In this final post in our Hunton & Williams Bermuda Form Arbitration Series, we discuss case law involving the Bermuda Form. As explained in a prior post, the Bermuda Form includes an arbitration clause specifying that disputes be submitted to arbitration in London under the English Arbitration Act, but applying the substantive law of New York. The natural consequence of this arbitration provision is that reported decisions analyzing the substantive provisions of the Bermuda Form are few and far between. Little binding precedent has developed—or will develop—regarding interpretation of the Bermuda Form given that awards are issued in confidential arbitration proceedings. Nonetheless, several decisions in England and the United States offer insight into the handling and resolution of disputes involving Bermuda Form policies.
AstraZeneca Insurance Co. Ltd. v XL Insurance (Bermuda) Ltd. and ACE Bermuda Insurance Ltd.,  EWHC 349 (Comm)
AstraZeneca Insurance Co. Ltd. v XL Insurance (Bermuda) Ltd. and ACE Bermuda Insurance Ltd.,  EWHC 349 (Comm), is the only reported decision we have found addressing substantive provisions of the Bermuda Form, and the arguments made in open court for, and against, the coverage the policyholder believed it had purchased. Its usefulness in interpreting standard Bermuda Form policies is limited, however, because – in a twist not usually found in these (or other commercial) policies – the policyholder there, evidently after the kind of negotiation not often found in these transactions, had succeeded in seeking revisions to the arbitration and choice-of-law provisions that are hallmarks of the policy form. As a result of these changes, which removed the arbitration provision to allow litigation in court and changed the governing substantive law from New York law to English law, the decision is likely to provide little precedential value for disputes under standard (non-modified) Bermuda Form policies. However, it provides an interesting insight, and a cautionary tale, about perhaps unintended consequences, or simply the advisability of consulting both the law in the jurisdiction proposed to replace New York as governing law, as well as experienced counsel, before making revisions to the standard ADR and choice-of-law provisions in the Bermuda Form (or any standard policy form containing such provisions).
In that case, the Commercial Court of the High Court of England and Wales, Queens Bench Division, considered whether AstraZeneca’s captive insurer was entitled to hundreds of millions of dollars in defense costs and settlement payments under a Bermuda Form policy in connection with product liability claims relating to the anti-psychotic drug Seroquel.
As noted above, the Bermuda Form policy used in AstraZeneca was unique in two key respects that explain how it made its way to the courthouse. First, the parties to that policy engaged in negotiations that eliminated the arbitration provisions standard in Bermuda Form policies, and instead conferred jurisdiction on the English Commercial Court. Second, and perhaps regrettably for AstraZeneca, the parties agreed that the policy would be governed by English law, and not the New York law used in the standard form. Thus, while these modifications allowed for a rare judicial review of the Bermuda Form, they also mean that the decision may be limited to its facts and its atypical governing law. It also highlights other potentially sticky aspects of Bermuda Form’s policy language that policyholders should consider when purchasing such products.
The core issue in AstraZeneca was whether the Bermuda Form policy covered payments made by the policyholder to settle the underlying claims. The insuring clause of the policy provided that the insurer was to “indemnify the Insured for Ultimate Net Loss the Insured pays by reason of liability: (a) imposed by law… for Damages on account of: (i) Personal Injury… encompassed by an Occurrence.” (Emphasis added). The policy defined “Damages” as “all forms of compensatory damages, monetary damages and statutory damages… which the Insured shall be obligated to pay by reason of judgment or settlement for liability… and shall include Defense Costs.” As the discussion below will show, this case presents a prime example of a foreign court assuming, incorrectly, that it is reading another jurisdiction’s law correctly.
The court first addressed the policyholder’s claims that its payments to settle the underlying claims qualified as a “legal liability” (i.e., a “liability…imposed by law”) under the policy as seen through the lens of English law. Policyholders, of course, buy liability insurance to protect against both judgments and settlements, with the understanding (by both policyholders and insurers) that most cases settle. Contrary to that common expectation, the court concluded that English law includes a “consistent and well-established” rule that an insurer is responsible only for indemnification of actual legal liability, not just an alleged liability. The court further explained that the burden is on the insured to prove that, on a balance of probabilities, the insured would have been subject to actual legal liability. The court relied on the conclusion that, although a judgment against the insured may be strong evidence of such liability, neither a settlement nor a judgment automatically establishes a policyholder’s “actual legal liability.” Thus, under English law, an insured is entitled to indemnity from its insurer only when it can show, on a “balance of probabilities,” that it would have been subject to actual liability for the third-party claim.
