Navigating the Bermuda Form

Most large U.S. companies buy catastrophic liability insurance through a Bermuda Form, a unique policy with many features designed to protect the selling insurance company. Further, Bermuda Forms require arbitration in London or Bermuda, under English procedural law and modified New York substantive law. John Ellison, Richard Lewis and Catherine Lewis explore how best to incorporate the Bermuda Form into policy programs, as well as the unusual hurdles to recovering under the Bermuda Form.

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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 policy holders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist. 

John: Hi, everybody, and welcome back to Insured Success. our continuing podcast series of important insurance topics. And today's topic is the Bermuda Form Part 1. This will be part of a two-part series we're going to do on this unique insurance product. And today's focus will be on the history behind the Bermuda Form and its development, and then some of the key policy terms. And then in our next episode, which will be coming out shortly, we will discuss how to perfect coverage under the Bermuda Form and issues relating to the unique dispute resolution provisions that are in the form. Today, our presenters are going to be my colleagues, Rich Lewis, who's a partner in the New York office, and Catherine Lewis, who is a senior associate in our London office, and I am John Ellison, a partner in the Philadelphia office. The three of us work together often on these Bermuda Form matters, as do many members, other members of our group. And due to our firm's geographic setup, depicted today by Catherine in London and Rich in New York, you'll learn that our firm is uniquely qualified and situated to handle these types of issues. So, Rich, I'm going to turn it over to you to give us some of the history and overview of the Bermuda Form. Rich. 

Richard: Okay. Well, I don't know, obviously, our listeners' experience with coverage disputes, but policyholders in the 70s and 80s started buying a lot of liability insurance, and that had to do with developments in tort law in the United States. And if you've ever been involved in a case involving those policies, they typically were occurrence forms triggered by injury or damage in the policy period. And the coverage charts, as you got later in the 70s and through the 1980s looked like ski jumps. Companies were buying hundreds of millions of dollars of insurance in the late 70s and the early 80s. This also, as I'm old enough to remember, accelerated a lot in the early 80s because of the high interest rates that insurance companies could get. It was something called cash flow underwriting, where they would underwrite lots and lots of policies just to get the premiums in to invest the income. The bill came due in the mid-80s for a couple of reasons. One, there were a number of coverage decisions in the asbestos context that said that multiple policies could be triggered by the same injury to one person. So that meant that in an asbestos case, many, many years of coverage from the early 60s through the time when asbestos exclusions were more common in the early 80s could be triggered. The second reason was circled liabilities from environmental cases. And as a result, everybody was recovering under these policies that had been sold for not very much premium so that the carriers could get the money in the door. And what happened was the liability insurance market crashed. You literally could not buy liability insurance from any of the major players in 1985. So what happened was a number of Fortune 50 companies got together with Marsh & McLennan and they created a Bermuda form company called ACE. And that started in 1985 and it would, it, it, provided liability insurance above $100 million. So true catastrophe liability coverage. And as Catherine will discuss, the core development of the Bermuda form as introduced and rolled out with ACE in 1985, and then another company, XL in 1986, was that it confined coverage to one year. So carriers weren't being held liable for years and years of coverage when they sold decades of coverage to somebody. The second part of the Bermuda form, which we will also talk about, is it allowed policyholders triggering that one year to spike their coverage all the way up a Bermuda form tower. And now I'm turning it back to Catherine. 

Catherine: So as Rich said, the North American market policies were often written on an occurrence basis, and the Bermuda form is a departure from this. So for occurrence-based policies, their coverage is triggered on the occurrence of some event, for instance, when the bodily injury was suffered or the property damage occurred. And the other type of policy we're all familiar with is a claims-made policy. And this is one where the policy response is linked to the time at which the claim is first made by the underlying plaintiff. And it is the time of the claim made against the policyholder and not the time at which the underlying injury or damage occurs that triggers the policy response. And subsequent acts or omissions by the policyholder might affect the cover available, but the link of the policy to the underlying injury or damage is the time at which the claim is made. The Bermuda form is what's called an occurrence first reported form. And as the name suggests, it's a hybrid of the two. For an occurrence first reported form, it's the report of the occurrence to the insurers that triggers cover and the crucial report or notice is the first notice of such occurrence and the wording of the policy which we will come on to is such that notice is a mandatory condition to cover. 

