It is not uncommon for insurance policies issued to companies based in the United States, particularly large commercial and excess policies brokered on the London Market, to contain choice of law and forum clauses specifying that the law of England and Wales governs and that any legal proceedings shall be brought in the English courts. This article will look at some of the key differences between the U.S. and English law approaches.
Bad Faith Claims
The primary goal of “bad faith” law in the insurance arena is to provide insurance companies with an additional incentive to promptly pay meritorious claims. The vast majority of U.S. states recognize some form of bad faith law. In those states with meaningful bad faith law, the incentive is provided through remedies such as attorneys’ fees, prejudgment interest at higher-than-market rates and punitive damages that become available to an insured when its insurer unreasonably refuses to pay a justified claim.
There is no bad faith under English law as that is understood in the United States. While the parties must deal with each other in “utmost good faith” at the time of formation, this doctrine does not generally extend past formation to require the insurer to handle claims fairly. Whether the lack of an English bad faith law ultimately is significant is debatable, though, as one of the most valuable bad faith remedies often is the ability to recover attorneys’ fees incurred pursuing coverage. But since England does not follow the “American Rule” underwhich each side pays its own attorneys, an insured that successfully pursues coverage can often recover its attorneys’ fees. Moreover, unlike states in which attorneys’ fees are recoverable only when the insurer acted unreasonably, fees can be recovered in England even when the insurer took a reasonable position which turned out to be erroneous. While that may be positive, the counterpoint is that the insured, if unsuccessful, can end up paying the insurer’s attorneys’ fees.
Insurability of Punitive Damages
Many states limit or prohibit coverage for punitive damages as a matter of public policy. A significant number of states do, however, recognize that insurance is available for punitive damages awarded vicariously. Other states permit insurance to cover punitive damages
Under English law, the Court of Appeal in Lancashire County Council v. MMI (1997) held that such insurance was not per se contrary to public policy in English law. This could be perceived as a significant benefit to English law, given potential limitations in the United States. It should be noted, however, that many of the situations under which punitive damages may be awarded in the United States can give rise to other arguments against coverage whether under U.S. or English law (e.g., arguments about the nature of the insured’s conduct).
Contract Interpretation/ Resolution of Ambiguities
Like U.S. law, English contract law seeks to give effect to the parties’ mutual intent at the time of contracting. It would be a mistake, however, to conclude that there is no meaningful difference between English and American law in this regard.
Among the most significant is the treatment of disputes involving a word or phrase that is subject to two or more interpretations, both of which are reasonable. Stateside, rules of contract interpretation require a court to adopt any reasonable interpretation resulting in coverage without regard to whether that interpretation is “better” or “more reasonable” than a coverage-limiting interpretation. By contrast, insurers often argue that English law permits the arbiter to choose which interpretation is “more reasonable” under the circumstances, taking into account the information which reasonably would have been available to the parties at the time of contracting. It does not matter, therefore, what information the parties actually had or what was actually said about the meaning the parties ascribed to words or phrases, just what would have been theoretically available to them, or at least so it is argued. If this argument is accepted, it is possible that an insurer’s coverage-limiting interpretation of ambiguous language will be accepted even if there is an equally if not more reasonable interpretation of the plain language that would favor coverage.
Scope of Discovery
There is generally no “discovery” in English legal proceedings as that is understood in the United States. Parties to English litigation are required to give “standard disclosure” under which they are to produce only those documents (including electronically stored information) on which they rely as well as documents which may adversely affect their case or support another party’s case. The rules also require that documents be preserved, and that a reasonable search be made for potentially relevant documents.
U.S.-style depositions generally are not permitted in English proceedings. If oral evidence is to be used at trial, it must be disclosed in written format in a “witness statement.” Witness statements set out the facts to be introduced orally at trial, and are usually exchanged several weeks before the trial. Then, the witnesses may be cross-examined by the other party’s lawyer at trial based on their witness statements.
This more limited approach to “discovery” could be perceived as inhibiting the “search for truth” or a sensible way to avoid excessive expense and resulting injustice. Either way, it is a significant difference that ought to be considered when analyzing an English law and forum clause.
Coverage When Underlying Case is Settled
The overwhelming majority of cases brought in the United States are settled before reaching a final judgment. One would expect, therefore, that a company’s insurer would be willing to pay settlements that are reasonable in amount and involve payment on account of alleged liability coming within the scope of coverage. For example, when a life sciences company purchases large amounts of coverage to pay for bodily injury claims brought against it, it reasonably expects that coverage would be available in connection with settlements to resolve bodily injury claims.
This may not be the case under English law. In AstraZeneca Ins. Co. Ltd. v. XL Insurance (Bermuda) Ltd. and ACE Bermuda Ins. Ltd. (2013), AstraZeneca’s captive insurer paid nearly $126 million in defense costs and settlements related to product liability suits. AstraZeneca obtained a complete defense verdict on the only case it tried. Since there was no judicial determination that AstraZeneca had “actual legal liability” to the underlying claimants, the excess insurer argued that, in effect, AstraZeneca had to litigate the underlying plaintiffs’ case against itself to obtain coverage.
The English courts agreed, holding that AstraZeneca could not recover defense costs or the settlements in the absence of a showing that it had “actual legal liability” to plaintiffs.
While U.S. insurers may sometimes assert the same position, the vast majority of states which have considered the issue have rejected such arguments. For example, the courts in Illinois have repeatedly recognized that it is patently unfair to require an insured to prove a claim against itself and that coverage is available when an insured settles “in reasonable anticipation of potential liability.” Federal Ins. Co. v. Binney & Smith, Inc., 393 Ill.App.3d 277, 288, 332 Ill.Dec. 448 (2009).
Strict Compliance with Covenants/Conditions
The typical insurance policy imposes upon an insured several obligations, most commonly the obligation to provide notice of claims, cooperate to some degree with the insurer at the time of the claim and not enter into settlements without the insurer’s consent. Depending on the particular duty and state, many—but not all—of these obligations do not require strict compliance, and an insurer cannot deny coverage under the U.S. approach on grounds of purported non-compliance unless it demonstrates that it has suffered actual prejudice as a result of the non-compliance.
By contrast, under English law, compliance with claims notification provisions often requires strict compliance (if the provision in question is considered a “condition precedent,” and not a “bare condition”), and an insurer can deny coverage even in the absence of any prejudice. Similar results can be found with respect to consent to settlement and cooperation clauses, i.e., that the insurer can deny coverage outright even in the absence of prejudice.
An insured’s pre-inception disclosures to the insurer also may be scrutinized more strictly under English law. That is, formation issues are governed by the doctrine of “utmost good faith,” which arguably imposes a duty to voluntarily disclose all material facts to permit the insurer to accurately assess the actual risk being undertaken. Failure to meet this standard can result in the policy being found void ab initio. While there are disclosure obligations under U.S. law, they are generally perceived as being less stringent.
Just as it is often remarked that the United States and Great Britain are two countries separated by a common language, the similarities and joint roots of their common law systems should not lull one into thinking that the choice of law and forum as between the two is mere “boilerplate” without meaningful significance.