The Bermuda Form (part 2): Perfecting coverage and dispute resolution

Insured Success

Continuing our two-part series on Bermuda Form policies, John Ellison, Richard Lewis and Catherine Lewis return to discuss how policyholders can perfect their coverage and handle the dispute resolution process.

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Transcript:

Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's Insurance Recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at [e-mail]. We'll be happy to assist.

John: Greetings, everyone. Thanks for joining us again for another session of Insured Success. This is part two of our podcast on the Bermuda Form, and today we are focusing on perfecting the coverage available under the Bermuda Form coverage and how to deal with the dispute resolution process. We've already covered the history of the form and key policy terms and coverage issues in our part one podcast, but now we're on to how the policy actually works and how you can put it to use. Joined today by two Lewises, Richard in New York and Catherine in London. And without further ado, I'll turn it over to you, Rich.

Richard: Okay. We're going to talk a little bit about some of the issues that we've seen at the claim side from the manner in which the program is structured. As we covered, I think, in the first one, the limits of Bermuda Form policies are huge. A program can have hundreds of millions of dollars in limits. And so are the retentions. They can be, I think when the policies first came out, they were 25 to 50. And a lot of policy holders have up to a hundred million dollars in retentions. And what will often happen is a policy holder will buy different products, whether it be captive insurance or actual domestic GL insurance and put that in their retention. And this can lead to some issues. The first issue being, as we covered in the first podcast, that the trigger of the occurrence-first reported policies, the Bermuda Form policies, is notice of an occurrence or notice of an integrated occurrence during the annual period. The problem would be if the policyholder in the retention purchase GL insurance that's triggered on a different mechanism, either an occurrence policies or claims made policies. Occurrence policies are policies that are generally triggered by injury during the policy period. And the issue you can see that may occur, and we've seen it many, many times, is that, you know, the policyholder gives notice in say 2005 of an integrated occurrence or an occurrence under its Bermuda Form policies. And there have been problems with this, you know, say a product over a 10-year period with injuries triggering a 10-year period in the occurrence policies. And so what the Bermuda Form carrier will say is that I'm excess not only of the retention in my year 2005, but I'm also excess of all the other limits that were recoverable under the occurrence policies from years 1995 to 2005. So I'm excess of 10 retentions. There's language you can use in your occurrence first report or in your occurrence policies, either like a deeming clause or something that deems only one year to be triggered. Similar issues occur with claims made policies, although generally claims made policies have a batching mechanism where only one year is triggered. Unfortunately, if the first claim came in in say 2003 and you give notice of integrated occurrence in 2004, the same issue can occur. The Bermuda Form carrier will say that I'm excess of two retentions. The other big problem that we've seen a lot is where the underlying coverage has defense costs outside the limit. Obviously, in these mass tort cases that implicate Bermuda form coverage, the defense costs can be massive. And a lot of those defense costs are incurred before there's any settlements or judgments. And if for some reason, the coverage and the retention, whether in a captive policy, we've seen that, or an actual real insurance has defense costs outside of limits, it's very difficult to recover those defense costs under the Bermuda Form policy. They say the only thing that eats through my retention where defense costs are outside of limits are settlements and judgments. And then I think I'm handling it back to John for the underwriting process.

