Tracing origins of a unique policy provision

The arbitration provision in the Bermuda insurance policy form dates back to the liability crisis of the mid-1980s and the creation of ACE Ltd. and XL Capital Ltd.

Both companies were established to provide much needed capacity for large policyholders.

The architects of the insurers determined that a clear method of resolving disputes between the Bermuda-based companies and their U.S. policyholders was necessary. And binding arbitration in London following New York law was the best way to achieve that, they say.

"The intent was to have the arbitration provision be truly binding for all parties. We had legal advice at the time that said the greatest certainty of a truly binding outcome would be achieved by using a U.K. domicile," said Robert Clements, chairman of New York-based brokerage Integro Ltd. in an e-mail. Mr. Clements played a key role in forming both ACE Ltd. and XL Capital Ltd. when he was a senior executive at Marsh & McLennan Cos. Inc. He has also helped formed other insurers and reinsurers in Bermuda.

In addition, the dispute resolution clause was intended to make the policy form fair to all parties involved, said Thorn Rosenthal, a partner with Cahill Gordon & Reindel L.L.P., and a drafter of the initial Bermuda form.

"London arbitration gives very rational results," Mr. Rosenthal said. "They have an ethics consideration that they all have to be neutral."

And that has proved to be the case in the years since the form was first introduced, he said. "In the past 20 years, we have found that the results have been rational, and they have been mixed."

The provision that New York law should apply was included because "New York is the financial capital of the U.S. and arguably the world," and "we thought that New York law is probably the best developed in commercial areas and is perceived to be very fair."

"The important thing was that we chose a law" so parties don't waste time finding a state law under which arguments should be heard, said Mr. Rosenthal.

But, policyholder attorneys say the provision is a disadvantage for insurance buyers.

"New York law is very Draconian, and somewhat pro-insurance company on a lot of issues," said Ed Joyce, a policyholder attorney with Heller Ehrman L.L.C. in New York.

New York law is strict on denying coverage for late notice of claims, and bad faith damages stemming from insurance company misconduct are rarely available to policyholders, policyholder attorneys say.

"Most policyholders have no idea what it means to have a New York choice of law provision" in arbitration, said Joshua Gold, New York-based attorney and shareholder with Anderson Kill & Olick, who says it is "very much a disadvantage in almost all instances" for buyers.