Richard: Which leads us into our next topic, which has always been a funny one for me, that when the forms were first rolled out in 85 and 86, as we will talk about later, and they're still controlled by New York law, but they also have a provision that says that the only thing you can look at is the policy language. You can't look at it in extrinsic evidence if something is ambiguous. The problem that the Bermuda Form Company soon discovered in ’85 and ’86 was that New York law was a, with regard to notice was a no prejudice state, meaning a carrier did not need to show that they were prejudiced by late notice to escape payment. And so policyholders recognizing New York law controlled ended up flooding Bermuda form companies with notice of every little claim because they didn't want to get poured out. So what ACE and XL did is they generated these things called notice guidelines that said essentially only give us notice of events that are likely to impact our layer, which I've always been amazed at the cheek of the insurance company, the Bermuda form companies to do that. Because if there is one body of people who are unlikely to look at something extrinsic to the policy, especially when the Bermuda form forbids you from looking at extrinsic evidence, it's the English barristers who are going to be on your panel. But anyway, it's now accepted that New York law has since changed. It's now accepted that you You only need to give timely notice of events that are likely to impact the policy. The next issue we're gonna talk about is batching and integration. Batching and integration, as I hinted before, is it's the flip side of the fact that only one policy period is triggered by a notice of an occurrence. What you can do under a Bermuda form policy is you can give notice of an integrated occurrence by designating a bunch of injuries as being related to an integrated occurrence or being related to each other. What that does is it pulls all of the injuries, regardless of the year in which they occurred, and regardless of the fact that you may have given notice in a previous annual period of an injury from a related occurrence as a separate occurrence. It pulls all of the injuries into the year in which you give notice of an integrated occurrence. There are some questions that will arise that we'll talk about in part two as to what happens if some of the injuries in your integrated occurrence happen before you bought the policy or what you do with regard to injuries that continue to occur after you give notice of an integrated occurrence. We'll talk about some of the devices that address that latter issue later. But what you need to know about an integrated occurrence is it's different from the ordinary common law concept of one occurrence and how you determine whether there's one occurrence or multiple occurrences. New York law on that is terrible. It doesn't bunch related injuries into one occurrence necessarily. And, Also, it's important under the Bermuda form that injuries that occur more than 30 days apart are deemed to have been caused by separate occurrences. So you have to be very aware of whether injuries that are caused by a common event or a common drug, whether you're going to aggregate them when you give notice of them. 

John: So now let's come on to some of the specifics of the Bermuda form and kind of the basic coverage grant and coverage provisions. Provisions as Rich and Catherine were explaining this policy form has largely become a substitute for the what we call the historic occurrence forms and so in in that sense it it largely covers the same types of claims that a policyholder may face which are ones that allege either personal injuries or property damage or some type of advertising liability but within that broad scope, there are some unique concepts that differentiate the Bermuda Form from the old occurrence forms. And Catherine, let me pass it to you to start to walk through some of those. 

Catherine: All right. So the Bermuda Form is, at its basic level, an insurance against legal liability. This is set out in the coverage clause. A policyholder must prove an ultimate net loss. This is obviously most easily satisfied by amounts that the policyholder has actually paid. There must be a legal liability to pay the ultimate net loss. That legal liability term is not defined and is therefore a matter for the governing law. It must also be in respect of damages, which is a defined term. Those damages must be on account of personal injury, property damage or advertising liability, as John said. The definition of damages is restricted to those which the policyholder is obligated to pay by reason of judgment or settlement for liability. As you can imagine, this is potentially challenging for policyholders where there is a commercial settlement and no liability. The final limb of the coverage clause is that the liability is encompassed by an occurrence, which we will come on to in a bit more detail shortly. But I guess the key takeaway from this sort of coverage clause is that the key to two, unlocking cover is actual liability. How that liability is established is a matter of New York law, which we can come on to and will depend, of course, on the particular facts at issue. 

John: And we will dive into this a little more deeply in phase two of our Bermuda Form podcast. But one of the big differences between New York law and English law, for example, is what needs to be demonstrated by the policyholder to establish legal liability that would be covered by the policy. And fortunately for policyholders that buy the Bermuda Form, New York law does not require actual liability to be established in order to trigger the coverage. but we'll dive into that a lot more deeply in the next go-round. But Catherine, why don't you take us back then into some of the details of occurrence and how that works under the policy? 

