The Court of Appeal has recently handed down judgment in AstraZeneca Insurance Company Ltd v XL Insurance (Bermuda) Ltd and Another  EWCA Civ 1660, reaffirming the first instance decision that liability insurance provides indemnity against actual established liability, as opposed to mere allegations, in the absence of clear policy wording to the contrary.
AstraZeneca (‘AZ’) is a global pharmaceutical group which manufactured and sold the antipsychotic drug, ‘Seroquel.’ AZ’s captive insurer provided cover pursuant to a Bermuda form liability insurance policy amended by endorsement to be governed by English law.
In August 2003, a class action was filed against AZ in respect of Seroquel. By October 2012, AZ’s captive had paid claims presented by AZ in respect of defence costs and settlement sums, and sought to recover defence costs of £83.5million under reinsurance policies with the defendants.
The issues for determination were as follows:
Could New York law and practice influence interpretation of the insurance policy?
Was it necessary to demonstrate AZ would have been actually liable in respect of the underlying claims, to obtain indemnity for paid settlement sums and defence costs?
At first instance, Mr. Justice Flaux concluded that AZ had to prove that it would have been actually liable to a third party claimant in order to recover any amounts paid in settlement or defence costs.
Although the standard Bermuda Form policy is typically subject to New York law and provides for arbitration in England, the judge was not prepared to give any weight to New York authorities in this case given the clear policy wording on jurisdiction. The requirement to prove actual liability is a well established principle in English law, unless the policy provides otherwise, and it was necessary therefore for AZ to show that underlying claims would have succeeded on the balance of probabilities.
Further, the judge ruled that absent express policy language, legal liability cannot be assumed from a settlement or even judgment. Whilst a judgment against the insured may in practice be treated as conclusive proof of liability, it is always open to insurers to challenge the underlying decision in response to an indemnity claim by the insured.
The Court of Appeal unanimously rejected AZ’s appeal, upholding the Commercial Court decision in full. Although there is no general right to recover defence costs under liability insurance policies governed by English law, the Court of Appeal found that defence costs were recoverable on a purposive interpretation of the policy in this case, subject to the requirement to prove actual legal liability in relation to the underlying defended claim
The Court of Appeal acknowledged that its application of English law resulted in a policy interpretation that was highly unfavourable to AZ and the requirement to prove actual liability is potentially very inconvenient for policyholders. By contrast, in the United States a policyholder that chooses to settle to avoid potentially disproportionate litigation costs and to mitigate the risk of an adverse judgment would expect to be indemnified under a standard liability insurance policy, on the basis that alleged liability would suffice.
The decision makes clear, however, that parties are at liberty to contract out of these strict requirements using sufficiently clear policy wording, for example by obtaining cover which insures against claims made, or judgments given, or against occurrences. In the reinsurance context, the development of follow the settlements clauses alleviates the cedant’s burden of proof, requiring the insured to establish only that the loss “as settled” falls within the terms of the reinsurance (assuming a settlement is reasonable and the insured has acted in a business-like manner), thereby preventing a reinsurer from reopening underlying decisions.
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