Archive for the ‘Bermuda’ Category

Insurance Arbitrations: Confidentiality versus Consistency

Tuesday, August 30th, 2016

By: Mark Chudleigh and Neil Thomson, Sedgwick Chudleigh, Bermuda

Arbitration is a common form of dispute resolution for resolving commercial insurance disputes, particularly on policies underwritten in the London and Bermuda markets.  There are many perceived advantages of arbitration, over court litigation, but one of the key advantages is the ability to resolve disputes in private: London and Bermuda arbitrations are deemed to be confidential as a matter of law.

But a byproduct of confidentiality, and the private nature of the process, is that the arbitral tribunal is unable to employ certain case management procedures available to judges presiding over court proceedings to coordinate separate but related disputes, such as alternative claims by a policyholder against its insurer (for coverage) and its broker (for malpractice), contribution claims between insurers, or claims by a policyholder against multiple insurers participating in the same insurance program.

Parties to separate but related arbitration proceedings may attempt to achieve some measure of coordination by appointing the same arbitrators in the separate disputes.  Further, if all parties agree, it may be possible to consolidate arbitrations or have them proceed in a coordinated fashion.

In the recent English Commercial Court case of Guidant LLC v Swiss Re International SE & Anor [2016] EWHC 1201 (“Guidant”), the insured sought coordination by appointing the same third arbitrator (or chairman) in each of three arbitrations related to three separate policies: one against Insurer A and two against Insurer B.  Although the policies were separate, each were written on the Bermuda Form in identical terms and involved the same underlying loss.  Each party had the right under the policies to appoint its own arbitrator to the three-member panel, with the Court to decide the third arbitrator/chairman in the event agreement could not be reached on that issue.  The insured agreed on a third arbitrator with Insurer A, and sought an order under the UK Arbitration Act 1996 that the same arbitrator be appointed as the third arbitrator in its two proceedings against Insurer B.  It argued that doing so would reduce inconsistency and costs.

Insurer B objected on the grounds that the arbitrator chosen by the insured and Insurer A may form views regarding the evidence and submissions in the first arbitration to Insurer B’s detriment in its two arbitrations.  Insurer B would not have the opportunity to be heard in the first arbitration, and would not be privy to the evidence and submissions in that arbitration without a waiver of confidentiality.

The Court agreed that Insurer B had a legitimate concern that the arbitrator could form views in the arbitration with Insurer A, over which Insurer B had no control, and which could potentially affect its position.  The Court accordingly declined to appoint the insured’s preferred candidate and appointed an alternative.

Insurer B went further, seeking an order that different third arbitrators should also be used in both its proceedings, notwithstanding they involved the same parties and identical policies and loss.  In support of this position, Insurer B argued that it was entitled to have each arbitration decided on its own merits and without disclosure of information from one to the next.

On this point the Court sided with the insured: although there was merit in having different arbitrators for the two proceedings involving different insurers (A and B), the same considerations did not apply with respect to the two arbitrations involving Insurer B alone.  It could not be said that the parties’ interests of confidentiality and privacy would be affected because the parties and their legal representation were the same and would have full knowledge of what occurred in each arbitration.

Guidant illustrates how a court may attempt to balance the often competing interests of coordination and confidentiality. On one hand, the court will strive to achieve coordination, consistency and cost reduction between similar arbitral proceedings where possible.  On the other hand, parties to arbitral proceedings are, to a significant extent, in control of process and procedure and a court will avoid interfering where possible.

It is also worth noting that the Court in Guidant acknowledged in passing that it had no power to order the consolidation of related arbitration proceedings, even if it had considered that desirable.

UK Supreme Court Modifies “Fraudulent Claims Rule”

Wednesday, July 27th, 2016

By: Neil Thomson, Sedgwick Chudleigh, Bermuda

The UK Supreme Court has ruled that “collateral lies” made in the context of an insurance claim will not necessarily void coverage. Previously English courts had held that an insurer could avoid paying a claim in its entirety where the insured had acted dishonestly in connection with the making of the claim. This “fraudulent claims rule” was applied to discourage insureds from dishonesty, fraud, and embellishment in making claims.

