Got a Bermuda policy? Check the fine print

As a growing number of insurers make Bermuda home, more policyholders may want to get acquainted with arbitration provisions in the policies issued by the insurers.

Policyholder attorneys say the provisions--which generally require coverage disputes to be heard before a London-based panel of arbitrators following New York law--make it harder for buyers to prevail in insurance disputes.

Among the biggest drawbacks to the arbitration provision, they say, is that policyholders must waive their right to a jury trial and appeals process. In addition, the dispute resolution process in London is expensive and inconvenient. Furthermore, they say, many buyers don't fully grasp the possible ramifications of such clauses.

Some risk managers say the provision is one downside to buying coverage in Bermuda, though that can be far outweighed by the benefits of buying coverage on the island.

Bermuda insurers, meanwhile, argue the provision is a fair, longstanding and well-known feature of their policies. Such London-based arbitration proceedings with clients are few and far between--used only as a last-resort means of dispute resolution, they say.

And when the negotiations do take place, the confidential nature of the arbitrations can help to protect policyholders' reputations, insurers say.

Insurers in Bermuda have long included a provision in policies requiring any coverage disputes to be resolved through London arbitration with New York choice of law. The provision was intended to curtail protracted coverage disputes, among other things (see story, page 20).

When ACE Ltd. and XL Capital Ltd. set up on the island in the mid-1980s, they became the first to use the policy template known as "the Bermuda Form." The number of companies in Bermuda that write primary insurance has grown over the past several years, and all new market entrants use the arbitration clause, observers say.

At least 16 companies on the island now write direct property/casualty or financial lines coverage.

The Bermuda Form is contained only in policies issued by Bermuda-incorporated insurers, and not policies written by their subsidiaries in the United States or elsewhere.

Typically, the venue for the arbitration proceedings is London, though in certain cases they have taken place on the island.

"The initial thought process was that arbitration would significantly reduce the cost and time it would take to resolve a dispute," said Michael D. Fisher, a managing director and Bermuda operations leader for New York-based insurance brokerage Integro Ltd.

"Although the insured isn't having access to a jury, he does very much have the right to choose his arbitrator," Mr. Fisher said.

Under the arbitration clause, each party chooses an arbitrator, and the arbitrators in turn choose another arbitrator to form a panel of three.

"Arbitrations afford all parties to a commercial insurance contract an efficient way to handle disputes," said Bradley L. Kading, president and executive director of the Assn. of Bermuda Insurers & Reinsurers, in an e-mail. "Arbitration is effective because it allows parties with knowledge of commercial insurance transactions to engage in resolving disputes. It is more efficient than litigation," Mr. Kading said.

The arbitration clause "is something that many insureds know about, but I'd say that almost all do not understand the implications," said William Passannante, a partner with policyholder law firm Anderson Kill & Olick in New York.

"It's not your home court, you're using the services of dispute resolution arbitrators who for the most part are people very experienced in the insurance industry, which for policyholders means you have an uphill battle with them," he said.

"Generally speaking, the rationale for arbitration is that it is quicker, less expensive, less messy, but more and more it is beginning to resemble litigation. They may not understand how expensive, and how unfriendly and unfavorable it could be," Mr. Passannante said. And, "In almost all cases, that determination of the issue...by the arbitrators is final."

Arbitration proceedings in London can also be costly, said Joshua Gold, New York-based attorney and shareholder with Anderson Kill.

"It is not inexpensive to get to London, and it is not inexpensive to hire these arbitrators...some (arbitrations) take months, maybe even years, but, that's not to say that in the courts it wouldn't go the same way," said Integro's Mr. Fisher.

According to David Siesko, founder and principal of New York-based consultancy Siesko Partners L.L.C., the arbitration clauses contained in Bermuda policies are the "tradeoff" for being able to obtain the high limits the market offers.