The court also limited the policyholder’s recovery of defense costs. Again, in a ruling that would likely shock U.S. policyholders, the court, relying on English law, concluded that the policyholder must show that it would have been subject to “actual legal liability” before it can recover its liability insurance. The court explained that defense costs were a component of the definition of Damages, and thus the policyholder could recover defense costs only in circumstances when “Damages” would be recoverable. Hence, the court concluded that the policyholder could recover defense costs only where it could show, on a balance of probabilities, that it would have been under an actual liability for the third party claim.
The Court of Appeal agreed with the lower court’s analysis. In a notable misreading of New York law, the English appeals judges also opined in dicta that that a U.S. court would reach the same result under New York law. However, New York law is clear that a policyholder who settles a case “need not establish actual liability to the party with whom it has settled ‘so long as…a potential liability on the facts known to the [insured is] shown to exist.’” See, e.g., Luria Bros. & Co. v. Alliance Assur. Co., 780 F.2d 1082, 1091 (2d Cir. 1986) (citation omitted); accord Tokio Marine & Nichido Fire Ins. Co. v. Calabrese, No. 07-CV-2514 JS AKT, 2013 WL 752259, at *8 (E.D.N.Y. Feb. 26, 2013) (If “an indemnitor has notice of the claim against it, ‘the general rule is that the indemnitor will be bound by any reasonable good faith settlement the indemnitee might thereafter make.’”). As Judge Weinstein explained in Uniroyal, Inc. v. Home Insurance Co., “the law is clear that a reasonable settlement binds the insurer to indemnify.” 707 F. Supp. 1368, 1378 (E.D.N.Y. 1988). These New York cases recognize that requiring the policyholder to prove its own liability would both defeat the protective purpose of liability insurance and provide grounds to the insurer to argue against coverage, a classic Catch-22. Under the New York cases, a policyholder need only demonstrate that settled claims are of a “type” that fall within the policy’s coverage; thus, the allegations of the complaint, rather than findings of actual liability,” suffice to show that the coverage applies.
Policyholders should be aware of the AstraZeneca decision and should challenge insurers who try to use it to argue that, even under New York law, coverage cannot exist under the Bermuda Form unless the insured can demonstrate “actual” as opposed to “alleged” liability. AstraZeneca should also serve as a reminder that policyholders considering the “Bermuda Form” should make sure to include “follow-the-settlements” wording that would require the insurer to indemnify its insured’s settlement payments without proof of liability. In addition, policyholders should be careful in their selection of governing law. While New York law can sometimes be more insurer-friendly than other jurisdictions, it likely favors policyholders on a number of critical aspects of coverage in comparison to English law.
H v L,  EWHC 137 (Comm)
H v L,  EWHC 137 (Comm), also demonstrates potentially important differences between New York and English law. There, the Commercial Court of the High Court of England and Wales, Queens Bench Division, considered an application for removal of an arbitrator in a Bermuda Form insurance arbitration based on allegations of an appearance of bias during the arbitration. The policyholders discovered that, subsequent to the arbitrator’s appointment in their arbitration with their insurer, he had accepted additional appointments involving the same insurer, its same counsel, and the same underlying incident.
The court explained that the test for impartiality of an arbitration tribunal under English law “is whether the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased.” The “fair-minded” observer “is gender neutral, is not unduly sensitive or suspicious, reserves judgment on every point until he or she has fully understood both sides of the argument, is not complacent and is aware that judges and other tribunals have their weaknesses.” The “informed” observer “is informed on all matters which are relevant to put the matter into its overall social, political or geographical context.”
The court found no appearance of bias that justified disqualifying the arbitrator. The court noted the overlap in the subject matter and identities of the parties between the arbitrator’s various appointments, but termed this a “regular feature of international arbitration in London.” The court also emphasized that insurance and reinsurance arbitrations are highly specialized and qualifying arbitrators “often comprise a limited pool of talent.” The court even considered the arbitrator’s experience dealing with similar issues as an asset that advances “the principle of speedy finality” which underpins the use of arbitration as a dispute resolution mechanism—and appears to have ignored the potential downsides to this experience (and lack of transparency at the outset of the arbitration).
Notably, the court did not consider the arbitrator’s failure to disclose the other appointments to be sufficient grounds for disqualification, reasoning that those other appointments did not themselves give rise to any justifiable concerns over his independence. The court noted that disclosure may be “prudent” and “there may be many good reasons for doing so,” but a failure to disclose is likely not in itself sufficient grounds for disqualification.