Versloot Dredging BV and anr (Appellants) v HDI Gerling Industrie Versicherung AG and ors (Respondents) [2016] UKSC 45 involved a loss arising from flood damage to the engine room of a cargo ship during a storm. In submitting their claim to insurers, the owners lied, claiming the crew could not respond to a flood alarm due to the weather conditions. The judge at first instance held that, although the insured’s lie was irrelevant (as the loss was otherwise covered), because the lie was a “fraudulent device” the entire claim was invalidated. This decision subsequently was upheld by the Court of Appeal.

By a majority, the Supreme Court found in favor of the insured on the basis that its fraud was, on the facts, immaterial to its right to recover. The Supreme Court ruled that “collateral lies” are an exception to the fraudulent claims rule and should not preclude the insured from an indemnity to the extent that it suffered a true, insured loss, but not of course for any fabricated loss. In other words, the claim would have been payable regardless of whether the insured lied, and accordingly neither party has gained or lost anything as a result.

Lord Sumption set out the test as follows:

… although a lie uttered in support of a claim need not have any adverse impact on the insurer, I consider that it must at least go to the recoverability of the claim on the true facts. By that test, the fraudulent claims rule applies to a wholly fabricated claim. It applies to an exaggerated claim. It applies even to the genuine part of an exaggerated claim if the whole is to be regarded as a single claim, as it must be. But it does not apply to a lie which the true facts, once admitted or ascertained, show to have been immaterial to the insured’s right to recover. [emphasis added]

The Court was careful to distinguish between fraud occurring during the formation of the policy and fraud occurring during the claims process. In the former setting, dishonest disclosure will directly affect the insurer’s ability to properly underwrite the risk, and will allow an insurer to completely avoid the contract (but note the imminent changes to this principle under the UK Insurance Act 2015). In the latter setting, however, the insurer already has assumed the risk and, if that risk eventuates (even with some embellishment), it is in no worse position than if the embellishment had not occurred.

Section 12 of the Insurance Act 2015 (which comes into force on 12 August 2016) provides that an insurer is not required to pay a fraudulent claim.  However, “fraudulent claim” is not defined, and there is no distinction between a completely fraudulent claim and a collateral lie. Versloot, accordingly, has provided guidance on this issue and has made it clear that there must be proportionality in the remedies available to an insurer in response to collateral lies. This approach is generally consistent with the approach found elsewhere in the Insurance Act 2015, in particular the proportionate remedies for non-disclosure (in contrast to the current position where even minimal non-disclosure may allow an insurer to completely avoid a contract).

Friendly Societies in Bermuda: Driving Without Insurance?

Wednesday, June 22nd, 2016

By: Alex Potts and Caitlin Conyers, Sedgwick Chudleigh, Bermuda

Friendly Societies in Bermuda have their origins in Britain’s industrial revolution in the 18th and 19th centuries, when mutual self-help organizations were first established to provide affordable welfare benefits and financial assistance to their members, including unemployment benefits, health insurance, pension benefits, and funeral expenses.

Although Friendly Societies may still have a role to play in 21st century Bermuda, the Supreme Court of Bermuda recently ruled that their role does not stretch so far as the unregulated provision of liability insurance for third-party motor risks, on a true interpretation of section 1 of Bermuda’s Friendly Societies Act 1868 and section 57(1)(a) of Bermuda’s Insurance Act 1978, and taking into account Bermuda’s status as a “financially sophisticated” insurance/reinsurance market.

In his recent judgment in the case of Bentley Friendly Society v Director of Transport Control Department [2016] SC (Bda) 65 Civ, dated 15 June 2016, Mr. Justice Hellman held that the provision by a Friendly Society of motor vehicle insurance with respect to third-party motor liability risks is “insurance business” within the meaning of the Motor Car Insurance (Third-Party Risks) Act 1943 and, therefore, it must be authorized by the Governor of Bermuda in compliance with that Act.

