Ace, XL win UK test case on the Bermuda Form
The Bermuda Form - the liability wording developed by Bermudian start-up (re)insurers such as Ace and XL in the mid-1980s - was put to the test in the UK High Court last month and produced a positive verdict for insurers.
On 28 February, Ace Bermuda and XL Insurance won a preliminary round in a dispute against global pharmaceutical group AstraZeneca over up to £133.33mn ($200mn) in claims that relate to the anti-psychotic drug Seroquel.
In its standard guise, the Bermuda Form is governed by New York law and arbitrated in the UK. It allows an insured to claim from (re)insurers provided that a legal liability to a third party is ascertained.
However, Mr Justice Julian Flaux ruled that when a Bermuda Form is governed by English law, an insured will have to prove an "actual legal liability" to a third party in order to be entitled to indemnity.
"Normally you can ascertain a legal liability to a third party by way of a court judgment [when a third party claimant sues an insured and wins], an arbitration award or a settlement agreement," said Ling Ong, a partner specialising in reinsurance at the London market team of Weightmans LLP.
"This judgment shows very clearly that under English law that is not enough. The burden is placed on the insured to show actual legal liability to be entitled to an indemnity under the liability policy," she added.
The Bermuda Form has previously been disputed through arbitration, which does not set legal precedent.
However, in this case, AstraZeneca, Ace and XL waived the arbitration clause and agreed that the policy wording should be governed under English law and dealt with by the English commercial court.
AstraZeneca paid out $786mn in legal costs and $63.7mn in settlements related to a string of class action suits that claim personal injury from Seroquel.
Plaintiffs claimed that the firm had failed to warn users of the drug's side effects.
The pharmaceutical giant's captive, Azico, provided it with £133.33mn of per occurrence and aggregate limit in excess of £365mn under an excess liability policy, which stretched from 2001 to 2003.
Azico reinsured the policy with XL and Ace Bermuda, which each had a 50 percent share. Each carrier was liable to pay out a maximum of £66.67mn per event and Ace additionally capped its exposure to $100mn.
Last October, Azico settled claims presented by AstraZeneca worth £83.5mn, in excess of £365mn, related to the Seroquel suits. However, XL and Ace refused to pay Azico on the grounds that an actual legal liability had not been proven.
The judgment noted: "In only one of the [Seroquel] cases has the matter been litigated through to a full trial and that resulted in a verdict for the defence. Other claims have been dismissed summarily."
Mr Justice Flaux said it was a "striking feature" of the case that Azico had not "advanced a positive case" that AstraZeneca would have been liable for the claims on a balance of probabilities.
The ruling has clarified the policy wording but the final judgment on the case is yet to be reached, and the decision is likely to be appealed.