H v L serves as an important reminder that arbitrator partiality disputes in London-based Bermuda Form arbitrations are resolved in English courts applying English arbitration law, notwithstanding the Bermuda Form’s provisions selecting New York as the applicable law for substantive contract interpretation issues. This feature is significant in light of high burden to establish an appearance of bias under English law, particularly with respect to an arbitrator’s duty to disclose. Under New York law, “the failure of an arbitrator to disclose facts which reasonably may support an inference of bias is grounds to vacate the award under CPLR 7511.” J. P. Stevens & Co. v. Rytex Corp., 34 N.Y.2d 123, 125, 312 N.E.2d 466 (1974); see also Sanko S.S. Co. v. Cook Indus., Inc., 495 F.2d 1260, 1264 (2d Cir. 1973) (“[T]he better practice is that arbitrators should disclose fully all their relationships with the parties, whether these ties be of a direct or indirect nature.”). While the English court in H v L considered disclosure to be “prudent,” New York courts have adopted a more stringent view, finding that “a rule requiring maximum prehearing disclosure must in the long run be productive of arbitral stability.” Rytex Corp., 34 N.Y.2d at 128, 312 N.E.2d 466. Similarly, Canon IV of the ARIAS • U.S. Code of Conduct for insurance and reinsurance disputes specifies that “[c]andidates for appointment as arbitrators should disclose any interest or relationship likely to affect their judgment,” that “[t]he duty to disclose all interests and relationships is a continuing obligation throughout the proceeding,” and that “[a]ny doubt should be resolved in favor of disclosure.”
Policyholders considering the Bermuda Form should be cognizant of the high burden for disqualification under English law, particularly in the context of arbitrator disclosure. Counsel experienced in London or Bermuda Form arbitrations are likely to have better knowledge, if only general, about the backgrounds and other appointments of arbitrators and may be better positioned to detect arbitrator bias. Coverage counsel can also assist policyholders to negotiate arbitration provisions that set forth appropriate criteria for arbitrator and Chair selection during the underwriting process or at the outset of the arbitration proceedings. Such advanced planning can minimize the risk of being saddled with an arbitrator who may be less-than-forthcoming about dealings that may create an appearance of bias.
MF Global Holdings Ltd. et al. v. Allied World Assurance Co. Ltd. et al., No. 1:16-ap-01251, 571 B.R. 80 (Bankr. S.D.N.Y. 2017)
MF Global Holdings Ltd. et al. v. Allied World Assurance Co. Ltd. et al., No. 1:16-ap-01251, 571 B.R. 80 (Bankr. S.D.N.Y. 2017), addressed an arbitration provision identifying (as some Bermuda Form policies have in the past done) Bermuda, not London as the place of arbitration. There, 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 insurance coverage dispute in Hamilton, Bermuda. MF Global initially 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.
Other courts have recognized, however, that an insurance coverage dispute certainly can be a “core” issue if the insurance coverage would have a significant aspect on the administration of the estate. See, e.g., In re U.S. Lines, Inc., 197 F.3d 631, 638 (2d Cir. 1999) (“Indemnity insurance contracts, particularly where the debtor is faced with substantial liability claims within the coverage of the policy, “may well be … ‘the most important asset of [the debtor’s] estate.’”).
MF Global illustrates that courts may enforce the Bermuda Form’s arbitration clause even when there are logistical challenges or countervailing public policy arguments that would favor resolving the dispute in court. Although debtors or other parties in bankruptcy may be able to establish that a coverage dispute is a “core” issue that should be adjudicated in the bankruptcy court, policyholders seeking the option to litigate Bermuda Form disputes in court in the advent of bankruptcy should consider including specific wording that provides that option.
This post is part of the Blog’s Bermuda Form Insurance Arbitration Series.
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A partner in Hunton & Williams LLP’s insurance coverage practice, Lorelie Masters is a member of the American Bar Association’s Board of Governors and a founder and former President of the American College of Coverage and Extra-Contractual Counsel. She is co-author, with English Barristers, Richard Jacobs QC and Paul Stanley QC, of Liability Insurance in International Arbitration: The Bermuda Form (Hart Publishing, 2d ed. 2011) (“The Bermuda Form”), which won the 2012 Book Prize of the British Insurance Law Association for outstanding contributions to the literature on insurance coverage.
Paul Moura is an associate attorney in Hunton & Williams LLP’s insurance coverage practice, where he represents clients from a diversity of industries in insurance recovery and related commercial disputes. Prior to joining Hunton & Williams, Paul was a policy researcher at a think tank based at the London School of Economics, where he helped to develop a network of policymakers, academics, and lobby groups collaborating in areas involving consumer protection and digital rights.
 As explained in a prior post, the 004 version of ACE’s Bermuda Form and some policy forms that follow the Bermuda Form required arbitration of disputes in Bermuda under the Bermuda Arbitration Act, often with the law of Bermuda applying. Those provisions have not proven popular with the insurance marketplace and largely have been replaced or superseded. Policyholders should take care to avoid such provisions if they can as arbitration in Bermuda is logistically more difficult.