with Bermuda Form policies to ensure that the claim is presented with an eye toward the unique definition of “occurrence” and other provisions included in Bermuda Form policies.
The insurance coverage practice group at Hunton & Williams has deep expertise with Bermuda Form policies and Bermuda Form arbitration. We present this series of posts about the unique provisions of these policies and the challenges of Bermuda Form arbitrations to provide a primer for policyholders. This series first surveys the key features of the excess general liability insurance policies sold by ACE and XL and now other insurers which have picked up on key concepts used in the Bermuda Form. The series then discusses practice aspects of arbitration in London under the English Arbitration Act. Finally, the series discusses the existing case law interpreting Bermuda Form policies in both United States and English courts.
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History of the Bermuda Form
Insurance broker Marsh & McLennan, with a consortium of US policyholder companies from across the Fortune 500, created the first Bermuda Form insurance companies, ACE Insurance Company, Ltd., and XL Insurance Company, Ltd., to provide high excess CGL insurance to companies operating in the United States in the mid-1980s when the market for such insurance collapsed in the 1980s’ liability insurance crisis. ACE was formed in 1985 to provide high excess cover excess of US$100 million, and XL was started shortly thereafter, in 1986, to provide excess coverage below the ACE layer, with limits of between $25 million and $100 million.1 When the capital markets, in perhaps one of their more significant miscalculations declined to provide the necessary start-up capital, Marsh worked with US policyholder companies to secure the necessary capital contributions. Thus, household names like DuPont and Ford provided the seed money for these nascent insurance companies as a means of securing the excess liability insurance they needed to protect against catastrophic claims such as DES and other mass torts that filled the headlines at the time.
Those investor companies sought in exchange for their capital contributions certain features in these new “Bermuda Form policies” like limited pollution liability coverage and recognition that coverage should apply when there was a later, huge spike in claims that, despite a routine or historic claims history for that product or type of claims, was unexpected.2 This latter concern led to the development of two of the characteristics that were (and largely remain) unique to Bermuda Form policies and formed a huge part of their attractions to US manufacturers and other policyholders: the unique definition of “occurrence” and the so-called maintenance deductible, a term that nowhere appears in the Bermuda Form and which, as the decades have proceeded, has become a source of complicated arguments used by Bermuda Form insurers to deny coverage. US investor policyholders sought high excess coverage that would provide coverage for the too-common situation in which a product with a known history of low level claims later experienced an unanticipated spike in claims that differed either in kind or number, or “magnitude,” from the previous historical level of claims. The early Bermuda Form insurers and investors used vaccines as the prototypical example of such a product or claim scenario: vaccines historically have always produced a predictable number of “noise-level” claims each year, but also can be subject to a later spike in claims deserving of insurance and for which the investor companies sought reliable insurance protection that would apply without protracted disputes or coverage.
The unique provisions of the Bermuda Form are the subject of later posts in this series. It is useful in considering those provisions and when claims arise to remember this history and the representations that ACE and XL made to investor and other prospective policyholders made at the time of their formation: that the Bermuda Form insurers would break with the unfortunate past, which had led to the seizing of liability insurance markets in the mid-1980s, when “traditional” liability insurers parsed policies closely in order to find as many bases for denying coverage as possible.3 Those representations seem increasingly to ring hollow today. Although, for many years, most disputes arising under the Bermuda Form were settled, today such disputes increasingly are arbitrated, either because Bermuda insurers, like insurers of yore, decide to litigate disputes or because the policyholder is unable to obtain redress (or even a response) otherwise.