In AstraZeneca Insurance Company Limited v XL Insurance (Bermuda) Ltd & Anor1, XL Insurance and Ace Bermuda obtained judgment against AstraZeneca Insurance Company (AZ), AstraZeneca Group’s captive insurer. The case is notable for two reasons: the English court analyses in detail the Bermuda Form and also resolves the question as to whether liability policies respond to actual or alleged legal liability.
The case concerned AstraZeneca’s drug “Seroquel”, an antipsychotic drug approved for the treatment of schizophrenia and bipolar disorder, which had been sold in the US and Canada since 1997. Litigation ensued in the US alleging that Seroquel was defective and caused personal injury. The majority of AstraZeneca’s losses represented defence costs (US$786 million) as opposed to settlements (US$63.7 million). AZ indemnified AstraZeneca and then sought to recover defence costs of £83.5 million from reinsurers.
The issues that came before the English court for determination were:
- Could New York law influence the interpretation of the insurance policy at issue, which was a variation of the well-known “Bermuda Form” wording, notwithstanding that it was expressly subject to English law?
- Did AZ have to demonstrate that AstraZeneca was under an actual or alleged legal liability to the plaintiffs?
- Were defence costs recoverable regardless of whether AstraZeneca was actually legally liable to the plaintiffs?
The Bermuda Form
This is the first time that the construction of the Bermuda Form has been considered by the English court, which is perhaps not surprising. An un-amended Bermuda Form policy provides for London arbitration, but is governed by New York law. The policy between AZ and AstraZeneca was however amended by endorsement, so that it was expressly subject to English law. The provision for arbitration was also waived.
AZ argued that it was market practice that the Bermuda Form (as usually governed by New York law) does not require the establishment of actual liability. An “alleged liability” will suffice. AZ asserted that the English court should be influenced by how the New York courts would approach the construction of the policy notwithstanding the endorsement to English law. Mr Justice Flaux described this approach as “misconceived and heretical”. The parties must have intended their contract to be governed by English law as they had agreed to the endorsement. Flaux J therefore held that “New York law plays no part in the construction of this particular policy”.
Further, the judge found that under New York law the insurer has been bound to indemnify the insured without proof of actual liability because of a substantive principle of New York law and not because of the way in which New York courts have approached the construction of the policy. AZ’s attempt therefore to import New York law doctrines was firmly rejected.
Actual liability or alleged liability?
AZ did not argue that on the balance of probabilities, AstraZeneca would have been legally liable for the claims made against it. Perhaps this was because the amounts incurred by AstraZeneca (approximately only 10% related to indemnity payments) suggested that actual legal liability on AstraZeneca’s part may have been difficult to establish. AZ instead contended that the policy provided an indemnity not only where there was an actual legal liability but where there was an arguable legal liability.
Having explored in some detail English case law on liability insurance, the judge concluded that “the insured under a liability insurance policy will need to establish actual legal liability to a third party claimant before it can recover from the insurer, unless the particular language of the policy clearly provides to the contrary”. Flaux J found that it was clear from the policy wording that one cannot assume legal liability for these purposes from a judgment or a settlement.
AZ also submitted that the policy should be read as a whole so that “liability” would be interpreted as “established liability” (as achieved by a settlement or judgment) rather than just “actual legal liability”. The judge commented that whilst AZ’s submissions were “beguiling and ingenious”, he was unable to accept them.
Flaux J found that defence costs were an addition to the main coverage under the liability policy. Defence costs could only be claimed in respect of those claims where the insured was legally liable. It was noteworthy here that the policy did not oblige AZ to advance defence costs.
The decision raises some interesting questions, first as to the nature of liability insurance and second, what insurers and reinsurers can do to alleviate the strict requirements of English law.
Insurers may typically treat a judgment against their insured as conclusive proof that their insured is legally liable to the relevant third party. The court in this case challenged that view. The judge ruled that absent express policy language, an insurer (and also reinsurer) is always entitled to challenge an underlying judgment when the insured seeks to make a claim on the liability insurance. The underlying judgment establishes the insured’s loss but although it is evidence of liability it does not necessarily prove conclusively that the insured was legally liable. Of course, in practice, it may be difficult for an insurer to demonstrate that an underlying judgment is not proof of actual legal liability. The position is clearer, however, when it comes to settlements. A settlement agreement does not offer any conclusive proof of an underlying legal liability and so is more easily open to challenge.
The court made it clear that parties are always free to contract out of these strict requirements, and to this extent, English law perhaps affords insurers a greater degree of flexibility than New York law (where the law is more rigid that alleged liability will suffice). Indeed, in the reinsurance context, the development of follow settlements language alleviates the cedant’s obligation to prove it was actually legally liable to its insured. Under a follow settlements provision, assuming a settlement is reasonable and the cedant has acted in a business-like manner, the cedant is only required to show that the loss “as settled” falls within the terms of the reinsurance (thereby expressly preventing a reinsurer from reopening underlying decisions). Here, it was unlikely any follow settlements language existed in the reinsurance contract, which again is not surprising given that the reinsurance was of AstraZeneca’s captive insurer.