John: So issues that can arise in these Bermuda Form claims often will implicate what happens during the underwriting process. And just like with any application process for any type of insurance, insurers will often look for misrepresentations as part of that. One of the things that's a little unique about Bermuda is that some of those forms, analogous to what some D&O insurers do, will be attached as exhibits to the policy when issued. So there has to be care taken to be candid and honest and open about your business and any issues you have with claims when applying for the product. But one of the things that we've seen that there's often a blurring between underwriting and claims that happens in the insurance world. And oftentimes policyholders are of the view that if they tell their underwriter something as part of the process of buying a policy, that will satisfy notice of claim requirements. That is generally not the case under the Bermuda policy. It really does need to be a separate line of communication with respect to claims and claim issues that is independent of and separate from any communications that are engaged with an underwriter at a Bermuda insurance company because the Bermuda carriers will take the position that information passed to the underwriter doesn't necessarily satisfy the obligation to provide information of claims to the claims department. So that's a point that is often overlooked and policyholders can be confused or taken advantage of if they don't recognize that distinction in how they're communicating with the Bermuda market. Now, another thing that needs to be kept in mind when you're potentially restructuring a program and maybe moving insurers around from their historic participation in the program, like changing layers or maybe actually switching from one Bermuda carrier to a new one, these policies have inception dates and retroactive dates. And typically, when the structure of the program is changed and a participation layer is different or a new carrier comes onto the program, the inception date that you will get for the new policy is often not back to the beginning of the time of the program when you were first buying Bermuda coverage so that there can be a gap in coverage. And the historic coverage that you thought you had because you've been buying in Bermuda for years or maybe decades can be disrupted substantially. And that is something you really need to keep in mind when you're renewing coverage in Bermuda and how the policies line up against the historic structure of the program. And you need to work on that closely with the broker to make sure you don't have gaps created by different inception dates or different retroactive dates that can leave huge holes of coverage based on the limits that Rich described earlier. One other thing I'll just talk about on the underwriting thing is there are oftentimes best terms provisions that are attempted to be put into policies, usually at the higher layers of a program that tries to, it's like a most favored nations type of clause. That can really be disastrous if there is some policy in the tower that is different or has more limited terms than potentially others in the program and just need to be aware of these things. They're often attempted to be slipped in, in my experience at least. Right near the renewal date, so there's not a lot of time to deal with them. You have to be vigilant about knowing what sorts of endorsements are being tacked on to the policies at the last minute. Again, that's something that should be a joint project with your broker, but it's definitely something you need to take into account. So we're now going to segue into actually perfecting your rights to coverage under the policy. And if you get into a claim dispute, how you may need to deal with the underlying defense issues and then perfecting rights under the Bermuda program. And I'm going to turn it over to Catherine to take this on.

Catherine: Thanks, John. So as Rich touched on at the start, the notice provisions in a Bermuda form policy are really important. And first point to note is that the notice clause will operate to trigger cover. And its second purpose is that it fixes the limits and retentions that will apply. What I mean by this is that the timing of the notice and the policy year in which it is noticed will confirm the retention or policy limits and the terms and conditions that will apply to that claim. So that will include any retroactive dates, discovery provisions and endorsements. So the policy year to which it's noticed is really important. Failure to give proper notice may defeat a coverage claim and now that's not a hard and fast rule but the clause typically requires notice to be given as soon as practicable and during the policy period or the discovery period and I say may defeat cover i mean the strictness of that is a question of New York law and will depend to the extent to which an insurer can show that it was prejudiced by the timing of the notice but typically the obligation to give proper notice will afford some sort of protection to insurers and in our experience is a real risk area for policyholders. And this on terms of formalities, notices must be in writing and we'll have to include general information about the underlying claim. The Bermuda Form also allows a policyholder to give notice of an integrated occurrence and we discussed integrated occurrences in some detail in our first podcast but in short it enables a policyholder to give notice of all of the personal injury or property damage claims that fall within the policy definition. If a policyholder is giving a notice of integrated occurrence the notice must be explicitly designated as such and it's important that any of these notifications are really carefully drafted and it has a significant impact on the volume of claims that are to be aggregated. So an overly broad notice might inadvertently capture issues outside the liability problem and if it's drafted too narrowly the notice may not capture the full extent of the problem particularly the case if the case theory as to the underlying issue changes as is likely to do. So over the first hurdle of notices the Bermuda Form also deals with the life of the claim itself and the conditions of the Bermuda Form set out the relationship between policyholder and insurers once there is a claim that's been notified and the insurers are afforded a right to associate with the policyholder in the defense and the control of claims relating to the occurrence. And as well as the insurers having a right the policyholder has the obligation to cooperate with the insurers. And we typically are advising clients to keep insurers notified of all material developments in the underlying actions. And this brings us on to notice and consent settlement. Obviously, when dealing with significant must-talk claims and underlying issues, the priority of policyholders and our clients is to resolve the underlying liability. The loss payable conditions in the policy envisages that a policyholder will seek and obtain insurers approval of settlement in writing. Practical issues that arise in our experience in relation to complex towers of insurance, where it might be unclear which ultimate attachment point the liability is going to reach. And it might be unclear whether consent of all the insurers in the entire tower is required, or simply those whose layer is affected. So depending on the particular facts and circumstances, it might generally be sensible to notice all insurers of the proposed settlement to avoid issues down the line. And of course, we've all seen that specific issues can arise where an insurer who has been asked to consent decides to ignore the request. And usually, if they ignore a request of consent, they can't then turn around later and invoke a lack of consent as the defenses are not paying. But it just really reinforces the fact that these policies do require significant interaction with all insurers no matter where they sit on a tower.

