Feature: Commerical and dispute resolution
Insurance coverage
disputes
Illustration: Rhona Garvin
Crossing the Atlantic
With insurance coverage disputes on the rise,
corporate policyholders need to ensure that they
clearly understand the terms of their policies. Jane
Harte-Lovelace, Thomas Reiter and Matthew
Smith set out the main legal issues under UK and
US law that a policyholder should consider when
facing a potential dispute with its insurer and at
the policy negotiation stage.
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The journal for subscribers to www.practicallaw.com/crossborder
Global insurance policies offer a number
of advantages to the policyholder such as
economies of scale, centralised administration and reduced risk of overlap or gaps
in coverage. However, the cross-border nature of such policies means that, in the
event of a dispute with an insurer, complex
issues often arise as to the correct law
and/or forum for resolving the dispute.
Insurance coverage disputes are on the
rise, particularly in the US and the UK
(see box, The growth in insurance coverage disputes: UK and US), and often
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Commercial and dispute resolution: insurance coverage disputes
The growth in insurance coverage disputes: UK and US
There have been a number of key drivers for the growth of insurance
coverage disputes in the US:
„ Changing public sentiment against big business and in favour of
polluter pays in a jury based legal system.
„ The scale of the successful asbestos and environmental contamination claims against major US companies and thus their insurers.
While the UK does not have jury-assessed damages there are a
number of parallels to the US experience including:
„ Asbestos liabilities claims against not only manufacturers but also
the actuarial profession (estimated recently at GB£20 billion (about
EUR29.5 billion or US$35.2 billion) over the next 30 years).
The relaxation of procedural and causation issues combined
with out of date and often loosely drafted policies.
„
„
The aggressive position asserted by insurers to rebut claims.
„
Financial services related claims, including mis-selling.
„ The emergence of a specialist bar acting only for corporate policyholders, unconstrained by the “conflict” of also representing major insurance groups.
„ Errors and omissions (E&O) claims and directors and officers
(D&O) claims against executive directors and, now, non-executive
directors.
„ The pressure by shareholders on corporate management to protect the company’s assets and maximise insurance recovery.
„ The increasingly aggressive positions being adopted by insurers
in resisting policyholder claims.
involve a cross-border element. A crossborder dispute typically involves the policyholder bringing proceedings in one jurisdiction for an indemnity under the policy and the insurer issuing parallel
proceedings in another jurisdiction for a
declaration that the policyholder has no
entitlement to such an indemnity.
The decision as to the correct law and/or
forum may have a fundamental impact on
a policyholder’s claim and even in some
circumstances determine the outcome of
the claim. For example, a claim by a policyholder may be statute-barred on the
grounds of limitation in one jurisdiction
but not in another, or the policyholder
may be deprived of an entitlement to recover an indemnity for punitive damages.
ent meanings depending on whether US or
UK law governs the terms of the policy.
„ The correct forum or jurisdiction for
resolving disputes. Although the choice of
law and jurisdiction are often linked, the
parties may agree that the policy should
be governed by, for example, Pennsylvania
law but subject to the exclusive jurisdiction of the English courts.
Whether there is an arbitration clause
in the policy and, if so, what law is to be
applied by the arbitrator in resolving the
dispute.
„
(See also box, Choice of law and forum
selection: some general guidance.)
Law governing the policy
There may be sound reasons to keep the
policy silent as to the choice of law and/or
jurisdiction (for instance, because of tactical considerations). However, it is worth
global policyholders considering these issues carefully before the policy is issued
and in the event of a potential dispute over
coverage.
This article sets out the main legal issues
under UK (England and Wales) and US law
that a policyholder should consider when
faced with a potential dispute with its insurer. In particular, it highlights the following issues that should be determined:
„ The law governing the policy. Choice of
law considerations are particularly important in insurance coverage litigation. For
example, particular terms may have differ-
2
Under UK conflict of law rules the proper
law of an insurance policy entered into after 1 April 1991 can be determined by reference to one of two statutory schemes depending upon where the risk covered by
the policy is located:
„ Risks located inside the European Economic Area (EEA). For risks located within
a member state of the EEA, the applicable
law of the insurance policy is determined
by reference to the Financial Services and
Markets Act 2000 (Law Applicable to Contracts of Insurance) Regulations 2001 (the
FSMA Regulations). These regulations implement EU directives.
