Academic journal article Defense Counsel Journal

The U.S. Corporate Defendant's Captive Insurer's Dilemma: Third Party Liability Claims and Recovery under English Law

Academic journal article Defense Counsel Journal

The U.S. Corporate Defendant's Captive Insurer's Dilemma: Third Party Liability Claims and Recovery under English Law

Article excerpt

IT HAS BEEN said that Great Britain and the United States are two nations separated by a common language. They might also be compared as two jurisdictions separated by a common law. A recent illustration of the divergence in legal analysis on the other side of the pond is provided by a series of English decisions which place defendants facing large product liability and other third party claims in the U.S. in an invidious position when they seek to be indemnified for commercially prudent settlements of those claims from insurers who in turn look to reinsurers for payment.

The manufacturer of a product that has not been withdrawn will typically defend product liability lawsuits vigorously, and any settlements that the manufacturer enters will naturally be without any admission of liability. The manufacturer may have good reason to believe that it was not liable and that it is settling on the basis of a well-founded fear of adverse jury awards that may not be overturned on appeal. The manufacturer will, in those circumstances, expect its product liability insurers to pay the settlement, provided of course that the settlement was reasonable considering the potential exposure. Let us suppose the insurer, who faces the prospect of a coverage law suit in the U.S. which he is advised he will lose, agrees to pay the claim.

The insurer may well be a "captive" wholly-owned by the manufacturer/ policyholder. Let us assume that the captive has received independent advice and acts as a commercial insurer. In the case of any large claim upon a captive insurer, a substantial part of its liability will be reinsured. It is likely that these reinsurers are located in either London or Bermuda. It will come as an unpleasant surprise to both the captive and its parent to find that, after having settled the loss, when they come to London to collect from their reinsurers, they will likely be met with a response like the following: We are not obliged to pay unless you prove that the manufacturer/policyholder was under a legal liability. A reasonable settlement based on a well founded fear of a large adverse jury verdict does not prove that the manufacturer/policyholder was under a legal liability. An English judge isn't interested in predictions of what a U.S. jury would have done and whether such a verdict (no matter how perverse) was likely to be sustained on appeal. You have to prove to the English judge as the trier of fact that, based upon the evidence and the relevant U.S. law as explained to him or her by experts, the manufacturer/policyholder was indeed liable.

This state of affairs will strike many U.S. lawyers as bizarre, yet it represents the current state of English law. We discuss the recent cases below and argue that they represent a departure from commercial common sense which has always been the hallmark of English common law since the days of Lord Mansfield. We suggest that the English Court of Appeal and the House of Lords should look again at the relationship between insurance and reinsurance and construe the, admittedly arcane, language of reinsurance contracts in a way that reflects the commercial expectation of the parties. We suggest that Bermuda courts should also make this shift.

Follow the Settlements

The case of Chippendale v. Holt (1) is an example of an early dispute over contracts of reinsurance in the English courts. The case was concerned with a preliminary issue between a reinsured and its retrocessionaire regarding what the reinsured had to prove to recover from the reinsurer. The reinsurance contract provided that the reinsurer was obliged, "to pay as may be paid thereon." It was common understanding of underwriters in the nineteenth century that this language required the reinsurer, "to pay without further inquiry any claim honestly paid by the [original] insurer. (2) However, the Commercial Court held the reinsured had to show that the claim for which he sought indemnity was indeed covered under the contract; it was not sufficient to simply demonstrate that payment had been made in good faith under the original contract. …

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