Bermuda Solves Excess Liability Problem

BERMUDA-FORM EXCESS LIABILITY INSURANCE

As the name implies, excess liability insurance is designed to provide an additional layer of insurance over the primary or 'working' layers in a company's insurance programme. Bermuda has been one of the principal markets for this form of insurance since the global excess liability insurance market collapsed in the mid-1980s.

In response to this collapse, a number of Bermudian excess liability insurers were set up with capital from large US corporations including ACE and XL. The excess liability insurance policies written by these insurers still share a number of common features which are unique to this particular market and which are often described collectively as the 'Bermuda form'.

The typical Bermuda-form policy would be an umbrella policy covering a global corporate policyholder and its subsidiaries. It covers a policyholder's liability for damages on account of personal injury, property damage or advertising liability.

The Bermuda-form policies have high self-insured retentions (often at least $50m) but typically provide a layer of cover of $50m or more for each occurrence. They are often an essential part of the insurance programme for large corporate policyholders seeking to protect themselves against significant claims. The main forms currently in use are the XL-004, ACE 005 and SELIC-02 policies.

THE 'OCCURRENCE REPORTED' TRIGGER

The Bermuda-form policy contains a unique 'trigger' of coverage. The 'trigger' used in many forms of insurance (such as public or product liability insurance) is an 'occurrence-based' trigger. Under an occurrence-based policy, the cover provided by the policy is triggered, for example, by the happening of an injury or property damage within the policy period. This is to be contrasted with forms of insurance such as professional indemnity insurance, which use a claims-made trigger. For these types of policy, the crucial date is not the date when the loss occurs but the date the claim is made against the policyholder.

The trigger under the Bermuda-form is neither occurrence nor claims-made. Rather, in order to trigger the cover under a Bermuda-form policy, the injury or damage typically must have taken place after the specified retroactive date of the policy and the occurrence must have been notified to the insurer within the policy period (or any extended notification period) for coverage to be triggered.

INTEGRATION OF OCCURRENCES

Another key feature of the Bermuda-form policy is that it allows the policyholder to integrate related occurrences. This is particularly valuable to corporate policyholders faced with numerous small product liability claims of the same type.

As mentioned above, the self-insured retention on an excess liability policy is likely to be significant. It is quite possible that a policyholder could be faced with a large number of claims, none of which individually may be large enough to reach the attachment level of the policy but which, together, may run to many millions of pounds.

For example, one of the most significant categories of claims received by the Bermuda excess liability market related to defective breast implants, which leaked silicone and allegedly caused injuries to women. The amounts claimed by each of the women affected were considerably below the retention on the policy. However, by integrating (or 'batching') these claims into a single occurrence, the manufacturers of the implants were able to exceed the self-insured retention amount and obtain coverage for a large share of the claims liabilities.

Under the XL-004 form, the policyholder is entitled to (but is not obliged to) give notice of an integrated occurrence where there have been several incidents of personal injury, property damage or advertising liability attributable to the same event, defect or failure to warn. If the policyholder gives such a notice, any claims that have been received or may be received in the future attributable to that cause will fall within that integrated occurrence or batch and be treated as one claim under the policy.

The policy limits at the time of the notification apply to the whole batch, regardless of when claims are subsequently received. This is beneficial to the policyholder in allowing it to access the insured layers faster, but it also benefits the insurer because only one set of coverage limits is invoked in relation to all claims attributable to that integrated occurrence.

THE 'MAINTENANCE DEDUCTIBLE'

Both the XL-004 and ACE 005 forms contain an exclusion in relation to claims which were expected or intended by the policyholder. This exclusion is an expression of the principle that insurance is not available to cover losses that are not fortuitous. If a loss or damage is subjectively intended by the insured, it is not likely to be considered fortuitous. In the XL-004 form, the exclusion may be found within the definition of 'occurrence'.

The difficulty with this exclusion for many manufacturers is that a certain level of claims may be anticipated to arise from the use of a particular product. A pharmaceutical company, for example, might expect that one in every hundred thousand consumers who use a certain drug might have an adverse reaction, without knowing the specific consumers who will be so affected.

It would be unreasonable if this element of 'expectation' precluded a policyholder from claiming under the policy in circumstances where the reaction to the drug caused a much larger-than-expected number of claims.

It is for the reason that the 'expected or intended' exclusion has an exception (often described as the 'maintenance deductible') in relation to personal injury or property damage which is 'fundamentally different in nature' or 'at a level or rate vastly greater in order of magnitude' than the normal level of claims expected for a particular product.

FORUM AND CHOICE OF LAW

The standard XL-004 and ACE 005 forms provide that the forum for any disputes in relation to coverage is arbitration in London, England in accordance with English arbitration law (the procedural law), but applying a modified version of New York law (the substantive law) to the interpretation of the policy. For example, New York law is modified to allow (amongst other things) an indemnity in relation to a policyholder's liability to pay punitive damages. In addition, certain rules of insurance policy interpretation under New York law are overridden by language in these policy forms. The application of New York substantive law and English arbitration procedural law to resolve disputes under the policy typically requires a collaboration of lawyers from both the US and UK in the dispute resolution process.

BIOGRAPHY

Matthew Smith is a solicitor in the London office of international law firm Kirkpatrick & Lockhart Nicholson Graham LLP. His practice includes advising policyholders concerning placing a wide variety of insurance policies as well as handling coverage disputes with insurers.