Universal application of contract wording will prove costly

24-01-2014

Universal application of contract wording will prove costly

In their drive to develop business in diverse geographies, re/insurers may be unwittingly exposing themselves to legal challenges relating to contract wordings and clauses developed for one system of law and/or jurisdiction that may not be understood or even recognised in other jurisdictions.  

That is the view of Kiran Soar, partner at law firm Ince and Co, who spoke with Bermuda:Re about AstraZeneca’s recent case against ACE and XL and what it might mean for the wider industry.

The case, which hinged on AstraZeneca’s contract wording—which did not use the typically applied Bermuda Form—has raised questions regarding the effectiveness of policy terms in jurisdictions where their use was perhaps unintended.

Soar says that insureds and re/insurers need to “appreciate that a small change in governing law can have potentially huge ramifications to the application of policy terms and coverage”.

“Given current market pressure many re/insurers are agreeing to governing law and jurisdictional provisions that are unfamiliar to them. Some insureds are insisting on the application of local law and while re/insurers may understand the meaning of contract wording in their own jurisdiction, its application may differ widely in emerging markets, where often insurance and reinsurance law is less well developed”.

He warns that if insureds and insurers do change the law applied to the policy it is worth considering closely how the policy as a whole will function.

In the case of AstraZeneca, a provision within the company’s reinsurance policy that applied English case law rather than the traditional Bermuda Form (which typically applies New York law) meant that the pharmaceutical company’s liability claims relating to anti-psychotic drug Seroquel were rejected by the English court.

AstraZeneca had hoped that the judge would uphold New York law through the widely recognised Bermuda Form, says Soar. This would have meant that in order to establish liability the pharmaceutical company would only have to prove it was arguably liable to third party plaintiffs, rather than being actually liability regarding the damage caused by Seroquel, as is the case under English law. AstraZenca was unable to do so because it had settled or won all the cases it had faced. Being unable to establish actual liability, AstraZeneca then lost the right to claim on liability reinsurance policies lodged with ACE and XL through its captive insurance company.

As a result AstraZeneca was unable to claim the in excess of $80 million of liability reinsurance they had hoped to draw upon from ACE and XL. How the rest of their reinsurance programme responded is unclear.

While much of that was likely inescapable, the case is an object lesson in the importance of well thought through contract wording and careful analysis of which law/jurisdiction might interpret that wording in the event of a claim, says Soar.

Ince & Co, ACE, XL, contract wording, legal

Bermuda Re