In February the English Commercial Court handed down its judgment in AstraZeneca Insurance Company Limited v. (1) XL Insurance (Bermuda) Ltd (2) ACE Bermuda Insurance Ltd)  EWHC 349 (Comm). The Court considered a dispute under an amended Bermuda Form of liability insurance, the first occasion that issues of construction of the Bermuda Form have come before the Court since its genesis at the end of the 1980s. This is because, ordinarily, disputes under the Bermuda Form are subject to London Arbitration, applying New York law. Click here to view the judgment by Mr. Justice Flaux.
The main aspects of the judgment are that: (a) it exemplifies the Court’s approach to contracts expressly stated as being governed by English law irrespective of whether they are generally governed by a law other than English law; (b) it restates the English principles on liability insurance; and, (c) it provides a clear example of what constitutes the boundary between the proper construction by a court of a provision contained in a commercial contract and what would amount to the rewriting of a contract by the courts.
The Dispute and Court’s Holding
Unlike in the traditional Bermuda Form, the policy issued by AstraZeneca’s captive was expressly amended by the parties to provide that English law governed the contract; and the arbitration clause was waived in favour of the jurisdiction of the English Commercial Court.
Even though the dispute was between the claimant captive insurer and its reinsurers, XL and ACE, the Court had to decide, as preliminary issues, the construction of the underlying Bermuda Form policy issued to AstraZeneca (“AZ”) by its captive (“AZICL”).
Beginning in 2003, in both the US and Canada, proceedings were issued against AZ claiming that the drug Seroquel, approved by the FDA, caused personal injuries. Despite a number of the claims being summarily dismissed and that it appears that only one was litigated through to trial (resulting in a verdict for AZ), AZ entered into settlement agreements in the region of US$ 64 million, with legal costs incurred by AZ reaching nearly US$ 800 million.
Having indemnified AZ, AZICL in turn sought an indemnity under the XL and ACE reinsurances for all sums it paid AZ in respect of both settlements and defence costs. AZICL asserted that (1) the policy provides coverage in respect of liability established by a settlement or judgment for “actual or alleged” personal injury without the need for AZ to demonstrate that it was or would have been under an actual legal liability; and, (2) that in any event the policy provided cover for defence costs on a stand-alone basis. Reinsurers disagreed.
In order to overcome issues relating to settlements for “alleged” rather than “actual” liability under English law, AZICL sought to rely upon New York law and “market understanding” in interpreting the Bermuda Form, an approach the Court found “heretical.” The Court held that the parties, in expressly agreeing in the policy to the application of English law, are to be taken to know its principles on liability insurance.
Flaux J acknowledged that under New York law if an insurer is notified of a 3rd party claim and declines to defend it, the insured can settle the claim and the insurer will be bound by a good faith settlement without the need for the insured to establish actual liability. However he distinguished the position in English law where, absent an express contractual obligation, liability insurers have no duty to defend (and indeed noted that the policy issued to AZ expressly states that AZICL is under no duty to defend 3rd party claims).
The Court identified two essential flaws in AZICL’s assertion that there is an understanding in the market that Bermuda Forms do not require the establishment of actual liability: “First…there is simply no evidence before the court of this…or which ‘market’ is being referred to. Second, to the extent that the argument depends upon the fact that the Bermuda Form is usually governed by New York law, not only is this contract different because it is governed by English law, but as I have set out above, the relevant principle of New York law is a substantive principle of law not dependent on the construction of the contract.”
The judgment restates the English law principles of liability insurance as follows: “(i) the insured has to establish that it was under an actual legal liability, not just an alleged liability, to the third party before it is entitled to an indemnity under the contract; and (ii) the ascertainment of loss by a judgment or settlement does not automatically establish such actual legal liability (although a judgment against the insured may be strong evidence of such liability). It is still open to the insurer to challenge that there was an actual legal liability, in which case it is for the insured to prove that there was.”
In order to obtain an indemnity for the settlement amounts the reinsured argued that the word “liability” in the insuring clause meant established liability in the sense of a liability established by settlements, not actual liability, and sought to rely on a number of definitions, exclusions and other provisions in the policy containing references to “actual or alleged” personal injury to broaden the scope of cover.
The Court, however, held that the policy’s insuring clause clearly required actual liability to be established on a balance of probabilities, particularly if AZN’s loss was crystallised by settlements. Furthermore, policy definitions are an unpromising source for an extension of coverage under the primary insuring clause and in the policy in question these do not amount to clear contrary wording which would displace the normal principle of English law liability insurance. Finally, the word “alleged” in certain provisions of the policy refer to the time when underlying 3rd party claims are made against AZ, drawing a distinction between provisions concerned with the temporal scope of the cover, and those addressing the nature of the eventuality insured.
On the issue of stand-alone coverage for Defence Costs, Flaux J acknowledged that the difficulty with the wording was that the definition of “Damages” made reference to the definition of “Defense Costs,” as an appendix. On the basis of his finding on the indemnity issue, the judge considered that it was difficult to see how Defense Costs which are expressly made recoverable as part of Damages can be recoverable even where no actual legal liability is established.
As such the Court rejected the claimant’s suggestion that the definition of Damages should be bifurcated, leaving the reference to Defense Costs as a separate “untidy bolt-on provision.” Whilst Flaux J acknowledged that on the other hand the defendant reinsurers’ construction involves treating Defence Costs as liability imposed by law for the purposes of the insuring clause, he considered that unlike AZICL’s construction it did little violence to the language of the provisions of the contract.
This judgment marks a clear cut distinction between liability under standard Bermuda Forms governed by New York law and those governed by English law, and confirms that one must look at the substance of the actual contract rather than consider the general understanding of a standard form. It also serves as a useful reminder to draftsmen of commercial insurance contracts that nothing prevents them in displacing generally applicable principles of English liability insurance, as long as this intention is clearly stated in the policy wording.
The judgment also illustrates an important 1998 obiter dictum by Potter LJ, Commercial Union Assurance v. NRG Victory Reinsurance  2 Lloyd’s Rep. that where there is a judgment of a foreign court against the reinsured that should be decisive and binding as to the reinsured’s original liability. Flaux J considered that the better view is that absent some agreement to be bound (such as a Follow the Settlements clause, which could readily be incorporated) it is open to a liability (re)insurer to challenge findings of liability in an underlying judgment: “…whilst the judgment may ascertain the loss, it will not necessarily establish the legal liability of the insured or reinsured, although it may be compelling evidence of such liability, depending on the circumstances in which it was obtained.”