In the Judge’s view, it would be for the Governor of Bermuda — when determining whether or not to grant approval — to consider public policy matters such as whether a Friendly Society would be able to satisfy any reasonably foreseeable third-party claims, and whether the interests of third parties would be adequately protected.  The Court noted, however, that the Bentley Friendly Society had not produced any audited financial statements (making it difficult for the Governor of Bermuda to assess its ability to satisfy third-party claims), and that it had not yet been authorized to conduct insurance business by the Governor.  The Court also pointed out that any person who conducts “insurance business” without proper authorization commits an offence.

The Court’s judgment upheld the position taken by the Government of Bermuda in April 2014, that approximately 50 motor insurance policies issued by the Bentley Friendly Society were legally invalid, as the Governor of Bermuda had not authorized the plaintiff to undertake such insurance business when the liability policies were issued.

The Bermuda Monetary Authority previously had recommended a repeal of section 57(1)(a) of the Insurance Act 1978 by its Consultation Papers dated June 2014 and October 2014, with a view to bringing Friendly Society insurance business into the regulatory, prudential, and legislative framework set out in the Insurance Act 1978, and under the supervision of the Bermuda Monetary Authority.  The Bermuda Monetary Authority’s proposed amendments have not yet been enacted, although the Court’s judgment has highlighted the need for regulatory reform in this area.  The Court noted, however, that different standards of regulatory oversight might apply to Friendly Societies with respect to first-party risks because, unlike third parties, “the members have the opportunity to inform themselves … and take an informed decision.”

Setting the Standard: Ontario Court Enforces Hybrid Arbitration Agreement in Favour of Bermudian P&I Club

Wednesday, February 17th, 2016

By Alex J. Potts, Sedgwick-Chudleigh Bermuda

In the recent decision of T. F. Warren Group Inc and Vanguard Shipping (Great Lakes) Ltd v The Standard Steamship Owners’ Protection and Indemnity Association (Bermuda) Limited [2015] ONSC 7778, the Ontario Superior Court of Justice granted a stay of court proceedings under Ontario’s International Commercial Arbitrations Act 1990, in order to enforce a hybrid London arbitration agreement between two insureds and The Standard Club, a Bermudian Protection & Indemnity Association (‘the P&I Club’).

The liability insurance claims asserted in the proceedings related to a maritime incident that occurred in 2011, when a ship collided with a railway bridge on the Maumee River in Ohio. As the Court noted in passing: “the bridge was very likely minding its own business.

Section 25 of the P&I Club’s Defence Rules imposed conditions that arguably could be read as giving the P&I Club unilateral discretion to delay the submission of any dispute to arbitration. In particular, section 25 provided that:

  1. The insured party had to submit the dispute to the P&I Club;
  2. No insured party was entitled to maintain any legal proceedings against the P&I Club unless and until the matter had been submitted to the P&I Club for decision;
  3. The parties then would engage in mandatory mediation (in London); and
  4. If the matter was not settled by mandatory mediation within 14 days, “the dispute shall be referred to and finally resolved by arbitration in London,” subject to the UK’s Arbitration Act 1996.

The Court noted that the P&I Club sat on the insured’s claim for a year.  The Court observed that, “the entire premise of granting a stay under the ICAA is that the party whose action is stayed is not denied access to justice but is gently but firmly directed to the correct door to obtain it.

To mitigate against the risk of further delays, the Court ordered an interim stay of the proceedings, which would then become a permanent stay if all conditions precedent to commencement of arbitration proceedings had been waived or completed within a reasonable period of time.

Although this decision should give comfort to the various P&I Clubs that are incorporated in Bermuda and in the UK that the Canadian Courts will enforce London and Bermuda arbitration agreements, it also illustrates the importance of careful drafting of such clauses, so that they can be easily understood, performed, and enforced.

