UK: English Court of Appeal Interprets Bermuda Form Policy Subject to English Law


    The Court of Appeal in AstraZeneca Insurance Company Ltd v XL Insurance (Bermuda) Ltd & ACE Bermuda Insurance Ltd [2013] EWCA Civ 1660 has dismissed the claimant’s appeal against the decision at first instance (see our earlier blog here).

    AstraZeneca Insurance Company Ltd, as the captive insurer (the Captive) to AstraZeneca (AZ), provided AZ with insurance under a Bermuda Form Policy (based on form XL004) (the Policy) whereby it agreed to indemnify AZ for losses arising out of its sale of its antipsychotic drug called Seroquel. By endorsement, the Policy was made subject to English law, rather than the modified form of New York law which normally governs Bermuda Form policies. From 2003 onwards, AZ faced a large volume of claims, for which it paid out $786 million in defence costs and $63.7 million in settlements. The claimant indemnified AZ and sought recovery from the defendants which reinsured the Captive in equal shares. There was no follow the settlement wording in the reinsurance policy.

    The Captive and the defendants waived the arbitration clause in the reinsurance policy and agreed that the Commercial Court would determine the dispute. At first instance, the court ruled that AZ had to prove, on the balance of probabilities, an actual liability to Seroquel claimants as opposed to an arguable liability in order to recover under the Policy. This meant where settlements were reached pre-trial, AZ had to prove they were actually liable to pay the claim. The court at first instance also ruled that AZ could only recover defence costs where it established actual liability for the claim in question.

    The Court of Appeal reviewed and upheld the decision. Lord Justice Christopher Clarke considered the particular wording of the Insuring Agreement, covering loss paid by reason of liability imposed by law, and the English law context in which it sits. He ruled that:

    1. AZ must establish a loss and a liability to recover under the Policy. Whilst the former can be established by a settlement with the claimant, the latter cannot, particularly in light of the fact that most settlement agreements do not contain an admission of liability.
    2. A judgment against AZ may not be sufficient to establish liability. Whilst a judgment provides good evidence of liability, an examination of the underlying facts by the insurer may reveal that the judge was misled or applied a legally fallacious or factually erroneous analysis.
    3. There must be a causal link between what is paid to the claimants and an actual legal liability.
    4. The Occurrence clause in the policy does not identify that which is the subject of indemnity but acts as the shell within which the pearl of liability must be found.
    5. Defence costs must be treated as parasitical on damages to be recoverable under the Policy. AZ can therefore only recover defence costs after establishing it was actually liable for the amount paid in respect of the claim in question. In situations where AZ successfully defends a claim, those defence costs are not recoverable.

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