History and Evolution of The BERMUDA LIABILITY FORM
The creation of the Bermuda Liability Form or Bermuda Form is unique and dates back almost 35 years. Insurance conditions in 1984 created panic for large corporate commercial insureds. Rates tripled, limits plummeted, and insurance carriers reacted with withdrawals from the market or reduced insurance contract exposures. The largest number of insurers in history became insolvent in 1984. Massive long-tail claims hit insurance carriers as the U.S. was plagued with the asbestos and pollution litigation explosion that began in the late 1970s. This caused large commercial enterprises under the leadership of Marsh & McLennan and JP Morgan to form two new Bermuda-based insurers, ACE Insurance Company, Ltd., formed in 1985 (“ACE”) and X.L. Insurance Company, Ltd., established in 1986 (“X.L.”). The litigious environment was compounded by changes in liability policies and then by the interpretation of those changes by several important court decisions that further changed the landscape for commercial liability insurance.
Bermuda Liability Form Changes
In the formation of these new Bermuda entities, there was a need to balance issues between the insureds and investors who were most often the same. Part of the balancing act included designating New York State as the choice of law with the arbitration in London as the form. This generally eliminated disputes over policy terms and coverage issues under the Bermuda Form policies that were adopted. The ACE and X.L. policies have evolved over the years from policy 001, which was virtually identical for both companies, but currently, both policies are quite similar to XL form 004. Additionally, Bermuda provided an attractive tax and regulatory environment and had the advantage of being quite close to the U.S., where policies were placed by Bermuda divisions of alphabet house insurance brokers. ACE provided coverage over $100 million retentions, and X.L. was formed for smaller organizations with coverage starting over $25 million retentions. Primary goals were to avoid legacy exposures such as pollution and asbestos and to provide high limits that responded only once to multiple occurrences arising from the same general condition.
The Bermuda Form policy had a unique construction. It was an “occurrence first reported” policy that covers occurrences reported by the insured during the policy period that are likely to produce claims that will involve coverage under the policy. As such, an affirmative notice by the insured triggers the policy. This eliminates “stacking of limits” since the “first notice” can only be given once. Renewals are treated as annual extensions under the policy, so there is, in reality, only one policy. Coverage B offers an option for an extension that the insured can select with terms, conditions and premiums determined in advance. The policy treats liability arising out of the insured’s products differently and also incorporates a so-called “maintenance” deductible that eliminates coverage for a normal frequency of claims expected and intended by the insured.
The Bermuda Liability Form policy also integrates multiple claims arising out of similar conditions by defining an “integrated occurrence,” which is two or more claims from comparable situations. This has the added advantage of allowing the insured to batch similar small claims to reach the retentions under the policy. Finally, the policy is a reimbursement policy, including defense, not “pay on behalf of,” so the insured must pay expenses and indemnity first and then get reimbursed for covered expenses.
Some of the significant coverage changes that insurers had to absorb leading up to the market problems of 1985 were the change from “accident” based coverage to “occurrence” forms in 1966, challenges and uncertainty over the effectiveness of pollution exclusions used in CGL and umbrella or excess policies, coverage litigation over how CGL coverage was triggered for long-tail claims.
Robert “Bob” Anderson owns these legal books about the Bermuda Form and after reading and digesting each has a thorough understanding of the books authored by lawyers in America and Queen’s Counsel in the United Kingdom. Books about The Bermuda Form can be found at various online locations.
- The Bermuda Form: Interpretation and Dispute Resolution of Excess Liability Insurance by David Scorey QC, Richard Geddes, Chris Harris
- Liability Insurance in International Arbitration: The Bermuda Form by Richard Jacobs QC, Lorelie S Masters and Paul Stanley QC