Privy Council Enforces Arbitration Agreement: When “May” Means “Must”

Friday, January 29th, 2016

By Alex J. Potts, Sedgwick-Chudleigh Bermuda

The Privy Council has handed down its judgment in Anzen Limited v Hermes One Limited [2016] UKPC 1, a case concerning enforcement of an arbitration agreement. The judgment can be found at http://www.bailii.org/uk/cases/UKPC/2016/1.html. The appeal came from the Eastern Caribbean (BVI) Courts, but the decision is of significance for all arbitration-friendly offshore jurisdictions whose final right of appeal lies with the Privy Council, including Bermuda and the Cayman Islands.

The main issue on the appeal was the proper interpretation of an arbitration clause in a BVI company’s shareholders’ agreement which provided that, in the event of an unresolved dispute, “any party may submit the dispute to binding arbitration.” The arbitration agreement was subject to English law, and any arbitration was intended to be subject to ICC arbitration rules and the English Court’s supervisory jurisdiction.

It was concluded both at first instance and in the BVI Court of Appeal that the use of the word “may” effectively resulted in the arbitration clause being non-exclusive, permissive and optional, rather than mandatory; and that, unless and until a party actually had exercised its arbitration option by commencing an ICC arbitration with respect to a dispute, there was no basis for the BVI Court to stay any Court proceedings.

The Privy Council disagreed. Although it did not accept that the arbitration clause was mandatory in all circumstances, it concluded that it was mandatory in the event that either party unequivocally insisted on there being an arbitration of any unresolved disputes (even if that party was not minded to commence arbitration itself, but simply waited until the other party did so).

The decision is to be welcomed as yet another example of the Court’s willingness to uphold and enforce arbitration agreements in arbitration-friendly jurisdictions such as Bermuda, the BVI, and the Cayman Islands.

However, the decision also illustrates, quite starkly, the importance of careful drafting of any arbitration agreement or jurisdiction agreement. Had the parties and their lawyers clearly used the word “shall” rather than the word “may” in the arbitration clause, they might have avoided the time and costs associated with over two years of litigation and two appeals.

Lost Cargo is Dead Weight: Insurer Avoids Coverage Due to Breach of “Deadweight Warranty” in Marine Policy

Friday, October 3rd, 2014

By Alex J. Potts, Sedgwick Bermuda

In Hua Tyan Development Ltd v Zurich Insurance Co Ltd [2014] HKCFA 72, the Hong Kong Court of Final Appeal dismissed a marine insurance claim on grounds of breach of warranty by an insured.

The parties entered into an insurance contract with respect to a shipment of a cargo of logs from Malaysia to the People’s Republic of China.   The contract contained a clause warranting the vessels’ deadweight capacity to be no less than 10,000 tons (the “Deadweight Warranty”).

In mid-January 2008, the vessel sank and the cargo was lost.  The insurers rejected the insured’s claim in connection with the loss on the basis that the Deadweight Warranty had been breached, as the vessel only had a deadweight capacity of about 8,960 tons.

The court held that insurers are entitled to rely on the Deadweight Warranty, despite the insured’s various arguments based on estoppel, waiver and rectification. The court found no inconsistency in the insurance contract with respect to the identification of the vessel by name and the existence of the Deadweight Warranty.

The judgment provides considerable certainty and clarification to insurers operating in the Hong Kong marine insurance market, to the effect that insurance contracts will be enforced in accordance with their terms. Although a Hong Kong court decision, the judgment should be of interest to London and Bermuda insurers and P&I clubs for a number of reasons:

  1. Hong Kong’s Marine Insurance Ordinance of 1961 largely follows the UK’s Marine Insurance Act 1906, which was in turn a codification of the common law. As in England and Bermuda, breach of a marine insurance warranty discharges an insurer’s liability automatically as of the date of breach.
  2. This is a topical area of law which is the subject of review, and likely statutory reform, in the UK.
  3. The dismissal of the appeal means that the insured’s brokers have been found liable to indemnify the insured with respect to the vessel’s insured value. The precise circumstances giving rise to the broker’s liability were not fully explored in the judgment; however, the case demonstrates the liabilities that brokers face in practice, when cover is successfully denied by insurers.