Richard: I just want to add a couple more things about this, just because one of the first things that happens in a Bermuda Form arbitration is there's a lot of hearings about disclosure. And so when you're cooperating or you're dealing with requests to associate or allegations that you have to cooperate, just keep in mind that at the level of the claim, what you need to do is you need to protect your privilege. And you have to have an eye on protecting the privilege information, the core privilege information. So in general, what we advise is you provide everything that crosses the line. What that means is all the underlying pleadings, everything that you're sending to the people who are making claims against you, everything they send to you. If you provide your defense counsel to give an update of the case, just like in any U.S. case, you do it by teleconference with an instruction to your defense counsel to not talk about privilege matters, but talk about things that cross the line. One thing that will often come up in these arbitrations is what they call the common interest or a waiver of privilege because the carrier is in a position, is in the same position as the policyholder. I think generally after reservation of rights, that shouldn't survive. But as a general matter, protect your core privilege material and also send correspondence to the carriers as if you are setting up a direct examination or a witness statement for your witness to show how much cooperation we were affording the carrier. And so there's a written record of everything that the policyholder was doing to comply with its duty to cooperate, although not to share privileged information.

John: So I think we're now going to talk about some settlement coverage issues that almost always arise in these disputes, given the amount of money involved and how much effort needs to go into resolving claims that reach attachment points in the hundreds of millions of dollars. But fortunately, New York law on this topic is generally pretty favorable for policyholders. There's a leading Second Circuit case called Luria Brothers that talks about what a policyholder needs to do to receive coverage under New York law for settlements. And it's basically a reasonableness test that takes into account all the factors and issues that your company is dealing with and defending, you know, a series of what is typically a series of claims. And all that needs to be ultimately demonstrated is that under the circumstances that you were facing at the time, those claims are resolved. You know, was there a rational, reasonable approach taken to valuing the claims and the exposure the company was facing? And then, you know, a resolution that was negotiated that essentially matches up with what a normal, reasonable business would do to protect itself in resolving claims like those that are pending against you. A related issue that often gets litigated in these arbitrations is when there are claims that are asserted in the underlying cases that are both in the covered basket of coverage and some that may not be covered. The classic example is where someone is facing a series of tort claims and they're alleged to have been negligent and engaged in some type of intentional conduct that would arguably be excluded under the policy. Again, New York law is generally favorable on this point. There's a whole line of decisions. It's called the relative exposure test. And, essentially what the policyholder needs to demonstrate only is that they've entered into a reasonable settlement that would satisfy the Luria Brothers test. And then there's a presumption that arises that all of the settlement is covered and the burden of proof shifts to the insurance company to demonstrate if they can, that some of the claims were paid for were outside the scope of coverage that were provided by the Bermuda Form. You typically prove this to a certain extent with testimony from defense counsel about things that cross the line, back to Rich's point about the privilege, often expert testimony is used to say that any reasonable company faced with the avalanche of claims that they've settled would have acted in accordance with the way the settlement was handled and papered. And there's lots of ways to work through this, but it's something that defense counsel, in-house counsel, and coverage counsel should be working closely on together so that it is documented and papered as best it can be with the eye towards avoiding having this issue become a big problem in an arbitration down the line. So we've covered some of the major points on perfecting the claim. Now let's talk about how the dispute resolution process and arbitration works under the Bermuda Form. And for that, we'll have Catherine get started.

