Law and jurisdiction clauses in insurance policies

03 October 2018

This article gives a brief overview of the issues that need to be considered when selecting or drafting choice of law, jurisdiction and associated clauses.

WHY IS THIS IMPORTANT?

Choice of law and jurisdiction are two different concepts Choice of law and jurisdiction are two different concepts although these are often addressed in a single clause. 

Choice of law deals with the body of law under which the policy will be construed and interpreted in the event of dispute between the Insured and the Insurer over the coverage granted by the Insurer.

Choice of jurisdiction deals with the venue or court system where such litigation will take place.

Where the policyholder and insurers are domiciled in the same country, it is unlikely that disputes will arise over which body of law or jurisdiction will apply.

Where the policyholder and insurers are domiciled in different countries, in the absence of a choice of law clause, disputes will likely arise over whether the law to be applied to the policy shall be the:

  • Domicile of the policyholder?
  • Domicile of insurer(s)?
  • Domicile of where the contract was negotiated?
  • Domicile where the policy was issued?
  • Domicile of the producing broker, if involved?

The absence of an explicit choice of law clause means there is a basic failure to provide contract certainty. The policyholder will be exposed to:

  • Doubt over which law is to apply to a disputed claim
  • Significant variations between each body of law
  • An uncertain outcome
  • Likely increased costs to deal with the dispute

Similarly, where the policyholder and insurers are domiciled in different countries, in the absence of a choice of jurisdiction clause, disputes will arise over whether the court to judge the dispute shall be in the country which is the:

  • Domicile of the policyholder?
  • Domicile of insurer(s)?
  • Domicile of where the contract was negotiated?
  • Domicile of where the policy was issued?
  • Domicile of the producing broker, if involved?

The absence of an explicit choice of jurisdiction clause means there is a basic failure to provide contract certainty. The policyholder will be exposed to:

  • Doubt over which court to engage litigation could lead to;
  • Forum shopping disputes
  • An uncertain outcome
  • Increased costs to deal with the dispute
  • Possible enforcement difficulties

Moreover, where subscribing insurers are domiciled in two or more countries, it is in the policyholder’s best interest to corral them into one single body of law and court venue to avoid multiple disputes in different venues.

  • Typically a default position of brokers is to propose the country or state of domicile of the Insured. However, this rule of thumb may not suit every placement, because:-
  • The policyholder (and its subsidiaries) may operates in more than one country
  • Some counties have multiple legal systems within each territory, so the choice of law should (but not always) be specific to a particular territory
  • The choice of jurisdiction clause must be specifically drafted to meet local requirements
  • Reinsurance contracts, when the choice of law or jurisdiction in the reinsurance may be different to the choice of law or jurisdiction in the original policy
  • Local law may restrict the choice of law especially when dealing with ‘protected classes’ (such as Employer’s Liability) or consumer disputes

EXPLICIT CHOICE OF LAW

Some countries have different legal regimes – so generic reference to USA law or UK law may not be adequate. Examples of countries which have different legal systems are

  • UK
  • USA
  • Australia
  • Canada

‘PRACTICE’ VERSUS JURISDICTION

Sometimes reference is made to a legal ‘practice’.

For example:

“This insurance is subject to English law and practice”

(Institute Hull Clauses 2003)

But what does the word ‘practice’ imply?

The example above does not include an English jurisdiction clause, so reference to ‘practice’ is intended to broaden its scope to include court procedures.

This should not present any difficulties unless there is a conflicting jurisdiction clause.

LINKING TO PLACE OF LOSS OR CLAIM

Some law and jurisdiction clauses link the choice of law to the where the ‘loss’ or ‘dispute’ occurred..

These terms must be defined because, absent clarification as to intent, the words are ambiguous.

  • Does ‘loss’ mean where the accident occurred or could this imply where the financial loss is taken (e.g. head office of the policyholder)
  • Does ‘dispute’ mean the claim made by the policyholder against insurers?
  • Or, could ‘dispute’ mean a third party claimant against the policyholder, which becomes the subject of a claim by the policyholder, if so, if the country of the claimant is different to the country of the policyholder or insurers, which law applies?

EXPLICIT CHOICE OF JURISDICTION

Some countries have different territorial legal regimes but choice of jurisdiction can be linked to its sovereign state, so generic reference to competent courts within a given country maybe adequate, but care must be taken to use the correct market wording applicable to the target jurisdiction.

Examples:

• “…In the event of a dispute arising under this Insurance, the Underwriters at the request of the Assured will submit to the jurisdiction of any competent Court in the Commonwealth of Australia…” (LMA5135)

• “This insurance shall be governed by and construed in accordance with English law and each party agrees to submit to the exclusive jurisdiction of the courts of England and Wales”. (Law Society)

What does the word ‘exclusive’ imply?

A choice of jurisdiction clause may be ‘exclusive’ or ‘nonexclusive’, whereby the latter is deemed to permit either party to commence proceedings in the nominated jurisdiction but leaves open the litigation can be fought elsewhere. Conversely, when the clause includes reference to ‘exclusive’ jurisdiction, both sides are obligated to submit to the nominated venue.

SERVICE OF SUIT CLAUSES

A Service of Suit clause is an agreement whereby insurers agree to nominate a representative to accept service of litigation proceedings within a jurisdiction.

Not all jurisdictions require a Service of Suit clause, e.g. UK domiciled insurers subject to English jurisdiction.

The wording of the Service of Suit clause may include the agreement to the choice of venue.

The Service of Suit clause must be specific to jurisdiction to which it applies, i.e. US Service of Suit can only to be used for USA jurisdiction.