Catherine: Sure. Thanks, John. So we discussed already at a high level that the Bermuda Form is an occurrence first reported form, and the occurrence definition is therefore pretty important. It's also fair to say that it's a pretty complex definition, and it's performing a number of functions. And certainly in our experience, as a consequence of that, it can lead to certain coverage debates. But just taking a step back, the definition of occurrence seeks to achieve a number of things. It fixes the temporal limit of cover. And by that, I mean whether the policy responds to historic issues and how far it's forward looking. The definition also contains aggregation language and the extent to which claims can form a single loss. The definition defines the types of losses or the ensured perils. And finally, it deals with issues of intentional harm and fortuity. And I think Richard's going to come on to that in a moment. And so part of the complexity also stems from the broad type of harm that the policy is intended to respond to. And that includes where the actual harm has occurred or where it's only alleged. The policy can also respond to cases where there is injury of a prolonged period of time or where there's a single catastrophic event. And there will also be cases where liability is alleged but never proven and where the underlying facts might be disputed. So a fairly complex structure in that sense and the definition is rather than assessed in two limbs. The first limb applies to anything other than product liability claims and the second part applies only to product liability claims. Taking the first limb there must be an event or continuous intermittent or repeated exposure to conditions which event or conditions commence on or subsequent to the inception date and before the termination date which cause actual or alleged personal injury, property damage or advertising liability. And the second limb responds to actual or alleged personal injury to any individual person or actual or alleged property damage to any specific property arising from the insured's products that takes place on or subsequent to the inception date and before the termination date. Both limbs therefore require an actual or alleged personal injury, ] each as defined in the policy and for the product liability claims so limb two that injury or damage must simply arise from the products and there is no further qualification about how that injury should arise. The first limb which is anything other than product liability claims is on its face at least more specific as to how the injury damage or liability is said to occur as it seemingly requires a more concrete causal link to the event that said there is a reference obviously to alleged which suggests that the first limb does capture alleged injuries suffered even when none on the facts were so suffered. We discussed at the start of the podcast the difference between claims made occurrence-based and occurrence-first reported policy forms and it is in this definition of occurrence that distinction becomes very clear between the types of policy forms. It is in the definition that the timing of the occurrence is relevant and we can discuss in more detail the timing of when a claim is made when we discuss notice provisions later on and again in part two. 

John: Yeah, and just to add one brief comment, Catherine, to your remarks, this is definitely one of the tricky areas of the Bermuda Form and it really is important when it comes to the point at which you're making a claim because often there are challenges from insurance companies about the scope of the occurrence or what falls within an occurrence that is noticed by a policy holder. So framing the occurrence and tying it to the specifics of the insuring agreement that Catherine just walked through is really critical. But we will, as Catherine said, we'll come back to that in a lot more detail in part two of this podcast. But now to make things even more complicated, Catherine, why don't we segue here into the integrated occurrence concept where we talk about how, you know, how we pull what would normally be considered a bunch of separate occurrences potentially under New York law into one giant integrated occurrence. How does that work? 

Catherine: Thanks, John. And you're right, it just takes the complexity to another level, perhaps. And Rich touched on this earlier. But treating multiple losses as a single occurrence is a key feature of the Bermuda Form policy. The integrated occurrence language is not interchangeable with traditional aggregation language, but it is related. And parties to complex insurance programs generally will be well aware of the coverage disputes that can arise about the extent to which underlying claims are to be treated as a single claim for the purposes of the policy response and accessing limits of liability. So an occurrence under a Bermuda Form policy can be included in an integrated occurrence where there is an occurrence which we've discussed encompassing personal injury, property damage or advertising liability to two or more persons or properties commencing over, first, a period longer than 30 consecutive days, and second, attributable to the same event, condition, cause, defect, hazard, and or failure to warn of such. Quite a mouthful. To take full advantage of the integrated occurrence wording, the noter should be specific that the occurrence is an integrated occurrence. So if the aggregation is permitted under the language, then one looks to the aggregating language in the cause. This is very broadly drafted and requires only that the injury or damage is attributable directly, indirectly, or allegedly to the same actual or alleged event, condition, cause, defect, etc. So the question isn't what the injury or damage is, but what caused the injury or damage. And this broad aggregation language can enable a policyholder to aggregate a wide number of claims to take advantage of the full limits of liability and pay only a single deductible. And a fundamental issue that we see arising out of integration occurrences under the reform is whether the cause or defect is the same. 

