Liability insurance: is actual liability required?
03 May 2013
AstraZeneca Insurance Company Ltd v XL Insurance (Bermuda) Ltd & ACE Bermuda Insurance Ltd  EWHC 349, 28 February 2013
The insured under a liability insurance policy will need to establish actual legal liability to a third party claimant before it can recover from its insurer, unless the language used in the policy clearly provides for the contrary. An arguable liability will not suffice.
In this insurance dispute, AstraZeneca’s captive insurer (the Captive) was seeking to recover from its reinsurers under the terms of a liability policy based on the Bermuda Form (the Policy).
The Bermuda Form is a form of policy well-known to the market, having been introduced to meet the needs of insureds (often pharmaceutical companies) faced with large product liability exposures. Normally such policies are governed by New York law, and disputes arising from them are heard by arbitration. In this case, however, the policy was governed by English law and the parties conferred jurisdiction on the English Commercial Court. This is therefore the first case in which issues of the construction of the Bermuda Form have come before the English courts.
The Captive was seeking to recover from its reinsurers for sums that it had paid out to AstraZeneca. AstraZeneca had incurred losses in defending claims relating to a particular drug, those losses comprising legal costs (by far the majority of the claim) and payments made by way of settlement (only a few cases were litigated through to a full trial).
Two preliminary issues came before the court:
- first, whether it was only necessary to demonstrate that the insured had settled an arguable liability in order for it to recover under its liability insurance, or whether it was necessary to establish an actual liability; and
- secondly, whether or not the entitlement to indemnity in respect of defence costs depended on the insured’s ability to demonstrate actual liability for the claims in question.
The Captive argued that, although the Policy was governed by English law, the court should bear in mind that part of the matrix of fact underlying the Bermuda Form was the traditions of the U.S. insurance market, the Bermuda Form usually being governed by New York law.
Flaux J was of the strong view that it would be wrong to construe the Policy in any respect by reference to New York law in circumstances where the parties had made a different choice of law. (He also noted that the Captive’s submissions as to the effect of New York law were in any event misconceived.)
Actual or alleged liability?
Flaux J analysed previous authorities on liability insurance (albeit not on the Bermuda Form) and concluded that, absent clear wording to the contrary: (a) the insured had to establish that it was under an actual legal liability, not just an alleged one, before it was entitled to indemnity; and (b) loss resulting from a judgment or settlement did not automatically establish such liability (albeit a judgment might be strong evidence of liability). In particular, he made it clear that it was open to an insurer to challenge findings of liability in an underlying judgment to which it was not itself a party in order to establish whether or not the insured was under an actual legal liability.
The judge then considered the specific wording of the Policy before him, focusing primarily on the Insuring Clause. This was expressed to provide indemnity for "Ultimate Net Loss the Insured pays by reason of liability… imposed by law… for Damages." In his view, the words "imposed by law" reinforced the need for an actual (rather than arguable or alleged) legal liability. In addition, the phrase "by reason of" indicated the need for a clear causal link between the payment made by the insured and the actual legal liability. Furthermore, the definition of "Damages" included references to an obligation to pay "by reason of judgment or settlement for liability" (our emphasis). Flaux J rejected the Captive’s argument for a broader interpretation of the Policy cover (for example by reference to the potentially wider definitions of Occurrence and Integrated Occurrence), albeit considering some elements of the construction proposed to be ingenious.
Flaux J concluded that there was nothing in the Policy to support the proposition that insurers had agreed to pay wherever a claim had been established by judgment or settlement, irrespective of whether there was in fact a liability. The insured was only entitled to indemnity if it could prove on the balance of probabilities that it would have been under an actual liability for the claim.
Turning to defence costs, Flaux J noted first that, under English law, in non-marine insurance there is no obligation on insurers to indemnify defence costs unless there is express provision for this in the policy.
In the Policy at issue, the definition of "Defence Costs" was linked to the definition of "Damages", "Damages" being defined specifically to "include" such costs. Flaux J’s conclusion that actual legal liability was required before Damages could be recovered under the Policy fed into his decision that defence costs too could only be recovered in the event of an actual liability. There was no standalone right to recovery of these costs.
Comment: The decision in this case is likely to lead to increased scrutiny of the wording of the Bermuda Form, some of which was acknowledged by the judge to lack clarity. Whilst matters of interpretation are always specific to the wording of a particular contract, it is highly recommended that anyone considering liability wording (and particularly the Bermuda Form) refer to the sections of Flaux J’s judgment that consider the relevant authorities and the specifics of the Bermuda Form.
Much turned in this case on the precise wording of the Policy. Parties entering into insurance contracts should seek to understand exactly what cover is being offered and, if different coverage is required, negotiate accordingly. For example there was no "follow the settlements" wording in the Policy which would have obliged reinsurers to indemnify the Captive against settlement of AstraZeneca’s claim without proof of liability; nor was the definition of "Defence Costs" free-standing (as it could have been).
Contracting parties should also think carefully about the law that they want to govern their agreement. The choice of law can be very important to the outcome and it will not be easy to persuade a court that the law selected by the parties should be viewed against the backdrop of some other law altogether.Finally, where an insured is looking to settle an underlying claim, it should check policy wording carefully and involve insurers in the process as required.