Catherine: Taking it back to its sort of basic level, the policy is a contract between the insurer and the policyholder, and as such, the arbitration clause in the policy is private as between those contracting parties. And as a matter of English law, arbitration is a confidential process and awards aren't public. So it's not therefore usually open to either the policyholder or the insurer to use one award as a precedent in a case against another insurer or policyholder. All that said, the insurance market is pretty small and people talk. So insurers participating on a program will be well aware of other decisions made on that program if there are multiple arbitrations against multiple different insurers. And they will also be aware of claims involving other policyholders. So if the same liability issue is arising throughout the market, the chances are that insurer will be sitting on a program for multiple policyholders and they'll be aware of the coverage issues arising under those programs. So given the inherent confidentiality surrounding arbitrations, and that it's a private dispute resolution mechanism between policyholder and insurer, it's challenging in our experience to join arbitrations together without the consent of the insurers involved. And it's sometimes a frustrating position where there would be significant cost savings for a policyholder inviting only one arbitration against its insurers. In practice, it's pretty difficult to persuade insurers to combine their arbitrations.

John: So now I think we're talking about how do we get the process started? I mean, it's typically a three-person arbitration panel. Each side gets to pick one, and the process is started by a notice of arbitration either from the policyholder or the insurance company to the other party designating their arbitrator, and then there's a 30-day period for the other side to pick theirs. And then there's usually a negotiation process that leads to the selection of the chairperson for the panel. The world of Bermuda Form insurance arbitrators is a pretty small one, and there are an enormous number of repeat panels and repeat players in this. So it is really important you're working with people who know that pool of candidates and also know kind of the general thinking that they have towards insurance issues because they will have likely seen some of these issues in other disputes previously. And it very much operates like a small club, so to speak, with the arbitrators typically having characteristics of either being a retired English judge, either still practicing or retired, now KC, who's had a substantial practice in the insurance space. And then there are often some U.S. lawyers who serve as arbitrators over there who have significant insurance background from their practices.

Richard: The only thing I'd say about that is sometimes you'll have an issue in your case that's just not understood by KCs being like, how could American juries do this? And sometimes you'll want an American practitioner or American judge to be able to explain that, you know, say liabilities for which the policyholder really had no responsibility are still being heaped upon them. And that that's just something that happens in parts of the United States.

John: Yeah, and it's hard to overstate the importance of this selection process because it often can be outcome determinative. So, you know, focusing on panel selection and doing your due diligence as best as you can on getting, you know, a panel that you're comfortable with is really critical to the process. It's really hard to overstate how important it is. But, Rich, go ahead on other characteristics of the panel.

Richard: Well, they're very expensive. KCs are very expensive and there's a little bit of sticker shock on that. And the other thing that you can expect is that when they see what each individual is getting paid, they're all going to want to get paid the highest rate of any of the three. And there's not a whole heck of a lot you can do about that, especially at the beginning of an arbitration.

John: Yeah. And one of the issues that's a little different about the way arbitrations work under this form is all of the arbitrators have to swear to neutrality. I mean, it's different in a lot of respects from a U.S. Arbitration under the AAA format or jams or something like that. You know, arbitrators are not party affiliated like they often are in the U.S. and so the conflict issue and things like that is not something that really has much weight in London like it might in the United States. And, you know, once the panel is in place, they're kind of off on their own as a three, three person group that operates entirely independently of the parties and is not to be dealt with, you know, other than administrative things. So it's, it's a very different system. And, and, you know, I think it works just as well as the U S system. You just have to be aware of how, how it operates in a slightly different fashion. But Catherine, why don't you tell us about the timing and process?