Risks located outside the EEA. Where
the risk covered by the policy is not situ„
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ated within the EEA, the issue as to the applicable law of the contract of insurance is
determined by reference to the Rome Convention 1980, which is implemented by the
Contracts (Applicable Law) Act 1990.
The rules for determining conflict of law
issues differ depending upon which of
these two statutory schemes applies.
In the US, the conflict of law rules to be applied typically are those of the forum, that
is, the state in which the insurance coverage proceedings take place. Insurance
coverage disputes in the US are generally
considered to present issues of state, as
opposed to federal, law.
It is therefore not possible to establish
any firm principles that would apply
across the US, there being no established
uniform conflict of law rules. However, a
large number of states including, for example, New Jersey, follow the Restatement (Second) Conflict of Law Rules
promulgated by the American Law Institute (the Restatement), which sets out
principles for resolving conflict of law issues.
There are three possible scenarios in relation to choice of law in an insurance policy:
„ Where the parties provide expressly in
the policy for the choice of governing law.
„ Where there is no governing law clause
but a choice of a particular governing law
can be implied.
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Commercial and dispute resolution: insurance coverage disputes
„ Where there is no express or implied
choice of law.
In some cases involving global policies
there may be an express or even an implied
choice of more than one governing law (see
box, More than one governing law).
Express choice of law
The parties may include a clause in the policy providing that it is to be governed by a
particular system of law.
UK. In relation to risks situated outside the
EEA, the parties are free to choose the applicable law (Article 3, Rome Convention).
Concerning risks situated within the EEA,
the FSMA Regulations have also been interpreted by the English courts as allowing
the parties the same unrestricted freedom
to choose the governing law of the policy. If
this interpretation is correct, the position
would be the same under both the Convention and the FSMA Regulations: an express
choice of law in an insurance policy would
prevail wherever the risks are located.
US. In the US, the courts of those states that
follow the Restatement may choose to apply section 187 of the Restatement, which
deals with the position where the parties
have chosen a particular law. The law of the
state chosen by the parties will be applied
unless either (section 187(2), Restatement):
„ “The chosen state has no substantial relationship to the parties or the transaction
and there is no other reasonable basis for
the parties’ choice”.
“Application of the law of the chosen
state would be contrary to a fundamental
policy of a state which has a materially
greater interest than the chosen state in the
determination of the particular issue and
whichwould be the state of the applicable
law in the absence of an effective choice of
law by the parties.”
„
Implied choice of law
Even if there is no expressly stated choice of
law clause in an insurance policy, the parties may still in effect have agreed a choice of
law.
UK. The English courts will look at the
terms of the contract and the surrounding
circumstances to decide whether or not
the parties may have still chosen a particular law in the absence of an express provision. Both the Convention and the FSMA
Regulations require that the choice must
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More than one governing law
An issue that sometimes arises in the context of global insurance policies is whether
more than one system of law applies to the
policy. A global insurance policy will usually have a number of different insureds, often subsidiaries of the principal policyholder.
UK. Under UK law the parties may agree that
different systems of law will apply to different parts of the policy. However, the English
courts have so far been reluctant to imply a
choice of different systems of law in a global
insurance policy:
„ In American Motorists Insurance Co (Amico) v Cellstar Corporation and another
([2003] Lloyd’s Rep IR 295) (see box,
Choice of law issues: the Amico case), the insurer argued that its relationship with the UK
subsidiary (Cellstar UK) was subject to a different governing law (that is, UK law) to that
governing its relationship with the main policyholder (Cellstar). The Court of Appeal rejected this argument, stating, that “neither
the parties nor the Rome Convention could
sensibly be taken to have intended to scissor
up the policy negotiated and issued in Houston and to subject different aspects of it to
different governing laws” (Mance LJ). It drew
attention to the potential problems that
could arise with such an approach, particularly where different countries had different
principles or remedies governing matters
such as non-disclosure or breach of warranty.
