Arbitration Agreements and their Enforcement in Bermuda Market Insurance Policies
Most insurance and reinsurance policies issued by Bermuda-based insurance companies contain arbitration agreements, which provide for any and all disputes between policyholder and insurer to be resolved through an arbitration to be conducted in Bermuda (subject to the supervision of the Supreme Court of Bermuda) or in London (subject to the supervision of the High Court of England and Wales).
Many Bermuda-market insurance policies are written on the 'Bermuda Form' (or a variation of that document), which usually provides that the substantive legal issues will be determined according to New York state law (subject to certain agreed modifications designed to ensure fairness between the parties), but that all procedural matters relating to the dispute shall be governed by Bermuda law or English law.
There are occasions, of course, when Bermuda law or English law are chosen to govern the substantive issues as well, according to the preferences of the policyholder and the nature of the policy. Bermuda substantive law is often chosen, for example, in the context of international life insurance policies, given the policyholder-friendly provisions of Bermuda's Life Insurance Act 1978, and Bermuda law is also chosen in the context of liability insurance policies that are designed to provide insurance against punitive damages liabilities arising in the United States.
There are a number of well-recognised benefits and advantages associated with a Bermuda arbitration agreement in a Bermuda-market insurance policy, both for insurers and for policyholders.
In addition to the practical, commercial, and tax-neutrality benefits associated with arbitration in the mid-Atlantic paradise of Bermuda, the legal benefits include the following:
- The parties can have their disputes resolved by specialist and independent arbitrators of their choice, whether they be US lawyers, English QCs, Bermuda arbitrators, retired judges, law professors or insurance industry personnel, with experience of international dispute resolution and the legal and commercial issues arising under international insurance policies. In this respect, the parties can avoid the risks, uncertainties, and potential biases (whether subconscious or otherwise) of non-specialist judges or local juries, and the procedural delays that can arise in local litigation in various national Courts;
- The arbitration process in Bermuda is confidential, which can be important to the commercial business interests of both the policyholder and the insurer;
- The arbitration process can be tailored to be as swift, and cost-efficient, as the parties and the arbitrators consider appropriate;
- Bermuda's 1993 Act adopts and applies the UNCITRAL Model Law on International Commercial Arbitration. The adoption of the UNCITRAL Model Law in Bermuda provides a universally applied and tried-and-tested statutory framework for arbitration, which has been adopted in 95 other jurisdictions, and is supported by a considerable body of local and international jurisprudence;
- Under the UNCITRAL Model Law, the local Bermuda court's powers to interfere with the arbitral process are reduced to a minimum (save to assist, for example, with the appointment of a third arbitrator if the parties cannot reach agreement). Bermuda has a specialist Commercial Court that is very familiar with and highly supportive of the arbitration process, and which acknowledges its limited role in that process;
- Under the UNCITRAL Model Law, the grounds upon which an arbitration award may be challenged or appealed are also very limited, and any challenge is made directly to the Court of Appeal for Bermuda (made up of experienced commercial judges, some from the English Court of Appeal), promoting finality of arbitration awards;
- Under Bermuda's 1993 Act governing international arbitration, parties are at liberty to stipulate in the arbitration agreement that they shall bear their own legal costs (if that is what they want, and as is often attractive for US policyholders unfamiliar with the "loser pays" costs regime), whereas such agreements are unlawful in the UK under the UK's Arbitration Act 1996;
- The Bermuda courts will act robustly to enforce parties' rights to arbitrate, including by way of anti-suit injunctions to compel arbitration. In this respect, the Bermuda court has expressly confirmed that it will follow and apply the UK's House of Lords decision in Donohue v Armco  1 All ER 749, to the effect that an arbitration agreement will generally be enforced unless there are sufficiently 'strong reasons' in any particular case not to hold the parties to their contractual bargain; and
- The Bermuda Court's jurisdiction to grant anti-suit injunctive relief remains wholly unaffected by European law or US law. Local Bermudian jurisprudence is now very well-developed and internationally respected, as a result of a number of well-reasoned and reported judgments of the Supreme Court and the Court of Appeal for Bermuda, as well as the Privy Council (Bermuda's highest appellate Court).
There have been a number of cases in which the Bermuda courts have had to consider whether the insolvency or bankruptcy of an insured might give rise to sufficiently 'strong reasons' not to hold the parties to their contractual choice of arbitration, bearing in mind the public policy (in the international insolvency context) of recognising and assisting foreign bankruptcy Courts to gather in the assets of a bankrupt foreign company for the collective benefit of all creditors, so far as may be allowed by Bermuda law.
The Bermuda Court has recently made clear, however, that as a matter of Bermuda law and taking into account recent Privy Council authorities, "contractual claims [by bankrupt policyholders] against debtors [i.e. insurance companies] arising under contracts containing arbitration clauses do not raise any opportunity for contending that the governing arbitration agreement is any way affected by the fact that the counterparty seeking to establish a contractual liability is itself in liquidation": see Various Bermuda Insurers v MF Global Assigned Assets LLP et al  SC Bda 6 Com, per Kawaley CJ at paragraph 9.
Although it may still be necessary for contracting parties to navigate their way through a foreign Court's bankruptcy procedures if they (or their assets) are otherwise alleged to be subject to the foreign Court's jurisdiction, the parties to a Bermuda Form insurance policy can be confident that, as a matter of Bermuda law, the bankruptcy of a foreign insured provides no justification for litigating, rather than arbitrating, an insurance coverage dispute that is subject to a Bermuda arbitration agreement.
Although it is quite rare in practice for matters to have to reach this stage, the remedies that might be granted by the Bermuda Court for breach of an anti-suit injunction in aid of a Bermuda arbitration agreement include non-recognition of a foreign Court's judgment, anti-enforcement injunctions, declaratory relief, monetary damages, costs awards, and even penal sanctions associated with a finding that a party has acted in contempt of the Bermuda Court. Since the Bermuda Court's judgments can be readily registered, recognized and enforced in the United Kingdom and in many other commonwealth states and countries, as well as in Bermuda, such remedies can be of considerable assistance in focusing the parties' minds on the importance of arbitrating, rather than litigating in breach of an arbitration agreement.