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Risky Business A U.S. and Bermuda Under 40s (Re)Insurance Collaboration Winter 2010 |
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Disputes between insurers in London, the US and Bermuda By Joanne Staphnill and Rachel Lawrie
Disputes between primary and excess layer insurers (or lead/follower disputes in subscription markets) arise quite frequently. For example, if the primary insurer mishandles the claim so that a settlement cannot be reached or the insured loss increases, excess layers may complain that the primary has increased their loss. If a primary insurer becomes insolvent, arguments may arise over whether excess layers have to ‘drop down’ to cover the void left in the insurance programme. Disputes can also arise over access to information, participation in settlement decisions and a host of other issues. There are significant differences in the laws governing such disputes in London, Bermuda and the US. As a result, where insurers in these jurisdictions participate on the same risk, complex disputes can arise. Joanne Staphnill and Rachel Lawrie consider whether a primary insurer owes a duty to excess layer carriers in order to highlight the differences between the jurisdictions, and comment on how insurers can seek to avoid becoming involved in a multi-jurisdiction inter-market dispute. The London market – law of England & Wales The most significant feature of the law of England & Wales is that there is almost no case-law on the legal relationship between primary and excess layer insurers on the same risk. This might be explained by the existence of an Ombudsman service for insurers that are members of Lloyd’s, and the tendency of insurers to resolve disputes between themselves as part of commercial negotiations. However, the problem remains that in England & Wales this area of law is undeveloped, which may be surprising to insurers from jurisdictions with well-developed case-law on this subject. There is some guidance available from analogous cases and English legal principles but the position as to whether the primary insurer owes a duty to excess layers remains relatively unregulated. Currently, the insured simply holds a number of separate insurance contracts with separate insurers in different layers, so there is no contract between the primary layer insurer and the excess layer insurers. Therefore, there is no duty of good faith between them, and the primary layer insurer is not a fiduciary in relation to the excess layer insurer, even though the subject matter of all the layers’ policies is the same. As a result, there is no duty on the primary insurer to consider the interests of the excess layers in relation to a claim or settlement. Similarly, there is no legal relationship that could require the primary insurer to share information or the results of its own investigations into a claim, or pass on any legal advice it has obtained. In practice, primary layer insurers do consider the interests of the excess layer insurers, to some extent, by sharing claims information etc. This is done to protect their reputation and commercial relationships in the market generally. However, there is no legal obligation between them that could require the primary insurer to do so, unless the primary layer deliberately and expressly takes on a responsibility for the excess layer’s interest. This is some possibility that the position could be different if it could be shown that a settlement was reached in bad faith or somehow in collusion with the other party to the settlement. However, it is not certain that even this would give rise to any duty to the excess layers, because the primary does not have any authority to reach a settlement binding on the other layers (unless one is expressly given), so any such purported settlement could be set aside. The primary layer insurance will sometimes have a clause giving the primary layer insurer the right to deal with the defence of any claim alone. Such a clause does not evidence any contractual relationship between the primary and excess layer. However, the excess layer insurer will have seen the primary layer insurance policy when writing the risk so that it may be estopped from later alleging that it should be consulted over claims, even if the excess layer policies do not contain a matching clause. Unless the primary’s claims control clause explicitly states that the primary can bind excess layers to a settlement (which would be unusual, and could give rise to a duty towards the excess layers), the primary layer does not automatically have authority to agree to settle a claim at a level that would impact on the other layers. However, if an ad hoc arrangement is agreed between the various layers to deal with a particular claim, such as a steering or claims committee, an agency relationship may arise between the layers so that one insurer could potentially have the authority to bind others, and owe duties to the others to settle claims competently. Bermuda The legal position appears to be almost identical to that in England & Wales. US Jurisdictions By contrast with England & Wales and Bermuda, the case-law in a number of US jurisdictions is much more developed and settled on the question of whether the primary layer owes the excess layer any duty. For example, in New York, in cases such as Hartford Accident and Indemnity Co v