In the recent case of AstraZeneca Insurance Company Limited v XL Insurance (Bermuda) Limited and ACE Bermuda Insurance Limited  EWHC 349 the Commercial Court was asked to construe the insuring clauses in a Bermuda Form liability policy under English law, for the first time.
The Court held, determining preliminary issues, that it was necessary for the insured to demonstrate that it was under an actual, rather than an arguable, legal liability, in order to be entitled to indemnity under the policy against (i) sums paid in settlement of claims, and (ii) defence costs. The court therefore rejected the claim that this was a “reasonable settlements” policy.
Although the standard Bermuda Form policy is governed by New York law and subject to London arbitration, the relevant policy in this case was governed by English law and the parties also waived the arbitration clause, conferring jurisdiction on the Commercial Court.
The claimant was the captive insurer of the AstraZeneca pharmaceutical group (AstraZeneca) which provided Bermuda Form liability cover excess of £365m to the group companies. XL and ACE each reinsured the claimant for 50% of that limit. It was common ground that, despite the fact that the proceedings were between the insurers and reinsurers of AstraZeneca, the relevant policy for consideration by the Court was the underlying Bermuda Form policy issued to AstraZeneca (the Policy).
AstraZeneca had manufactured and sold in the US a second generation anti-psychotic drug known as Seroquel. A class action was filed against AstraZeneca in 2003 alleging that Seroquel caused personal injury, and since then numerous plaintiffs had brought proceedings raising similar allegations of personal injury. As at 31 October 2012 the claimant had settled claims presented under the direct insurance by AstraZeneca for indemnity in respect of legal costs incurred in defending the claims and for settlements made in respect of the claims, amounting to some £83.5m excess of £365m. Significantly, however, only one case had been litigated through to a full trial and that had resulted in a verdict for the defence. Other claims had been summarily dismissed.
The claimant claimed that it was entitled to be indemnified by XL and ACE under the reinsurances in respect of all sums paid by way of settlements or defence costs. Importantly, the claimant did not advance a positive case that AstraZeneca had an actual legal liability to the US class action plaintiffs. XL and ACE contended that the underlying direct Policy (and hence the reinsurances) only responded where there was an actual legal liability.
The Court was asked to resolve two preliminary issues, namely (i) whether, in order to trigger the cover under the Policy, AstraZeneca was required to demonstrate an actual legal liability, or only an arguable liability, to the US plaintiffs; and, (ii) whether the Policy provided a free-standing entitlement to indemnity for defence costs, or whether that head of cover was subject to the same requirement to demonstrate an actual legal liability.
Flaux J confirmed that the general principle under English law, supported by a consistent and well-established line of English decisions, helpfully reviewed in his judgment, is that, in the absence of clear wording to the contrary:
- The insured under a liability policy has to establish that it is subject to an actual legal liability, not just an alleged liability, to a third party claimant before it is entitled to an indemnity; and
- The ascertainment of loss by a settlement or judgment does not automatically establish actual legal liability (although a judgment against the insured will be strong evidence of liability). Following a settlement, it is still therefore open to the insurer to put the insured to proof that it was under an actual legal liability. He also reaffirmed that where the insured’s legal liability would have been (but was not) determined by a foreign court, then in principle the English court has to decide what that court’s decision would have been, following the applicable law and any relevant rules of construction; on the presumption that the court would have arrived at its decision according to the applicable law, and that extraneous reasons for saying that a jury would have arrived at a particular verdict are irrelevant, at least when such a verdict would have been contrary to the applicable law (see Commercial Union v NRG Victory).
Therefore the determination of the first preliminary issue turned on whether, on the true construction of the Policy, these general principles of English law were displaced in this case.
The claimant argued that although the Policy in this case was governed by English law, the court should keep in mind when construing its terms that the Bermuda Form is usually governed by New York law, under which cover is provided for reasonable bona fide settlements regardless of whether actual legal liability is proved. Flaux J categorically dismissed this proposed approach, describing it as “heretical”. He also agreed with XL and ACE that the above principle of New York law derives from the duty to defend imposed on liability insurers, whereas the Policy in this case expressly stated that no such duty applied.
Flaux J also did not accept that there is a settled understanding in the market that the Bermuda Form does not require the demonstration of an actual legal liability, as alleged by the claimant.
The Judge held that evidence of the commercial background, and in particular the US mass tort litigation system, even if admissible, was irrelevant to the proper construction of the Policy. The claimant also argued that it would be commercially unfair for a liability policy to respond only to actual liability, since this might discourage AstraZeneca from entering into commercially reasonable settlements. However the Judge again held that this was not a legitimate or permissible consideration in construing the Policy wording. He noted that if required, cover could have been obtained for commercially reasonable settlements, for example by way of a QC clause or other form of contingency insurance.
The claimant raised several “ingenious” construction arguments to support its submission that the Policy, read as a whole, provided coverage without the need for AstraZeneca to prove actual legal liability. In particular, it submitted that the word “liability” in the insuring clause meant “established” liability in the sense of a liability established by a settlement or judgment rather than an actual legal liability.