John: And again, just to reiterate, because this cannot be overstated or said often enough, These terms, occurrence and integrated occurrence, are critical to understand when presenting your claim to the insurance company so that the description of it is framed properly and as broadly as possible to encompass as much of the risk and the loss that the policyholder is facing. Fall within the scope of the claim that is being presented. Again, we're going to come back to this a lot in phase two of the podcast. But Rich, why don't we turn to some other issues that arise under the form that have some unique aspects, especially under New York law? 

Richard: Well, the Bermuda Form states flatly that any injury, actual or alleged injury that is expected or intended will not be part of an occurrence. And this is a common issue that has arisen in New York law for decades. And New York law couldn't be better if I'd written it myself. Essentially, there's an old learned hand case where he said, you can drive around New York running every red light and know that eventually you will get in a crash, but the specific crash you get in won't be expected by you. And that's essentially the standard in New York. You have to to specifically intend, the policyholder has to specifically intend to intend the injury to the specific person to which the injury is actually or allegedly occurs. Whose knowledge is it? Well, ordinarily under New York law, it would be a member of the control group. One thing that has arisen in a couple of our Bermuda Form cases recently is that in the later versions of these Bermuda Forms, and we're on version four for XL and version five for ACE, the carriers changed expectation or intent of the insured to expectation or intent of an insured. And that can be an issue. We had a case a while ago in which that involved unnecessary surgeries. And the issue is whether the hospital expected or intended the injuries to the patients. But, you know, The carrier argued, well, obviously the surgeons did, and the surgeons are uninsured. And we had to litigate the issue of whether the surgeons were essentially on a frolic and detour or their actions were not attributable to the insured being the hospital. Yeah. The question of whether it's a subjective or an objective intent, this comes up almost in every case. Obviously, the policyholder will say, well, it can't be objective because an objective intent is just negligence and liability policies are supposed to cover negligence, so it has to be subjectively intended by the insured. Then the issue arises sometimes of the timing of the determination and the policyholder will say, well, the timing of the determination has to be the first day that I bought Bermuda Form coverage because technically Bermuda Form policies are a single policy that's renewed from annual period to annual period. What the carriers will say is that it's a rolling inquiry, especially like in a drug case where you continue to sell a drug and it continues to, you know, there are minor levels of injury, and then there's a great deal of injury. Carriers will say at some point on this rolling inquiry, you expected or intended injury from the drug if you continue to sell it. Another issue is what's called a maintenance deductible. That is a mechanism in the Bermuda Form that recognizes that a policyholder that sells drugs or sells toasters will inevitably. Have injuries every year from that product if they sell a bunch of them. And so what the maintenance deductible says is, you know, the ordinary level of injuries caused by your product, won't cause an eventual spike in injuries in a particular year to be deemed to be expected or intended, just that the policyholder will have to eat a maintenance deductible of essentially the noise level of claims. The final issue is what have been in since I think the third ACE version, which is a commercial risk exclusion, or actually XL4 and ACE5, I think. And the commercial risk exclusion deems injuries from a product to be expected or intended if those products are released into the market after notice of an integrated occurrence. It does accept injuries that are vastly greater, vastly different or that are different or vastly greater in magnitude by order of magnitude. And ordinarily the carriers say that means 10 times as big. Back to Catherine for some exclusionals. 

Catherine: I’m going to talk briefly about the known occurrence exclusion. And this goes to the issues of fortuity and the fact that the issue must be unexpected and unintentional. So there's no express exclusion in the standard form that mentions fortuity or known loss or known risk and one argument for the rationale for that is that those purchasing insurance and this type of insurance in particular do so because they expect an element of risk or loss and provided that remains uncertainty as to the type and level of loss it will not offend the fortuity principle. As always and as Rich said earlier the timing of the increasing claims or or awareness of the potential claims and the potential loss, is an area that we see being challenged by insurers. All that said, there is a known occurrence exclusion endorsement which provides as a condition precedent that a policyholder was not aware of such occurrence prior to the date specified within the endorsement. And very similar to other discovery type provisions, this then requires an analysis of the knowledge of the relevant directors, officers or managers in risk management, insurance or legal departments and to establish who was aware of an occurrence and when. This type of wording or exclusion is not a particularly unusual concept and is intended to ensure that notices are made to the proper year and that policyholders with this wording we would always remind them of the importance of making any notifications prior to renewal. And I think Rich is going to pick up on some of the other exclusions in the policy. 