Commercial Union Insurance Co, 772S SUPP741(EDNY,1991- Liability) the courts have constructed a reason why the primary insurer has to consider the interests of the excess insurer, and has even gone so far as to impose a "fiduciary" obligation which is quite onerous. It seems that in Michigan the duty is much reduced, and seems to be merely a duty to allow the excess layer insurer information and an opportunity to be involved rather than a full "fiduciary" duty or a duty to negotiate settlements with the insured in good faith. In Illinois, in the case Certain Underwriters at Lloyds London and companies in interest v Fidelity and Casualty Insurance Company of New York, the court commented that "The Primary Carrier owed no greater duty to an excess carrier than the Primary Carrier owed to his Insured. If the insured did not have a cause of action against the Primary Insurer, then the Excess Insurer was also precluded from bringing a bad faith claim against the Primary Carrier." The result of this is that in many US states, insurers have the benefit of settled case law to give clarity about the extent of the duties that exist between them. Disputes between insurers in different jurisdictions It is very common for insurers in London, the US and Bermuda (as well as other jurisdictions) to participate in different layers of the same risk. However, as summarized above, there are significant differences in each jurisdiction in the legal relationship between insurers. It is important to remember that, as a result, the different insurers could easily have very different understandings and expectations of the relationship between them. If a large claim arises that could impact on a number of layers, it can often benefit the whole market to discuss the claim to find best way to go about investigating, settling or defending it. There can often be differences of opinion between insurers about the best course to adopt, although these do not usually develop into a significant dispute. However, it is worthwhile bearing in mind the different perspectives of the parties involved. A London insurer would not expect that he or she was under any obligation to share information about the claim. However, a Michigan insurer might consider that he or she was entitled to that information, and commercial friction and delay might start to arise as a result of the misunderstanding between them. Much more serious problems can arise if a primary layer handles a claim in such a way that the loss is not minimized or even increases. For example if a primary layer took too long to consider a claim under a business interruption policy for a very large business, the delay itself could increase the loss suffered by the insured and thereby increase the size of the insurance claim so that it impacts more heavily on excess layers. If there was no bad faith involved, a London insurer would not expect there to be any right of redress by the excess layers against the primary, whereas a New York insurer on the same risk would expect to be able to bring a claim against the primary. In such a situation, there could be real difficulties in establishing what law applied to the situation, especially as most insurers cannot predict who else will participate in a risk at the time of writing. Complex multi-jurisdiction litigation could easily result that could be very costly and time-consuming to resolve. It is worthwhile bearing all these issues in mind when dealing with insurers in other jurisdictions on existing risks, to help prevent misunderstandings causing delay and damage to commercial relationships. However, there are potentially serious consequences if insurers do not consider at the outset what should happen in the event of an inter-market dispute. Accordingly, consideration should be given at the time of writing the risk to recording (for example in a side letter) which law and jurisdiction should govern the relationship between the insurers themselves and how any disputes should be resolved.
About the Authors: Joanne Staphnill is a solicitor in Robin Simon LLP’s London office, where she practices in policy coverage and insurance/reinsurance law, including reinsurance arbitrations. She has been noted in the Legal 500 as "well regarded" for insurance and reinsurance litigation. She also undertakes professional indemnity defence work for a variety of professions, but particularly solicitors and insurance brokers. Rachel Lawrie is a solicitor in Robin Simon LLP’s London office, where she practices in insurance/reinsurance law and undertakes professional indemnity defence work for solicitors and barristers. Rachel is also admitted to practise in New York. If you have any questions, you can contact Joanne at joanne.staphnill@robinsimonllp.com, +44 (0)333 010 28 or Rachel at Rachel.lawrie@robinsimonllp.com, +44 (0)333 010 2804. Robin Simon LLP is a specialist insurance law firm, with a national presence in the UK and an international reach. Please visit their website. |
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Winter 2010 Articles: · Bermuda Under 40s – 2009 Year in Review · U.S. Re Under 40s Group – What’s happening? · Lloyd’s Non-Marine Under 30’s Group: 2009 Bermuda and US Study Tour · Broker and Customer Portals for the Reinsurance Industry – Let’s Transact! · Disputes between insurers in London, the US and Bermuda · House of Lords considers 'back to back' reinsurance |
