The Court of Appeal in AstraZeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd & Anor  EWCA Civ 1660 has unanimously upheld the first instance decision of Mr Justice Flaux  Lloyd’s Rep IR 290. Our review of the first instance decision can be found here: [insert link].
AstraZeneca Insurance Company, AstraZeneca’s captive insurer (AZIC), agreed to indemnify AstraZeneca for losses which might arise out of its sale of the antipsychotic drug, Seroquel.
A class action claim was subsequently launched against AstraZeneca, asserting that Seroquel had (amongst other things) caused personal injury, and a number of other law suits making similar allegations were subsequently commenced. AZIC either defended or settled the majority of the claims. On the sole occasion that the matter was litigated through to a full trial, judgment was found in favour of AstraZeneca.
AZIC reimbursed AstraZeneca under the insurance in respect of the legal costs incurred in defending the claims and also in respect of approximately 50% of the settlement sums. AZIC then sought to recover an indemnity for the amounts which it had paid to AstraZeneca from XL Insurance (XL), its reinsurer.
The first instance decision
The reinsurance contract was on the so called ‘Bermuda Form’ and the first instance decision in this case is particularly notable as being the first case in which the English courts have considered the proper interpretation of such a policy. This is perhaps unsurprising as an unamended Bermuda Form is governed by New York law and provides for arbitration. The Bermuda Form in this case, however, had been amended to make it expressly subject to English law. The parties also agreed to waive the arbitration clause and to submit their dispute to the English Commercial Court for resolution.
Flaux J, at first instance, found as follows:
- Although the reinsurance was originally drafted as being subject to New York law, New York law could not influence the interpretation of the reinsurance policy. The parties chose to amend the choice of law clause and hence must have intended that English law would apply. The policy was to be interpreted accordingly.
- In order to recover under the reinsurance, AZIC had to establish that it was liable under the insurance policy. To do that, it had to establish that AstraZeneca would have been actually legally liable for the claims against it, as opposed to merely showing that there was an alleged liability against AstraZeneca. It was held that actual legal liability could not be assumed from a judgment or a settlement, meaning that the settlements reached by AstraZeneca could be challenged by XL.
- AstraZeneca’s defence costs were in addition to the main coverage and could only be claimed under the insurance and reinsurance when AstraZeneca could prove that they were actually legally liable. This was due to the wording of the policy which tacked the phrase “and shall include Defence Costs” on to the definition of “Damages”, thus linking the payment of defence costs to the requirement to establish an actual liability in order to claim damages.
AZIC brought an appeal against Flaux J’s judgment in relation to the issues listed at points (2) and (3) above.
The Court of Appeal held that the existence of an actual liability of the insurer to a claimant had to be established to the satisfaction of the insurer or, failing that, the judge or arbitrator who had jurisdiction to decide such a dispute. Should such a settlement or judgment not be enough to persuade the insurer to pay, the insured must then prove that it was legally liable to indemnify the third party.
As Christopher Clarke LJ set out, “the insured must establish both a loss and a liability. The former will be established by a judgment against him or a settlement… but the latter may not”. Accordingly, the Court of Appeal upheld the judgment of Flaux J on this point.
In relation to the second issue on appeal, the Court set out the basic starting point on defence costs within non-marine liability insurance, namely that there is no automatic right to recover. Any entitlement to recover defence costs must, therefore, depend on a free-standing provision in an insurance policy.
Whilst it was conceded that the parties clearly intended that the defence costs should be recoverable in some circumstances, an analysis of the policy revealed that there was no provision which stipulated that these costs would be payable on receipt of a “Claim”. It was, however, consistent with the policy’s language to treat the defence costs “as parasitical on the definition of Damages”. Accordingly, AZIC’s appeal on this point was also dismissed.
The principle that an insured must establish actual (not alleged) liability in order to be entitled to recover under a liability insurance, and that a settlement or judgment against it is not conclusive proof of actual liability, is (as put by the Court of Appeal) “potentially very inconvenient for insureds”.
This judgment clarifies that if an insured makes a commercially sensible decision to settle a weak claim, that insured may not be entitled to recover from its insurer, as it may not be able to show that the claim was well founded in law. As Christopher Clarke LJ set out, however, there are a number of methods available to the insured which would reduce these difficulties, some of which are set out below:
- Provisions can be drafted which define the circumstances in which actual liability can be established;
- The policy may contain a QC clause, or something similar, meaning that a QC’s opinion as to the merits of the insured’s defence against the claim must be obtained. Should the QC determine that the insured’s case does not stand a reasonable chance of success, the insured is then not required to proceed with the defence;
- The insurer can be made a party to the proceedings in which the claim against the insured is determined, as the insurer is then likely to be estopped from disputing the insured’s liability;
- At the reinsurance level, the reinsured may seek the consent of his reinsurer to the settlement; and
- At the reinsurance level, the policy can contain a follow the settlements clause, thus binding the reinsurer to the reasonable and business like settlements of the reinsured which are within the scope of the cover;
Although this result is unfavourable for the insured, it is, of course, always open to the insured to attempt to contract out of a reinsured’s policy terms and to alleviate the strict requirements of English law.