Heresy, Drugs And The Bermuda Form

In AstraZeneca Insurance Company Limited v XL Insurance (Bermuda) Ltd & Anor1, XL Insurance and Ace Bermuda obtained judgment against AstraZeneca Insurance Company(AZ), AstraZeneca Group's captive insurer. The case is notable for two reasons: the English court analyses in detail the Bermuda Form and also resolves the question as to whether liability policies respond to actual or alleged legal liability.

Background

The case concerned AstraZeneca's drug “Seroquel”, an antipsychotic drug approved for the treatment of schizophrenia and bipolar disorder, which had been sold in the US and Canada since 1997. Litigation ensued in the US alleging that Seroquel was defective and caused personal injury. The majority of AstraZeneca's losses represented defence costs (US$786 million) as opposed to settlements (US$63.7 million). AZ indemnified AstraZeneca and then sought to recover defence costs of £83.5 million from reinsurers.

The issues that came before the English court for determination were:

1. Could New York law influence the interpretation of the insurance policy at issue, which was a variation of the well-known “Bermuda Form” wording, notwithstanding that it was expressly subject to English law?

2. Did AZ have to demonstrate that AstraZeneca was under an actual or alleged legal liability to the plaintiffs?

3. Were defence costs recoverable regardless of whether AstraZeneca was actually legally liable to the plaintiffs?

The Bermuda Form

This is the first time that the construction of the Bermuda Form has been considered by the English court, which is not surprising. An un-amended Bermuda Form policy provides for London arbitration, but is governed by New York law. The policy between AZ and AstraZeneca was however amended by endorsement, so that it was expressly subject to English law. The provision for arbitration was also waived.

AZ argued that it was market practice that the Bermuda Form (as usually governed by New York law) does not require the establishment of actual liability. Analleged liability will suffice. AZ asserted that the English court should be influenced by how the New York courts would approach the construction of the policy notwithstanding the endorsement to English law. Mr Justice Flaux described this approach asmisconceived and heretical. The parties must have intended their contract to be governed by English law as they had agreed to the endorsement. Flaux J therefore held thatNew York law plays no part in the construction of...