Business Interruption Insurance: Clearing up the Confusion

Tuesday, September 16th, 2014

By Alex J. Potts, Sedgwick Bermuda

In Eurokey Recycling Ltd v Giles Insurance Brokers Ltd [2014] EWHC 2989 (Comm), the English Commercial Court has confirmed the nature of an insurance broker’s duties to its clients when obtaining Business Interruption Insurance (BII) cover.

This case arose out of a broker’s negligence claim, brought by a waste recycling company that had suffered significant losses following a fire. The court dismissed the claim on the basis that the broker had satisfied its duty of care, and it was the company’s own acts or omissions that had resulted in it being under-insured.

The court summarized the broker’s obligations as follows:

  • A broker is not expected to calculate the BII sum insured or choose an indemnity period (which are matters for the commercial client).
  • A broker must, however, explain to the client the method of calculating the sum insured, technical policy terms such as “estimated gross profits” and “maximum indemnity period,” and relevant considerations when choosing a maximum indemnity period.
  • A broker will need to take reasonable steps to ascertain the nature of the client’s business and its insurance needs, but not necessarily by way of detailed investigation. The nature and scope of a broker’s obligation to assess a commercial client’s BII needs will depend upon the circumstances, including the client’s sophistication, and the number of times the broker has met the client in the past.
  • Although BII is for commercial clients, the level of client sophistication will vary enormously. It cannot be assumed that a small or medium-sized enterprise (an SME) will have any understanding of the nature of BII cover.
  • If a client who appears to be well informed about his business provides a broker with information, the broker is not expected to verify that information unless he has reason to believe that it is not accurate.
  • Having satisfied these obligations, a broker must exercise reasonable care to adhere to express instructions as to the BII cover to be obtained.

Although the outcome of the case turned on its own facts, the legal principles are important to the way in which insurance brokers conduct themselves when placing BII risk in the London market, and they should be of interest to brokers’ professional indemnity insurers.

The court made two observations of relevance to the London market collectively. The court noted that, notwithstanding the contract certainty initiative in the London market, there were certain aspects of standard BII policy wordings, such as the definition of gross profit and the calculation of indemnity periods, which still remained unclear for clients, brokers, loss adjusters, and even some insurers. The court also noted that the insurance industry, unlike other parts of the financial services industry, did not yet have standard procedures in place for the identification and recording of sophisticated clients.

It remains to be seen whether the same standard of care is imposed on brokers in the Bermuda insurance and reinsurance market, given certain differences in market practice in London and Bermuda, and the sophisticated nature of many Bermuda (re)insureds.

Offshore Professional Risk in 2014

Wednesday, April 16th, 2014

By Mark Chudleigh, Chen FoleyNick Miles, and Alex J. Potts, Sedgwick Bermuda

From the Cayman Islands to Hong Kong, there’s a lot going on in the world of offshore litigation and law reform. In this report, Sedgwick’s Offshore Professional Risks practice offers a global perspective on professional risk, with unique expertise and solutions valuable to providers and users of offshore services and insurance carriers operating in offshore jurisdictions, including Bermuda, the British Virgin Islands, the Cayman Islands, the Channel Islands, and the Isle of Man.

Learn more about new laws changing the future of this business, collective investment schemes, issues relating to cybercrime and cyberliability, and the dangers of being an offshore lawyer.

 Read the full news report here.

State of Washington v. James River Insurance Company – What Impact on Bermuda Insurers?

Friday, February 1st, 2013

By Richard J. Geddes, Sedgwick Chicago

The short answer is – none.

State of Washington, Dept. of Transportation v. James River Insurance Company, – P.3d –, 2013 WL 258877 (Wash. January 24, 2013), a January 2013 decision of the Washington State Supreme Court, upheld a Washington statute prohibiting insurance contracts from depriving Washington policyholders from access to state courts, due to the insurer’s contract provisions calling for arbitration to resolve contract disputes. [The Insurance Law Blog reported on the decision shortly after the court ruled on January 17th.]