"Policyholders go to a market such as Bermuda because they are looking for unique and distinct coverages and terms and conditions...they are looking for something that in many cases they cannot get in the United States," he said. "This arbitration U.K. dispute system is one of the potential downsides to going with the Bermuda market."

Pros and cons for buyers

Risk managers have mixed feelings on the arbitration provision.

"We purchase excess liability coverage from both XL Bermuda and ACE Bermuda. We have a very good relationship" but, the arbitration provision is the one aspect "that we really do not like," said a Utah-based risk manager who did not want to be identified.

"To have to go to London and work there when our legal counsel is here in the states would be difficult at best. We could hardly predict what outcomes would come from an arbitration," the risk manager said.

"The big reason for us going to Bermuda tends to outweigh this arbitration provision. We go to the Bermuda market because punitive damages are covered in their policies and any really large lawsuit against deep pockets is going to go after punitive damages. The availability of such high excess limits from solid companies is also a great consideration," the risk manager said.

"I think it is a disadvantage to us," said Gretchen Van Parys, general manager of risk management for Delta Air Lines in Atlanta, who this year became aware of the arbitration provision in her Bermuda policy for the first time, after it was pointed out by her broker.

"On my property program we have 25-30 insurance companies. (In the event of a claim) I'm going to be able to utilize a jury trial with the other markets and have to go through a different legal avenue for the Bermuda carrier," she said.

In her experience so far, "There is no negotiation or movement on behalf of carriers; it's take it or leave it" on the arbitration provision.

"Arbitration provisions are common and are the main source of resolution in the financial services industry," said William J. Kelly, president of WJK Advisory L.L.C. and former risk manager for Merrill Lynch & Co. Inc. and J.P. Morgan & Co., though "the London side of it is a little bit of a twist."

"I was never terribly concerned with that issue, because Bermuda markets were generally used in excess" and in the event of a claim, if the primary carrier pays, then usually the excess will follow, Mr. Kelly said. "If Bermuda is your primary and direct market, this provision has much more significance."

"It isn't anything that caused me significant heartburn, mainly because of where I place the coverage in our program. It's very high excess coverage and for that reason I don't feel that we would ever trigger that provision," said William R. Powell, head of Tempe, Ariz.-based utility Salt River Project's risk management department, which has one direct policy placed in Bermuda. "But I will say that when we have our counsel look at (the clause) they would always prefer to follow Arizona law, and not New York law, and for that matter not arbitrate things in London."

Policy provisions fair

Bermuda insurers insist that the clauses are fair and well-understood by buyers.

All of the direct policies that XL Insurance (Bermuda) Ltd. issues contain "a standard arbitration clause," said Henry French, general counsel for XL Insurance (Bermuda) and XL Capital Ltd.'s general counsel for global litigation.

"Policyholders are well aware of the arbitration and choice of law provisions, as they are standard clauses in the Bermuda Form," said David Hebbeler, assistant vp-coverage counsel, for Hamilton, Bermuda-based Allied World Assurance Co. Ltd., in an e-mail.

Insurers say the confidentiality is beneficial to clients. "If you are a major corporation being sued by lots and lots of people, you are managing a public relations situation, and I don't think the corporate policyholder would then want their insurance coverage to also be publicly available," Mr. French said.

Mr. French added that having the clause that arbitrators must follow New York law "is a very helpful feature to both parties, because you know going into a dispute what law will govern any substantive issues."

And there are some signs of flexibility from insurers on this front.

"In certain instances, these provisions can be negotiated by the parties involved in the transaction," said AWAC's Mr. Hebbeler. "Brokers and insureds do request changes to both the location of the arbitration as well as the choice of law. We consider these requests on a case-by-case basis."

"We haven't had a dramatic number of arbitrations," and "we have found the results to be mixed and fair," said XL's Mr. French.

"It is my understanding that XL has been to arbitration no more than 15 times, and ACE no more than 25 times," said Robert N. Lane, senior vp at Willis (Bermuda) Ltd. "That is a testament to why the arbitration provision is exemplary."