A dozen years after asbestos and environmental liabilities of U.S. companies led to the downfall of Lloyds’, London is again in the center of the liability insurance world—this time as the location for many insurance arbitrations over coverage for product and toxic tort liabilities. Foreign insurers insist upon arbitrating coverage disputes in London to avoid having their contractual obligations decided in the U.S. courts, where rulings in the 1980s and 1990s resulted in billions of dollars in insurance coverage awards and settlements for corporate America and asbestos trust funds. American companies need to be prepared for this new reality.
The Arbitration Clauses: New York Law With a Twist
Many excess liability insurance policies today couple provisions requiring the arbitration of disputes in London with the application of New York law. The choice of venue allows London-based underwriters to arbitrate on their home turf, and gives Bermuda-based insurers a neutral forum. However, applying UK law to coverage for risks located in the United States might not survive challenge in either country, so the law of an American jurisdiction was needed. New York law is generally agreed to be favorable to insurers when compared with that of most other states. Indeed, New York law can be quite draconian toward policyholders, yet the insurers go even further to make sure that no advantage can be given to policyholders by inserting language into the choice-of-law provision that removes any conceivable legal presumption in favor of coverage. Moreover, this provision prohibits the introduction of parole or other extrinsic evidence to aid in the interpretation of the policy.
Clearly, the combination of a UK forum, New York law, and an extra provision that changes New York law, is intended to give the insurer a significant advantage when a dispute arises. It need not turn out that way, but it certainly could if the policyholder is not prepared for the rarified world of the London arbitration.
They Speak The Same Language, Don’t They?
Do not go into a London arbitration thinking it will be just like arbitrating in the United States. From the selection of arbitrators, to the drafting of briefs, and the presentation at the hearing, London arbitrations are conducted in their own unique way under England’s Arbitration Acts.
The arbitration panels, which usually consist of three members, will likely include at least two Queen’s Counsel (“QC”), the highest level of barrister. As a result, the arbitration will follow a standard protocol that incorporates a particular set of English practices, rather than the more common approach followed in arbitrations elsewhere of structuring the proceeding at the initial stage with the participation of the parties. All three arbitrators must serve as neutrals. Each party appoints one member of the panel, and those appointees select the chairperson. The insurance company will probably select a QC as its party-appointed arbitrator. The policyholder need not select a QC, and whether it chooses a QC, an ordinary barrister, or an arbitrator with different qualifications, may depend upon the circumstances. Indeed, the policyholder may be well served by selecting an arbitrator from the United States if the law of New York or of another U.S. jurisdiction is to be applied.
If a U.S. arbitrator has considerable stature, such as that of a retired appellate court judge from a well-regarded court, he or she ought to be viewed as an expert on U.S. law, and therefore be able to speak with authority on legal issues during the hearing and in panel deliberations. The selection of the panel may be the most important part of the arbitration, and it should be done with the assistance of experienced U.S. and UK counsel.
As evidence is usually via Witness Statements prepared and exchanged prior to the hearing, written submissions are the principal means of presenting evidence to the panel. The briefs are not drastically different from those presented in U.S. arbitrations, but a higher level of civility is expected, and care must be taken not to invade the province of the panel by arguing too directly for the ultimate conclusions a party wants adopted. This is an alien concept that requires some getting used to.
With a few idiosyncrasies, hearings are conducted much like those in U.S. arbitrations. Perhaps most unusual from a U.S. perspective is the practice of counsel and panel members having the entire evidentiary record and all legal authorities in front of them in binders (called “bundles”), and extensively reading aloud from cases, as well as insurance policies and other evidence. Counsel should be prepared to give a very thorough discussion of the cases, and to read into the record every passage from a decision that is relied upon.
Clarence Darrow or Rumpole of the Bailey?
There is a difference of opinion among policyholder counsel on the issue of whether the client should be represented at the hearing by U.S. or UK counsel. Certainly both have a role to play in the preparation of the case. If U.S. law is to be applied, a strong argument can be made for having a U.S. policyholder-appointed arbitrator, and if that is the case, having U.S. counsel present the party’s case at the hearing. On the other hand, if the panel consists of three individuals with backgrounds in British law, the policyholder should be represented at the hearing by English counsel. Regardless of who makes the oral argument before the tribunal, the policyholder will likely want U.S. counsel to do a significant share of the preparation work, alongside UK solicitors.
Loser Pays, and Pays
Although a London Arbitration Panel may apply New York law, it will also follow the English procedure of requiring the losing side to pay the opponent’s attorneys’ fees and costs, and all of the arbitrators’ fees and costs. This can create a powerful incentive for both sides to settle, provided the claims are not enormous. Often, though, the claims are so large that the prospect of paying another million dollars or so in costs is relatively insignificant.
Learning to Love the Bomb
Companies frequently include arbitration provisions in their commercial contracts, but often have a strong negative reaction when a coverage dispute arises and they are required to arbitrate. This is in large part because of the fact that the arbitration clauses in insurance policies typically contain unfavorable choice-of-laws provisions. It is certainly worth the effort to try to remove such provisions from policies, but the market for excess liability insurance has surprisingly few participants, and except in the softest of insurance markets, it may be impossible to achieve that objective. However, being required to arbitrate a coverage dispute in London, even with a pro-insurance company choice-of-law provision, is no reason to settle cheaply, based upon the assumption that the policyholder will not be treated fairly. The caliber of arbitrator found on the panels is typically quite high and their decisions are generally well-reasoned. While the results of the arbitrations are confidential, the policyholder bar does not perceive a trend favoring insurers.
Moreover, it should not be assumed that a London arbitration panel will at best “split the baby.” Often, London arbitrations turn primarily upon issues of contract interpretation, and result in awards that are entirely in favor of one side or the other. Therefore, policyholders should evaluate each claim on its merits, and pursue a recovery without feeling that it is at a disadvantage. Cheers!