„ In CGU International Insurance Plc v
Ashleigh Szabo & Others ([2002] Lloyd’s
Rep IR 196), the policyholder argued that a
global liability policy was severable, there
being separate contracts with each named
insured. The court decided that the global liability policy provided for a uniform contrac-
tainty by the terms of the contract or the
circumstances of the case” (Article 3(1),
Rome Convention; Reg 6(1), FSMA Regulations). In other words, there must be a
“real” choice of law rather than a tenuous
or uncertain choice.
The official commentary on the Rome
Convention (the Giuliano-Lagarde Report) provides the following non-exhaustive list of examples of circumstances that
may be taken into account in demonstrating a “real” choice of a particular law:
„
The contract is in a standard form
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tual framework and there was nothing to suggest that the definition of “the insured” under the policy was intended to have a different meaning according to the law of the
country of the person claiming.
„ In El Dupont de Nemours & Co v IC Agnew
& Others ([1987] 2 Lloyd’s Rep 585), the
Court of Appeal considered choice of law under a global product liability policy in two excess layers comprising 16 separate policies,
with Lloyd’s as the lead insurer on both layers. The following policies were issued in
several different jurisdictions including The
Netherlands, Texas, New York, Pennsylvania
and Delaware. None of the policies contained an express choice of law clause.
The insurers argued that the proper law of all
of the following policies was not the same as
that of the lead Lloyd’s policy. The Court of
Appeal rejected this argument and stated
that, while a following policy could contain
an express or implied choice of law different
from that of the lead policy, there was a prima
facie inference that a following policy is governed by the same law as the policy it follows.
The Court of Appeal decided that there was
an implied choice of UK law in the lead
Lloyd’s policies and on the evidence there
was no reason why the same law should not
apply to the following policies.
US. The courts in those states that follow the
Restatement (Second) Conflict of Law Rules
(Restatement) may apply section 187 to determine the appropriate law where there has
been an express choice by the parties of different systems of law for different parts of the
policy. The Restatement does not provide expressly for an implied choice of law by the
parties (see main text, Implied choice of law:
US).
which is known to be governed by a particular system of law, such as a standard
Lloyd’s policy of marine insurance.
„ There is a previous course of dealing
between the parties under contracts containing an express choice of law.
„
There is a choice of a particular forum.
„ The contract refers to the laws of a particular legal system.
US. The Restatement does not have a direct
and express equivalent to the UK concept of
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Commercial and dispute resolution: insurance coverage disputes
Choice of law issues: the Amico case
One illustration of the practical application
of the UK law principles concerning choice
of law issues is provided by the case of American Motorists Insurance Co (Amico) v Cellstar Corporation and another ([2003]
Lloyd’s Rep IR 295). Cellstar, a US mobile
phone distributor, had taken out a global
transportation policy with insurer Amico.
Amico was incorporated in Illinois but authorised to conduct business in Texas.
The named insured under the policy was
“Cellstar Corporation and its Subsidiaries”
and the policy covered mobile phones when
“in transit in the care and custody or control
of the carrier”. The policy was negotiated in
Houston, Texas through Texas brokers.
One of the subsidiary companies of Cellstar
was Cellstar UK, based in Manchester, England. Two shipments of mobile phones being
transported from Cellstar UK’s warehouse in
Manchester went missing in transit. Amico
purported to deny the resulting claim on
grounds of breach of warranty and both Cellstar and Cellstar UK commenced proceedings in Texas against Amico. Amico responded by bringing parallel proceedings in
England for a declaration that it was not liable to Cellstar and its subsidiary under the
policy. The English court had to decide
whether the policy was governed by UK or
Texan law.
The first question was whether there had
been a choice of law. There was no express
choice of law clause in the policy and the
court therefore had to decide whether a
choice of law could be implied. The court
addressed the issue as to whether the policy and the circumstances demonstrated
with reasonable certainty that the policyholder and the insurer had made a “real
choice” of a particular system of law. The
Court of Appeal held that there was an implied choice of Texan law. In giving judgment, Mance LJ cited the following in support of this conclusion:
„ The policy had been negotiated and issued in Texas between an insured who em-
an “implied” choice of law. However, some
commentators have suggested that section
187 of the Restatement may be wide enough
to allow the courts to conclude that the parties have made an effective choice in the absence of an express governing law clause.
