In MF Global Holdings Ltd. et al. v. Allied World Assurance Co. Ltd. et al., No. 1:16-ap-01251 (Bankr. S.D.N.Y. Aug. 24, 2017), the United States Bankruptcy Court for the Southern District of New York ordered MF Global Holdings Ltd. and Allied World Assurance Co. Ltd. to arbitrate their $15 million errors-and-omissions coverage dispute in Hamilton, Bermuda. MF Global initiated an adversary proceeding against Allied World in the bankruptcy court after Allied World had refused to pay MF Global for amounts that MF Global returned to its customers’ accounts as part of a settlement of claims against MF Global’s former managers and directors. Allied World denied coverage under its “Bermuda Form” errors-and-omissions policy, claiming that this procedure was tantamount to deposit insurance, and not professional liability insurance, which is what errors-and-omissions coverage typically provides., No. 1:16-ap-01251 (Bankr. S.D.N.Y. Aug. 24, 2017), the United States Bankruptcy Court for the Southern District of New York ordered MF Global Holdings Ltd. and Allied World Assurance Co. Ltd. to arbitrate their $15 million errors-and-omissions coverage dispute in Hamilton, Bermuda.  MF  Global initiated an adversary proceeding against Allied World in the bankruptcy court after Allied World had refused to pay MF Global for amounts that MF Global returned to its customers’ accounts as part of a settlement of claims against MF Global’s former managers and directors. Allied World denied coverage under its “Bermuda Form” errors-and-omissions policy, claiming that this procedure was tantamount to deposit insurance, and not professional liability insurance, which is what errors-and-omissions coverage typically provides.

MF Global sought to litigate the coverage dispute in the bankruptcy court in New York, arguing that the disposition of coverage was core to the bankruptcy proceedings because resolving rights under the policy required interpretation and enforcement of prior bankruptcy court orders, and also because the dispute implicated an important asset of the estate. However, Allied World sought to enforce the insurance policy’s broad Bermuda arbitration provision. It argued that the coverage dispute was a “non-core” issue and public policy favors enforcing arbitration agreements.

The bankruptcy court agreed with Allied World, and concluded that it must refer the coverage dispute to arbitration in Bermuda. The court deemed the coverage dispute a “non-core” issue that was based on the parties’ pre-petition relationship, was not based on rights created under the Bankruptcy Code, and did not implicate the most important asset of the estate. The court also emphasized the Federal Arbitration Act’s strong policy in favor of enforcing arbitration agreements. Finally, the court also stayed the adversary proceeding in its entirety pending the outcome of the Bermuda arbitration.

F Global illustrates the potential consequences faced by policyholders who purchase “Bermuda Form” policies. These policies typically provide for Bermuda or London-based arbitrations, and have gained in popularity over the past several decades because of the perceived procedural and substantive advantages of avoiding U.S. governing law. For example, insurance carriers may be drawn to “Bermuda Form” arbitration provisions because of their application of English or Bermuda common law, as well as the UNCITRAL Model Law on International Commercial Arbitration and The Bermuda International Conciliation and Arbitration Act of 1993. In comparison to U.S. substantive law, these governing standards may offer insurance carriers more options for avoiding coverage for settlement costs, and more options for seeking rescission of coverage and avoiding awards of punitive damages.

MF Global serves as a reminder that policyholders will need to evaluate jurisdictional and choice-of-law differences when considering “Bermuda Form” policies, including the potential impact on the scope of coverage. Coverage counsel can assist policyholders in understanding these and other international coverage forms to assess their potential rewards, and to develop strategies for mitigating their potential risks.