The Court of Appeal has upheld the decision of the Commercial Court in AstraZeneca Insurance Company Ltd v XL Insurance (Bermuda) Ltd and Ace Bermuda (to read our previous Law Now on the Commercial Court’s judgment please click here). In that case it was held that on the proper construction of a modified “Bermuda Form” liability policy, there is the presumption that the policy will respond only when the insured has incurred actual liability.
The appellant captive insurer (AZICO) provided liability cover under a “Bermuda Form” policy for a group of pharmaceutical companies (AZ).
Disputes arising from this form of policy are usually resolved under New York law, however in this instance the parties had explicitly agreed that the policy would be subject to English law.
AZICO settled various claims presented by AZ. Those claims related to personal injury actions arising from one of AZ’s products, Seroquel, and in respect of which AZ had incurred legal defence costs. AZICO sought indemnity from the respondent reinsurers, XL and ACE; however, indemnity was refused on the ground that there had been no finding of actual liability in accordance with the terms of the underlying policy.
Commercial Court’s decision
The Commercial Court provided judgment on two preliminary issues in respect of the construction of the policy:
- whether AZ’s entitlement to indemnity for the sums it provided in settlement of the personal injury claims would have been dependent upon whether it would have been, on the balance of probabilities, legally liable for those claims; and
- whether AZ’s entitlement to indemnity for defence costs was dependent upon liability being established in the same sense as 1.
The Commercial Court found that the insuring clause required AZ to demonstrate actual legal liability in order to be entitled to be indemnified by AZICO and that defence costs were only recoverable where “traditional” damages were recoverable. Defence costs were not recoverable free-standing from damages.
AZICO appealed these two points. AZICO submitted that the policy should be looked at both clause by clause and as a whole. As such the policy did not require the demonstration of actual liability if it was established by a judgment or settlement (in line with the principles applied in determining liability under New York law). AZICO referred to the definition of an “Occurrence” which provides the scope of the coverage to include AZ’s alleged liability for personal injury claims as well as actual.
Court of Appeal decision
The appeal was dismissed. The court reiterated and upheld the first instance decision, which reaffirmed the position under English Law: that in the absence of clear language to the contrary a policy indemnifies the insured only in respect of actual liability. The existence of alleged occurrences is merely a trigger for the establishment of actual liability, which is particularly pertinent in personal injury claims where an alleged injury can arise without necessarily resulting in the establishment of the insured’s liability; the “Occurrence is the shell within which the pearl of liability must be found”. Therefore, the existence of the insured’s liability has to be established to the satisfaction of the insurer or the court determining policy coverage, and it is not necessarily sufficient that the insured is held liable to the claimant by an underlying court or tribunal (the court referred to Omega Proteins v Aspen Insurance, in which it was established that the insured must establish both a loss and liability). In the case of AZ, the settlements that had been reached with the personal injury claimants were more commercial decisions reflecting the risk of litigation as opposed to AZ’s actual liability.
In relation to the second issue, the court pointed out that despite there being no right to recover Defence Costs in respect of non-marine liability insurance under English law there was an apparent intention for defence costs to be covered in certain circumstances. The court however found that the only way in which Defence Costs could be recovered was to treat them as being parasitical on damages; liability has to be actually established (on the basis outlined above) in order for defence costs also to be recoverable. Therefore, the insured can only recover defence costs if it fails in its defence of the underlying claims.
This judgment reaffirms the precedent set by the Commercial Court’s construction of the Bermuda Form liability policy that it will and can be construed in line with English law only when explicitly specified. The decision imposes an onus on insureds and reinsureds (particularly captives) which may be difficult to meet. The outcome is therefore favourable to market Insurers and Reinsurers.
The court’s ruling on AZ’s appeal emphasises the care that an insurer should take before accepting liability for a claim that has not been litigated to a conclusion. Insurers under English law Bermuda Form policies will be entitled to satisfy themselves as to the insured’s actual liability before agreeing to indemnify the insured.
The insured should therefore be aware of the extra onus that is being placed on them in relation to their liability policy when settling any actions made against them, bearing in mind both their commercial obligations and their obligations under the policy. Major insureds such as AZ often seek to manage their liability exposures internally, without recourse to their Insurers until after the claims have been settled, but this decision may force insureds to enter into a dialogue with their Insurers and Reinsurers at an earlier stage.
The Court of Appeal judgment provides some suggested practical solutions for an insured to the inconvenient position arising out of this type of policy construction. They included possible alternatives to a liability policy and the inclusion of terms such as a “follow the settlement” clause.
Without “follow the settlements” language, insureds may be faced with a dilemma in settling underlying claims, because of the risk of non-recovery under their policies, and even if they allow the underlying claims to proceed to judgment, Insurers and Reinsurers may still be able to argue that liability is not established, because of doubt cast on the value of the underlying determination. The Court of Appeal itself recognised this decision may be regarded as “very unfavourable to the insured”.
Going forward, insureds under the Bermuda Form may be reluctant to agree a modification to apply English law, although given the tail on liability claims this decision may be applicable to a significant number of high value policies already placed on behalf of major corporations.
Further reading: AstraZeneca Insurance Company Ltd v XL Insurance (Bermuda) Ltd and Ace Bermuda  EWCA Civ 1660