4
ployed a Texas broker, and an insurer situated in Texas.
„ The policy provided for a limitation period
of 12 months from the date of the loss unless
such limitation was invalid “by the laws of
the State within which [the policy] is issued”. This was believed to be a strong indication that the parties had chosen the law of
the state in which the policy was issued, that
is, Texas law, as the governing law.
„ It was a group policy negotiated by the
parent company in the state where it had its
principal place of business.
„ Neither those negotiating the policy nor
any of Cellstar’s subsidiaries could reasonably have contemplated that the policy
would be governed by more than one system
of law.
Mance LJ considered the position if the
answer to the first question was wrong and
there was no choice of law. This meant
considering the presumptions under the
statutory provisions now replaced by the
Financial Services and Markets Act 2000
(Law Applicable to Contracts of Insurance)
Regulations 2001 and the Rome Convention 1980. He decided that, even if there
was no implied choice of law, the circumstances and the manner in which the policy was issued were sufficient to outweigh
any presumption in favour of the law of the
EEA state in which the risk was situated
(that is, UK law).
If the Rome Convention applied, Mance LJ
found that the presumption would also be in
favour of Texas given that performance was
by Amico through its Houston office where
the policy was negotiated and issued. However, even if that was wrong and the presumption was in favour of the state in which
Amico had its central administration (assumed to be Illinois, where the company was
registered) Mance LJ stated that this presumption was again outweighed by the circumstances, which all pointed to Texan law
as the governing law.
No choice of law
UK. Under UK law, where there has been
no choice (express or implied) the two
statutory schemes set out the principles to
be applied in determining the governing
law of the insurance policy:
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„ Risks located outside the EEA. In the absence of a choice of law by the parties, the
contract will “be governed by the law of the
country with which it is most closely connected” (Article 4(1), Rome Convention).
A presumption exists that the contract is
closely connected with the country where
the party that is to effect the performance
“characteristic” of the contract has, at the
time of conclusion of the contract, its habitual residence or, in the case of a company, its central administration (Article
4(2)). If the contract is entered into in the
course of that party’s trade or profession,
the appropriate country is that in which the
“principal place of business” is situated. If,
however, it is the case that performance of
the contract is to be effected through a place
of business other than the principal place of
business, the appropriate country is stated
to be that in which the other place of business is situated.
As far as a contract of insurance is concerned, it has been argued that the characteristic performance is the provision of insurance cover. If this is correct, the party
that is to effect the performance that is
characteristic of the contract of insurance
would be the insurer. The contract of insurance would therefore be presumed to be
most “closely connected” either with the
country in which the insurer has its principal place of business or, where performance is effected through a branch office, the
country in which that office is situated. For
example, under this view, if the New York
office of a US insurer headquartered in
Delaware issues a policy for an office building in California owned by an English company, the presumption under the Rome
Convention would be that New York law
will apply to the insurance policy. The presumption can, however, be rebutted depending on the facts of a particular case.
„ Risks located within the EEA. The
FSMA Regulations also employ the concept of “close connection”. The Regulations again provide that the contract of insurance will be governed by the system of
law of the country with which the contract
has its closest connection. However, a different presumption is to be applied in identifying the “closest connection”. There is a
presumption (again rebuttable) that the
contract of insurance has its closest connection with the EEA state in which the risk is
situated (Regulation 4, Part II, FSMA Regulations). To give another example, if a New
York insurer covered a factory in England,
the presumption under the FSMA Regulations would be that UK law would apply to
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Commercial and dispute resolution: insurance coverage disputes
Choice of law and forum selection: some general guidance
At the contract negotiation stage, global policyholders should:
„ Determine whether an express choice of law and/or jurisdiction
clause is, or ought to be, included in the policy and the effect on
any claims under the policy. An express choice of law clause may
add greater certainty to the coverage provided by the policy.