James River represents a purely U.S.-domestic dispute. All parties to the dispute were U.S. residents, such that the NY Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the NY Convention”), which is the source of enforcement of international arbitration agreements, did not apply. The NY Convention applies to arbitration agreements between parties of different nations, each of which is signatory to the NY Convention, and requires those nations to enforce the arbitration agreements between those parties.

The law in the U.S. dealing with conflicts between international arbitration agreements and state insurance law is not uniform, but if a trend is apparent, it is to recognize the primacy of these international contractual agreements via the NY Convention over contrary state law. The question: whether the McCarron Ferguson Act, granting the states the right to regulate insurance except in cases where Congress has expressed a contrary intent, would be trumped by Federal law recognizing the enforceability of international arbitration agreements. The issues controlling these decisions are complex, and require consideration beyond the space available here. However, of the three Circuit Courts that have considered this question, two,¹ and importantly, the most recent two, have found in favor of enforcing the arbitration agreement, while only one,² the earliest, has not.

The lesson here is that U.S. state court decisions about purely domestic disputes say nothing about the enforceability of international arbitration agreements as are typically included in Bermuda form policies. The U.S. federal courts have generally favored the enforcement of these agreements. Equally important to Bermuda insurers is the fact that Bermuda and U.K. courts have routinely been receptive to applications to issue anti-suit injunctions to bar lawsuits filed in contravention of arbitration agreements. In short, Bermuda insurers may continue to rely on the enforceability of their chosen Bermuda- or London-based arbitration selection. 

 


¹ Safety National Casualty Corp. v. Certain Underwriters at Lloyds, 587 F.3d 714 (5th Cir. 2009); ESAB Group v. Zurich Insurance PLC, 685 F.3d 376 (4th Cir. 2012).

² Stephens v. American International Ins. Co., 66 F.3d 41 (2d. Cir. 1995).

 

Boom or Bust: Third Party Rights Against Liability Insurers of Bankrupt Entities in Bermuda and the U.K.

Friday, February 1st, 2013

By Alex J. Potts, Sedgwick Bermuda

In the recent case of Re Kingate Management Limited (in Provisional Liquidation) [2012] SC (Bda) 52 Com, the Supreme Court of Bermuda considered the statutory rights of third party claimants to assert direct claims against liability insurers of insolvent and bankrupt insureds in Bermuda.

This is the first occasion that the Court has considered and applied Bermuda’s Third Parties (Rights Against Insurers) Act 1963, a piece of legislation modeled on the U.K.’s Third Parties (Rights Against Insurers) Act 1930.  The Court confirmed that the effect of Bermuda’s legislation is that the benefit of insurance policies taken out by an insolvent company (or bankrupt individual) with respect to third party liabilities are directly transferred to any third party to whom the company is liable, by operation of law.  The transfer of rights takes place when a winding-up order is made or a liquidator is appointed.

The Court also confirmed that the Act imposes discovery obligations on an insolvent insured and its liquidator, receiver or trustee in bankruptcy, as well as its insurer.  A third party who asserts a disputed claim against an insolvent company which is insured against the relevant liability is entitled to obtain from the insolvent insured, and its insurer, such documents and information as may reasonably be required for the purpose of ascertaining and enforcing such rights, if any.

Importantly, the Bermuda Court followed and applied the English Court of Appeal’s decision in Re OT Computers Ltd (in administration) [2004] 3 WLR 886, which made clear that, under English law, a third party claimant did not need to have conclusively established liability before it was entitled to documents and information relating to the insurance position.

It should be noted that the U.K. Act is due to be significantly reformed by the Third Parties (Rights Against Insurers) Act 2010. However, the implementation date for the U.K. reforms has been delayed, and the new legislation is not currently expected to come into force until later this year.

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