Richard: I’m going to talk about two other types of exclusions that will preview a little bit of the second podcast. The first is what is labeled the securities, antitrust, etc. Exclusion, which seems pretty harmless, but it has a free-floating term in there of fraud. And I've seen it pled in almost every Bermuda Form case I've been involved that some part of the injury is due to fraud because almost every complaint, tort complaint, will allege fraud. This is not usually a terrible issue for reasons we'll get to in the second broadcast, but essentially under New York law, there can be an allocation of what you settle or an allocation of any judgment and very little of what policyholders end up paying even in a complaint that alleges fraud is due to fraud. The second issue is what I'll call laser exclusions. And you'll see these exclusions appended to the policy form as, again, it is just renewed from annual period to annual period. And what will happen is the Bermuda Form carriers will see a number of their policyholders making claims for a particular type of thing, whether it be asbestos, silica, or MTBE back in the day, and they will add a laser exclusion for the renewal. Which just means that your insurance department has to be on its toes. And when you are renewing and a laser exclusion is being added, you're going to have to give notice of an integrated occurrence under the expiring policy form if you have those types of exposures. 

Catherine: Great. Thanks, Rich. We're going to talk a little bit now about the law of construction, which we discussed briefly earlier, and regarding the interpretation of the Bermuda Form. And this is where things get quite interesting for practitioners and potentially quite complicated for policyholders. The form is unique in terms of the applicable law. It is to be construed in accordance with New York law. However, the general principles of New York law are modified. So for instance the recovery of punitive damages may be prohibited. The biggest challenge however is the modification insofar as the construction and interpretation of the policy is concerned. The policy does not introduce a different system of law for construction for instance English law but seeks to modify the principles of New York law. I'll hand over to John and Rich very shortly as there will be very few people on the planet who know more about this than them but I wanted to highlight a few points to note. So firstly, the policy is to be construed in an even-handed fashion, and that includes in cases of ambiguity, and so therefore it disapplies the principle of contra proferentum. And there's also to be no reference to the reasonable expectations of either party, any reference to parole or other extrinsic evidence when it comes to interpretation. And finally, to the extent that New York law is rendered inapplicable by virtue of the points I I just mentioned, then English law applies. 

Richard: Yeah the one thing I will raise on this, and maybe John wants to talk to it too, is that this can be a huge thing. John and I had a case involving an unusual exposure that the carrier said was barred by a pollution exclusion, and it didn't involve traditional environmental exclusion. And John and I had collected all these cases, and the case law couldn't have been better for us that unusual exposures that aren't traditional pollution are not barred by a pollution exclusion. And on the first day of the hearing, the panel said, well, yeah, those are all right out because they all mention ambiguity as a backup reason. And so it can be a hugely impactful thing, the manner of the construction provision and the Bermuda Form policy. 

John: What I will say is that that is not the right conclusion that should be drawn on how New York law should be applied and interpreted in these arbitrations, that is an argument the insurers are likely to raise. But I think it's fair to say that other panels have not gone the way as the one that Rich just mentioned. And just because a New York case happens to mention ambiguity doesn't mean it should be thrown out the window for all purposes. But we're going to come back to this a lot in phase two. So let's leave that there for the moment. But what I think this does amount to, especially for a U.S. Company, is that you really need to look at these claims and any disputes that arise about the claims in a different manner because the arbitration becomes much more of an English law exercise in some respects because you're not able to introduce things that you routinely introduce in a U.S. Litigation like parole evidence or other types of information that might inform the court's interpretation of the policy, you really need to take the policy as it's written and argue from that as you would in an English court. And that's where the barristers come in, you know, and we often work closely with them in crafting our arguments because coming at it from a U.S. perspective is helpful, but it then needs to be translated, so to speak, using air quotes around translated, into the English version of what New York law is. And that really requires cross-ocean effort to get the message presented in the best way possible. And as I just mentioned, the dispute resolution procedure here is arbitration before three arbitrators, typically in London, but sometimes in Bermuda or Toronto. And we're going to get into a lot more detail on that in the Bermuda Form Part 2, which will be coming out shortly. But we thank you all for listening to us today. Any of us are available to answer any questions by email or otherwise. And we hope you join us again for the next Insured Success Podcast, Bermuda Form Part 2. 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 insuredsuccess@reedsmith.com. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

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