„ Consider agreeing a choice of law and/or jurisdiction that will
minimise the introduction of public policy concerns into any dispute with insurers, for instance, the UK. (Note that public policy in
some US states such as New York and Illinois preclude, or may in
some circumstances preclude, indemnification of an insured
against an award of punitive damages. The argument is said to be
that since punitive damages are awarded on grounds of personal liability for grossly reprehensible conduct, it is against public policy
the contract of insurance.
US. In those US states that follow the Restatement, “the rights and duties of the
parties with respect to an issue in contract
are determined by the local law of the
state which, with respect to that issue, has
the most significant relationship to the
transaction and the parties” (section
188(1), Restatement).
A number of factors are relevant to determining the applicable law where there is
no statutory directive on choice of law
within the forum state (section 6, Restatement). These include:
„ The relevant policies of other potentially interested states.
„ The relative interests of those states in
the determination of the particular issue.
In addition, section 188(2) specifies a
number of matters to be taken into account in applying the governing principles
of section 6 to determine the proper law
where there is no effective choice of law by
the parties. These include:
„ The domicile, residence or nationality
of the parties.
„ The place of negotiation, conclusion
and performance of the contract.
The place where the injury and the conduct causing it occurred.
„
The correct forum/jurisdiction
It is important to be aware of the fundamental distinction between choice of law
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for the insured to escape punishment by seeking an indemnity from
the insurer.)
„ Consider combining the choice of law and jurisdiction clauses
(that is, providing for the same jurisdiction as the chosen law). This
may avoid the potential for disputes over the appropriate law and/or
jurisdiction.
„ Remember that there may well be numerous insurers, possibly
domiciled in different jurisdictions, covering the various layers in
the insurance programme.
„ Consider an arbitration clause as an alternative to a clause giving exclusive jurisdiction to the courts. The English courts and the
courts in the US will generally enforce an arbitration clause.
and jurisdiction. A “forum selection
clause” (US) or “jurisdiction clause” (England) in an insurance policy specifies the
courts before which any disputes relating to
its terms should be brought. This does not
necessarily need to be consistent with the
chosen law. A clause might, for example,
provide for the resolution of disputes by the
English courts applying New York law.
UK. Under UK law, jurisdiction in matters
relating to insurance where the defendant
is domiciled in an EU member state is
(subject to certain limited exceptions) decided by reference to a number of detailed
provisions in Council Regulation (EC)
44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement
of judgments in civil and commercial
matters (the Brussels Regulation), which
supersedes the 1968 Brussels Convention.
According to these provisions, persons
domiciled in a member state, whatever
their nationality, are to be sued in the
courts of that member state (Article 2,
Brussels Regulation). A corporate entity
is domiciled where it has its statutory seat,
central administration, or principal place
of business. In matters relating to insurance, policyholders generally have a
choice of courts but insurers are restricted
to the courts of the member state in which
the policyholder is domiciled (Articles 814, Brussels Regulation).
Where the defendant is not domiciled in
the EU (or Iceland, Norway and Switzerland, which are parties to the Lugano
Convention 1988) the English courts will
apply common law principles, supplemented by statute and the Civil Procedure
Rules 1998, to determine whether they
have jurisdiction and, if so, whether to ex-
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ercise that jurisdiction. In particular, the
English courts have a discretion to decide
whether to grant a stay of proceedings on
the grounds of forum non conveniens
(that is, on the basis that the courts of another jurisdiction, such as a US jurisdiction, would provide a more appropriate
forum).
A number of English cases over the past
few years have addressed the issue as to
whether, in the light of the Brussels Convention and the Brussels Regulation, the
English courts still have the discretion to
stay proceedings against defendants
domiciled in England on forum non conveniens grounds.
In the recent case of Owusu v Jackson &
Others ([2005] 1 Lloyd’s Rep 452) the European Court of Justice (ECJ) decided
that where proceedings were commenced
in England against a defendant domiciled
in England, the English courts had no discretion to stay the proceedings in favour of
a more appropriate forum (in that case
Bermuda). The provision in the Brussels
Convention (and the provision in the
Brussels Regulation which replaced it)
was held to be mandatory. The ECJ decided that an English court cannot stay
proceedings against a defendant domiciled in England in favour of the courts of
another non-European jurisdiction even if
that jurisdiction is a more appropriate forum for resolving the dispute.