Flaux J held that the claimant’s arguments were all defeated by the language of the insuring clause, which provided cover for losses paid by AstraZeneca “by reason of liability imposed by law”. Following the decision in Enterprise Oil v Strand , he held that this language requires proof of an actual legal liability, because an alleged liability is not “imposed by law”. Furthermore, he noted that the clause goes on to require liability for “Damages on account of personal injury” as opposed to “alleged” personal injury. References to “alleged” personal injury in the Policy (for example in the definitions of Occurrence and Integrated Occurrence, where the focus is on notification, attachment and aggregation issues) did not affect the scope of cover, which was defined by the insuring clause.
A further important feature of the Policy was the Loss Payable clause, which expressly permitted the claimant to “examine the underlying facts giving rise to a judgment against or settlement by the Insured to determine if, and to what extent, the basis for the Insured’s liability under such judgment or settlement is covered by this Policy”. The Judge commented that this made clear that the ascertainment of liability by judgment or settlement was not conclusive – AstraZeneca still had to demonstrate that it was under an actual legal liability which was covered under the Policy. In other words, AstraZeneca’s liability was not “established” by a settlement or judgment itself, as the claimant contended.
Flaux J commented that there was nothing in the wording which extended the coverage to cover claims “established” by judgment or settlement, irrespective of whether there was any underlying liability.
Consistent with the general principles of English law summarised above, which were not displaced by the Policy wording, he held that AstraZeneca was only entitled to an indemnity under the Policy if: (i) on a balance of probabilities, (ii) assuming a correct application of the law governing the claim in question, and (iii) applying that law to the evidence properly analysed, it would have been under an actual liability for the claim.
As a starting point, Flaux J noted that there was no concept of “sue and labour”, as a matter of English law, in non-marine liability insurance. Hence costs incurred by an insured in defending a claim in order to avoid a liability which would otherwise have arisen, would not in principle be covered, in the absence of an express sue and labour provision.
The Judge also noted that there was no duty to defend under the Policy (which might have given rise to an implied right on the part of AstraZeneca to recover legal costs of defending a claim, if its insurer failed to do so).
Flaux J acknowledged that the scope of coverage for defence costs under the Policy was unclear, since the relevant reference to defence costs was within the definition of Damages, rather than the insuring clause.
The claimant argued that a sensible commercial construction of the provision would be to divide the definition of Damages in two, so that the Policy provided freestanding coverage for defence costs.
Flaux J however agreed with XL and ACE that it must have been intended that defence costs should only be recoverable under the insuring clause as an element of Damages, ie where there is an actual legal liability. This was the construction which was the most compatible with the Policy language. In any event, the claimant could not begin to demonstrate a free-standing provision for defence costs, let alone one providing cover where no actual legal liability was demonstrated.
Significance of the Judgment
- This case affirms the key principle of English law that the insured must demonstrate that it is under an actual legal liability, not just an alleged or arguable liability, to a third party claimant to be entitled to an indemnity under a liability policy. A liability policy will not cover “reasonable” settlements unless such coverage is expressly provided by the policy language.
- The ascertainment of an insured’s loss, by way of a settlement or judgment, is a separate requirement which does not automatically establish actual legal liability. Where the insured has concluded a settlement it is still open to the insurer to put the insured to proof that it was under an actual legal liability – in principle, the same analysis applies, even in the event of an adverse judgment or award against the insured (although in most cases a judgment will be conclusive).
- What the judgment confirms in practice is that in order to establish a right to indemnity under liability coverage, an insured must be able to demonstrate by pointing to the factual and expert evidence, and the legal analysis of the merits of the claim and any available defences, that on the balance of probability it would be subject to a legal liability if the claim proceeded to trial or an arbitration hearing. This is a key requirement not only as a trigger for coverage under a direct policy, but also for the response under any facultative or treaty reinsurance.
- In practice, the majority of third party liability claims for which indemnity coverage is available are settled with the consent of insurers before a settlement is concluded. The practical point which insurers can take from this judgment is that it reaffirms the evidential and legal standard which an insured must demonstrate for an insurer’s purposes in responding to an application for consent to settlement.
- In view of the importance of this point in the context of liability coverage and the sums at issue for the claimant, there must be a clear possibility of an appeal against the first instance decision; however, in our view Flaux J has correctly applied the principles in accordance with the consistent and strong body of case law cited in his judgment.
- The English law principles summarised above are in marked contrast to the position under New York law, where, based on the insurer’s duty to defend, an insurer is bound by good faith reasonable settlements made by the insured, irrespective of whether there was an actual legal liability – analogous to the position under a follow the settlements clause in the reinsurance context. This difference is a highly relevant factor which insurers should actively consider when selecting the governing law of their policies.
- Finally, this case contains the first publicly available analysis by an English Court, under English law, of certain provisions of the Bermuda Form. This will be of interest to all Bermuda Form practitioners and will serve as an important precedent in disputes where such policies are governed by English law or Bermuda law.