Coverage for Settlements and Defense Costs Covered by Bermuda Form Insurance — Must You Be “Actually Liable?”, Insurance Policyholder Advocate
On February 28, 2013, the Commercial Court (part of the England and Wales High Court, Queens Bench Division) issued the judgment in AstraZeneca Ins. Co. Ltd. v. XL Insurance (Bermuda) Ltd. and ACE Bermuda Ins. Ltd.  EWHC 349 (Comm) (28 February 2013). Justice Flaux held that AstraZeneca's captive insurer was not entitled to nearly $126 million in defense costs and settlement payments incurred in the defense of pharmaceutical product liability litigation involving the branded drug Seroquel (an anti-psychotic). This is the second-ever reported decision involving the so-called "Bermuda Form" of liability insurance.
The essence of the dispute was whether AstraZeneca's captive insurer (AstraZeneca Ins. Co. Ltd.) could adequately establish the existence of liability on the part of its insureds, which were entities within the AstraZeneca Group. AstraZeneca had embarked on a strategy of settling claims. In addition, AstraZeneca had tried one case to judgment, resulting in a defense victory for AstraZeneca. Thus, there had been no judicial determination of "liability" on the part of AstraZeneca.
The AstraZeneca captive did not attempt to put on a "positive case" in the English court that would establish AstraZeneca's liability to the standard required under English insurance law. Under English law, a policyholder seeking indemnity under a policy of insurance must show that, on a balance of probabilities, there was "actual legal liability" to the underlying claimant.
The English court rejected the argument that an "arguable liability" is sufficient to trigger indemnity obligations. The court also held that this same deficiency of proof doomed AstraZeneca's request for defense costs, which had totaled $786 million through the time of submissions to the court (not all of these would have been payable from the coverage layer involved in the dispute). In what is the most surprising part of the judgment, and also obiter dicta, the Court essentially stated that the same result might have been reached under New York law, absent a breached duty to defend.
Two quotes from the judgment should give a policyholder reason for pause, because the Court holds that the Bermuda Form does not cover forms of "liability" that are usually taken as covered, nor does it cover defense costs without actual liability:
104. The critical words are “[damages] which the Insured shall be obligated to pay by reason of judgment or settlement for liability on account of Personal Injury”. . . .[I]t is not damages payable under any judgment or settlement that qualify under this provision: the judgment or settlement must be “for liability”, in other words there must be a liability. I do not see how the word “liability” in this context can be interpreted as anything other than actual legal liability. “For liability” must be qualifying both judgments and settlements in the same sense. Since you cannot have a judgment for alleged liability, it seems to me you cannot have a settlement for alleged liability under this clause. In both cases, the liability must be actual. . . .
144. In my judgment [insurers' counsel] is right that by tacking the words “and shall include Defense Costs” on to the definition of Damages, the parties have expressed the intention that defence costs should only be recoverable in circumstances where what might be described as “traditional” damages are recoverable, not that there should be free-standing coverage for such defence costs. . . . . [I]t is difficult to see how Defense Costs, which are expressly made recoverable as part of Damages (“and shall include Defense Costs”) can be recoverable even where no actual legal liability is established. . . .
The Court in AstraZeneca stated, in obiter dicta, that the New York standard allowing proof of "potential liability" instead of "actual liability" is based on cases in which an insurer has breached its duty to defend the policyholder. If an insurer were to suggest that New York law requires proof of "actual liability" when there has been no breach of a duty to defend, that would not be correct. New York jurisprudence on this issue has strong ties to the general law of indemnity, and is not limited to situations in which there is a defense duty. For example, a recent case from the Eastern District of New York illustrates that, so long as an indemnitor has notice of a claim as to which indemnity is sought, the indemnitee need only show that it made a reasonable, good faith settlement. See Tokio Marine & Nichido Fire Ins. Co. v. Calabrese, 2013 U.S. Dist. LEXIS 26984 (E.D.N.Y., Feb. 26, 2013). The reasonableness of a settlement involves a consideration of the potential liability faced by the settling party, but not proof of "actual liability." The Calabrese court summed up New York law:
“[I]t is well-established under New York law that, where an indemnitor does not receive notice of an action settled by an indemnitee, ‘in order to recover reimbursement [for the settlement], [the indemnitee] must establish that [it] would have been liable and that there was no good defense to the liability.’” [citations omitted]. . . .
If, on the other hand, 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.” [emphasis added; citations omitted]
What Can Be Distilled from AstraZeneca for U.S. Policyholders?
It is possible that Insurers might attempt to use AstraZeneca to contend, incorrectly, that the result reached under English law should likewise be reached under New York law. Therefore:
- Policyholders must be on guard against insurer arguments that the Bermuda Form should be interpreted under New York law to require a showing of “actual liability” in order to support payment of settlements or defense costs.
- Policyholders should carefully scrutinize policies at every excess layer for non-concurrencies that might introduce English law.
- Policyholders must be aware that a higher excess insurer might contend that settlements or defense costs actually paid by lower layers nevertheless are not covered by the higher layer, and therefore do not erode underlying coverage.
Policyholders should discuss these issues with an insurance professional such as their inside or outside coverage counsel.
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