Catherine: Yeah, sure, John. Thanks. I'm talking about a bit of logistics. So, yeah, as John mentioned, there's a pretty narrow pool of specialist arbitrators who hear these. They're also very busy. And combining that with the barristers that are usually appointed by each party, fixing the final hearings can be challenging. And for hearings over a week, I think you're looking 18 or more months ahead. So it's not a quick process once you're in the arbitration and I'd say 18 months is still pretty quick in some of our experience in terms of structure they follow a typical English civil litigation format so for any international listeners these are not memorial style pleadings you'd get in some other arbitrations it's rather an exchange of evidence at various stages and for those in the US there are no depositions and I'll just run through the steps very briefly. The first stage is always an exchange of pleadings so statements of claim defense and counter claims there's then a procedural hearing which sets the order of directions for the remainder of the arbitration and the first sort of evidential step is then disclosure or document production often by Redfern or Stern schedules which is a common feature of arbitration generally typically the discovery or disclosure burden is going to be on the policyholder as that's the party with the relevant documents regarding the underlying claims and liability fully appreciate it's going to be quite extensive and therefore quite expensive for when you're dealing with the mass talk claims and frustratingly for policyholders is quite often minimal disclosure by insurers. Once the document production stage is over, it's then on to witness statements. So these are written witness statements prepared by each party, sort of advancing its own factual position. And there were no depositions. What happens at the final hearing is that the witnesses attended for cross-examination and they're then cross-examined on the points made in their witness statement. After the exchange of written witness statements, there's then expert reports. Then it's preparation for the final hearing which will be involved preparing written opening submissions which in England and Wales is referred they're referred to as skeleton arguments then there's the main hearing followed by written closing submissions if the tribunals ask for them, and then the preparation of the award by the tribunal and I think Rich is going to talk to us a little bit more about some of the logistics.

Richard: Yeah I just have a couple brief points you know one of the points is you will be very well served by hiring a barrister to present your case. John and I did this one time without a barrister. It went much better with the barrister. Another issue is whether you have English solicitors. If you are a US firm that has a policyholder as a client, there's just so much groundwork that needs to be done over there. If you don't have a London office in that law firm, you probably need to hire a solicitor as well as a barrister. Another issue that comes up is procedural or substantive law. UK law will cover the procedural issues. US, typically New York law will cover the substantive issues, but there are some things that fall between the cracks. For instance, we had a case where privilege attached to what we'll call peer reviews of doctors. And was that California privilege? Did that apply or would it be evaluated under English law? Other issue that comes up is interest. Is it substantive in New York law, or is it procedural in English? And that's still up for a little bit of debate.

John: Yeah. And one of the things that is unique about this is that these rulings are all supposed to be confidential, but this goes back to what I was talking about earlier and the due diligence and importance of selecting a panel. Even though everything is supposed to be confidential, there is a small cadre of people who seem to know the result of just about every arbitration that happens. Maybe not all the details, but at least who won and who lost. So although there isn't precedent in the traditional sense of being able to cite to another case or another arbitration award. People do know what is going on in these cases, and it's important that you be aware of that. And even though there isn't some website or books that you can go look up the results of all of these prior arbitrations, you do need to have people on your team who do know what's going on over there and how these things are proceeding in other matters. So just a point there.

Catherine: Thanks. Yeah, just the last point for me on this is a fairly unique aspect of the media form arbitrations, which is a feature of English procedure. And it's certainly a novel point for our US clients. So the usual rule in England is that the losing party pays the winning parties legal costs and expenses. In these types of arbitrations, there's usually a fairly clear a successful party with either the insurer being ordered to pay the claim or the policyholder being denied coverage. If there is an uncertainty then about who has won and who has lost the tribunal will typically be asked to determine it. The rule as to cost shifting and the losing party paying costs doesn't mean that there's an open-ended indemnity for all costs but a successful party in the arbitration might recover anywhere between 65% and 80% of its legal costs and expenses.

John: Just to close this out, we want to highlight a couple of points that we hope you've already gotten, but just to emphasize the notification process and the communications process with the carrier is critical. It's a little different than dealing with kind of traditional US domestic insurers. So you need to work closely with your broker and with a knowledgeable coverage counsel on that. That's also, that same logic applies to the structuring of the right legal team for these because although there are similarities to arbitrations that occur domestically, there are unique aspects. And as Rich said, the happenings in London, if that's the form as opposed to Bermuda, are often substantial. So having a cross-ocean team in place is really critical. I already re-emphasized the picking the right panel and doing your due diligence there. All of these are our key points. And we hope that we've given you a little more understanding of the Bermuda Form process and happy to help with any questions that may arise. And we thank you again for listening to this latest podcast of Insured Success and hope you keep on listening. Thanks very much.

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact [e-mail].

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