An exclusive jurisdiction or forum selection clause in the insurance policy may
avoid having to deal with the fairly detailed provisions in the Brussels Regulation in any dispute over jurisdiction where
the defendant is domiciled in an EU mem5
Commercial and dispute resolution: insurance coverage disputes
ber state and the opposing proceedings
are commenced outside Europe. Under
the Brussels Regulation, such a clause will
be effective in these circumstances if it is in
favour of the policyholder but can only be
relied upon by the insurer if the restrictive
conditions in Article 13 are met.
US. In the US, the position again differs
between states although US courts will often take a forum non conveniens approach to determining issues of jurisdiction. In relation to jurisdiction or forum
selection clauses, the leading case in the
US is The Bremen v Zapata Off-Shore Co
(407 US 1 1972), in which the Supreme
Court held that forum selection clauses
are “prima facie valid and should be enforced unless enforcement is shown by the
resisting party to be ‘unreasonable’ in the
circumstances”. Courts in US states will
generally enforce such clauses, following
the Supreme Court’s decision in The Bremen, where it is reasonable to do so.
The reasons for refusing enforcement of a
forum selection clause, often described as
the “unreasonableness test”, include
fraud, overreaching (that is, uneven bargaining power), unfairness or public policy grounds.
Arbitration clauses
An arbitration clause can be used in an insurance policy as an alternative to requiring coverage disputes to be determined by
the courts of a particular jurisdiction.
The arbitration clause can be combined
with a choice of law clause. Note, however, that the governing law to be applied
in interpreting the terms of the policy (often described as the “substantive law”)
will not always apply to the arbitration
procedure (“procedural law”). This is because the “seat” or location of the arbitration may be in a different jurisdiction to
that of the chosen substantive law. The
seat of the arbitration typically determines the procedure and, to be effective,
an arbitration award has to comply with
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as the following:
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www.practicallaw.com/2-103-1132
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www.practicallaw.com/8-103-2044
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www.practicallaw.com/ 8-200-9764
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www.practicallaw.com/2-200-4590
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www.practicallaw.com/9-200-8226
the requirements imposed by the law of
the seat of the arbitration.
The combination of an arbitration clause
and a choice of law clause in an insurance
policy may also allow the parties to agree
to modify the application of the chosen
substantive and/or procedural law to the
dispute.
An illustration of this is provided by the
“Bermuda form” excess liability insurance. The Bermuda form policy requires
disputes to be resolved by arbitration in
London, England, according to UK law
(the procedural law) but provides for a
modified version of New York law in determining disputes arising under the policy (the substantive law). These modifications relate to, for instance:
„ Punitive damages, which, it is often argued, are uninsurable under the law of the
state of New York (as well as a number of
other US states) on grounds of public policy
(see box, Choice of law and forum selection: some general guidance). The Bermuda
form policy therefore includes a provision
expressly modifying the application of
New York law to enable the policyholder to
recover an indemnity for punitive damages.
„ The application of the UK Arbitration
Act 1996 to the arbitration procedure. The
Bermuda form policy provides that the parties waive their rights under the Act to apply
to the court for determination of any question of law arising in the proceedings (section 45) and any right of appeal to the English courts on a point of law (section 69).
In the UK and in the US, a valid arbitration
agreement will generally be enforced, although in the US the formal requirements
for the validity of such an agreement may
vary. There is a long line of US cases upholding arbitration clauses in international
contracts. In the UK, the Brussels Regulation provides that it does not apply to arbitration (Article 1(2)). Where the interpretation of the arbitration clause is subject to
UK law, it will be interpreted in accordance
with the provisions of the Arbitration Act,
which set out the requirements for the existence of a valid arbitration clause.
Jane Harte-Lovelace is head of the insurance coverage practice of
Kirkpatrick & Lockhart Nicholson Graham’s London office and
Thomas M Reiter is a partner in the Pittsburgh office of the firm.
Matthew E Smith is a senior associate in the London office of
Kirkpatrick & Lockhart Nicholson Graham.
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