The Court of Appeal for England and Wales’s decision to uphold a lower court’s ruling in the dispute between AstraZeneca Insurance Company (AZICO) and Bermudian reinsurers could teach US captives and their management firms some important lessons.
The British appeals court ruled in favour of Bermuda reinsurers XL Insurance (Bermuda) and Ace Bermuda in December, after they refused to pay certain claims to the pharmaceutical company’s captive, AZICO, based on no finding of actual liability in accordance with the terms of their reinsurance contracts.
Several lawsuits were brought against the London-based pharmaceutical company AstraZeneca and one of its products, an antipsychotic drug named Seroquel.
It was alleged that Seroquel, used to treat schizophrenia and bipolar disorder, had caused diabetes, and in some instances sudden death, in its users.
Before the suits, the drug had sales of $5.3 billion and was the company’s second-biggest seller behind cholesterol-reducing drug Crestor.
Without admitting wrongdoing, AstraZeneca settled more than 28,000 claims in the US, paying out approximately $25,000 to each patient to the grand total of $647 million.
The company also agreed to pay $520 million to settle a suit brought by the US federal government, which claimed that the drug had been illegally marketed to be used for anxiety, sleeplessness and post-traumatic stress disorder (PTSD)—for which the US military regularly prescribed it.
AZICO reimbursed the costs and then turned to its reinsurers to indemnify the claim. But its Bermuda-based reinsurers, XL Insurance and Ace Bermuda, which had a potential coverage exposure of $200 million, refused the claim on the grounds that the cases were settled, arguing that a court had not entered a liability ruling.
Disputes over insurance policies are typically settled through arbitration, but this case was battled out in the UK’s Commercial Court, which ruled in the reinsurers’ favour.
It is not uncommon for major insurers to settle claims before filing reinsurance claims. In finding for the reinsurers in this case, the court applied case law relating to traditional insurance companies to the captive programme, according to Thomas Hodson, a legal and reinsurance expert who heads up JLT Towner Insurance Management in Connecticut.
“English court cases may have no precedential value in the US, but there is analogous law here that applies to non-captive insurance companies,” commented Hodson.
“Since a captive, at its core, is an insurance company, I could see a US court coming to the same conclusions as the AZICO ruling.”
Hodson recommends that captives—with the help of their captive managers—always solicit input and get agreement from their reinsurers in any settlement discussion.
But, any business—captive or otherwise—should include contractual language protecting itself from situations such as these.
“Captives must have the freedom to settle and recover legal and settlement costs from reinsurance companies,” said Hodson.
“But good practice dictates that if a captive is ceding risk to reinsurers, it should make sure the reinsurance agreements include a `follow the settlements’ or `follow the fortunes’ clause. Worded properly, these clauses bind the reinsurer to pay settlement costs, without needing to establish clear liability under the insurance policy.”
