Astrazeneca Insurance Company Ltd v XL Insurance (Bermuda) Ltd & Anor

A liability policy governed by English law ordinarily indemnifies only an actual legal liability. A judgment or an insurer-approved settlement may establish the insured’s loss, but does not conclusively establish liability or coverage unless the policy provides otherwise.

References to alleged injuries within the definition of an occurrence enable timely notification and aggregation. They do not transform the occurrence into the peril insured against or extend cover to alleged liability. A loss-payable clause ordinarily determines when an existing covered liability becomes payable; it does not create or establish that liability.

Where defence costs are included only within the policy definition of damages, they are parasitic on covered damages. The insured must therefore establish actual liability before recovering those costs, even where the underlying claim was successfully defended.

The appellant was the captive insurer of a pharmaceutical group. The respondents reinsured its liabilities under a Bermuda Form policy, amended to be governed by English law. Numerous claims alleged that a pharmaceutical product had caused personal injury. Most expenditure consisted of defence costs, while claims were generally settled commercially without any admission or proof of actual liability.

On preliminary issues, Flaux J held that indemnity for settlements and defence costs depended upon proof that the insured was actually liable to the third-party claimants. The insurer appealed.

The central questions were whether an approved settlement was sufficient without proof of actual liability, and whether defence costs were recoverable where liability had not been established.

1. Appeal dismissed unanimously. Christopher Clarke LJ, with whom Briggs and Moore-Bick LJJ agreed, held that the policy indemnified actual legal liability. Under English law, the insured must prove that it was liable to the third party. A judgment or settlement may establish loss and provide compelling evidence of liability, but it is not conclusive unless the insurer was bound by it or the policy provides otherwise.

2. The policy language confirmed the ordinary position. Article I covered ultimate net loss paid by reason of liability imposed by law for damages. The definitions of ultimate net loss and damages likewise referred to sums which the insured was obligated to pay for liability. Those expressions required an actual legal obligation.

3. The references to actual or alleged injury and causation in the definition of an occurrence did not extend the indemnity to alleged liability. An occurrence was a gateway to coverage and facilitated notification and aggregation while injury and causation remained uncertain. It did not identify the peril insured against. The substantive coverage language still required actual liability.

4. The loss-payable clause did not deem actual liability established by a final judgment or an insurer-approved settlement. It presupposed a liability already covered and determined when the amount became fixed, certain and payable. Its express permission to examine the underlying facts allowed the insurer to investigate whether injury, causation and a legally valid basis of liability actually existed.

5. Defence costs had no free-standing coverage. The policy expressly imposed no duty to defend, while defence costs appeared only as an addition to the definition of damages. They were therefore parasitic upon covered damages and recoverable only if the insured established that it was, or would have been, actually liable for damages. This construction produced the unusual and commercially unattractive consequence that costs of successfully defending an unfounded claim were not recoverable, but the policy wording permitted no other result.

6. The court declined to decide whether an insurer consenting to settlement could thereby prejudice its reinsurer, or the extent to which a discretion to approve settlement must be exercised in good faith and rationally. Those matters were unnecessary to the appeal and had not been sufficiently argued or determined below.

1. Court of Appeal (Civil Division): The insurer’s appeal was dismissed unanimously. The answers given by Flaux J to both preliminary issues were upheld: [2013] EWCA Civ 1660.

2. Commercial Court: Flaux J held that recovery of settlements and defence costs required proof, on the balance of probabilities, that the insured was under an actual legal liability. No citation for that judgment is stated.