Examples:

“Any summons notice or process to be served upon the Underwriters may be served upon:

- ……………

-- Lloyd’s General Representative in Australia

-- Lloyd’s Australia Limited….Sydney…Australia

who has authority to accept service and to enter an appearance on the Underwriters’ behalf, and who is directed at the request of the Assured to give a written undertaking to the Assured that he will enter an appearance on the Underwriters’ behalf.

 “It is agreed that…the Underwriters will submit to the jurisdiction of a court of competent jurisdiction within the USA.

-- …

-- It is further agreed the Assured may serve any process upon any senior partner in the form of Mendes & Mount….” (CL 355)

USA ISSUES

In the USA, there is no body of law which can be described as ‘USA law’ Instead, the law is a mix of State law or Federal law. Each state has its own unique body of statue law and judicial precedence. Similarly, Federal law comprises statute law and judicial precedence. Federal law can apply where the policyholder has breached a Federal Statute, e.g. Environmental Protection laws.

Moreover, there is no single court system. Instead, disputes can be held in, or moved to and from State or Federal Courts. Insurance disputes are not subject to Federal law but can be held in a Federal Court applying state law. Insurers prefer Federal Courts because some State Courts are perceived to be hostile to insurers.

Once the jurisdiction has been determined, the court will decide which body of law to apply. Usually this will be the law of state where the action is taking place, but, courts will recognise unambiguous choice of law clauses.

Given this uncertainty, a service of suit clause is necessary. This is an agreement whereby ‘alien’ insurers, such as Lloyd’s, will submit to a US court of competent jurisdiction to avoid duplication of litigation in the US and UK. Lloyd’s nominate the party in the USA to accept proceedings on their behalf. The Service of Suit clause also allows Lloyd’s to initiate proceedings and preserves their right to seek to transfer an action to a Federal court or another State court.

Thus a US Service of Suit clause remains crucial for US risks.

It should be noted that Lloyd’s Bulletin Y3406 (issued in 2004) which, inter alia, requires a specific state law to be nominated as the choice of law has not been updated. While some US domiciled policyholders are prepared to nominate a given state body of law, this is not universal practice and many policyholders prefer to remain silent. The ‘LMA Rules clause’ is in use to preserve this option, whereby the choice of law will be determined by the court of competent jurisdiction as provided in the Service of Suit clause.

MANDATORY RULES

Generally, the policyholder and the insurers have the commercial freedom to agree choice of law clauses, but, in certain classes of insurance these might be prevented by local statue. This restriction is most likely to apply to consumer insurance and certain types of ‘protected classes’ such as Employers Liability.

EU ISSUES

In the absence of an express choice of law clause, the EU is subject to the “Rome I Convention”.

The test applied is what law is “most closely connected” with the contract. Thus, it is likely to favour English law where the policy has been placed in London with UK domiciled insurers. This must be balanced against the possible involvement of an overseas producing broker and the domicile of the policyholder. A test of “characteristic performance” could tip the scales in favour of the law of the domicile of the insurer.

However, this is not conclusive and FSMA (Law Applicable to Contracts of Insurance) regulations 2001 might apply to shift the choice of law to the domicile of the EU policyholder.

Similarly, the absence of an express jurisdiction clause can give rise to disputes and the EU is governed by the “Brussels I Regulation”.

In summary this inhibits specific jurisdiction to allow the policyholder a choice, after the event, to litigate in:

  • His domicile, or
  • The insurers’ domicile, or
  • For liability claims, the domicile where the event occurred.

In Assens Havn v Navigators the European Court applied a test of ‘the weaker party’ and ruled that a third party Danish claimant could bring proceedings under Danish direct action law to overturn exclusive English jurisdiction in the liability insurance contract.

Conversely, in Aspen v Karios Shipping, the English High Court held that a bank seeking to overturn English jurisdiction did not meet ‘the weaker party’ test and agreed the ‘harmful event’ (in this case misrepresentation) occurred in England.

However, large commercial risk policyholders (and Reinsurance risks) will be bound by any exclusive jurisdiction clause incorporated in the policy. Where such risks do not include an exclusive jurisdiction clause, the policyholder must proceed in the ‘place of performance’ which will be the domicile of the insurer or reinsurer.

ARBITRATION/ALTERNATIVE DISPUTE RESOLUTION (ADR) CLAUSES

Many policy wordings include Arbitration and/or ADR clauses. Such clauses must not conflict with the law and jurisdiction clauses. Any inconsistency between the two sets of clauses could undermine the efficacy of the law and jurisdiction clause.

However, the policyholder and insurers are free to agree to arbitration procedures which might not comply with the choice of jurisdiction. This is to allow the parties to agree to a more specific arbitration regime which can be different from the venue to litigate. This is acceptable provided both sides agree. It is typical for risks placed in Bermuda to be subject to New York law with arbitration rules subject to English law.

Where the parties fail to accept an arbitration judgement or require enforcement of it, the parties must commence proceedings in accordance with the jurisdiction clause.

Examples:

“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.

The number of arbitrators shall be [one/three].

The seat, or legal place, of arbitration shall be [City and/or Country].

The language to be used in the arbitral proceedings shall be [ ].

The governing law of the contract shall be the substantive law of [ ].”

(London Court of International Arbitration)

“Any dispute…shall be finally and fully determined in London, England under the provisions of the Arbitration Act of 1966...”

(OIL wording – Note the policy is subject to New York law)

CONFLICTS BETWEEN CHOICE OF LAW AND JURISDICTION

In an ideal world the choice of law and jurisdiction should be consistent, but this may not always be possible, given insurers may be unwilling to agree to local law and jurisdiction where they perceive this to be less developed or hostile.

A compromise solution could be to allow local law to stand but change the jurisdiction to a more trusted venue.

Many courts throughout the world will try cases based on a foreign law, but this process is open to the discretion of the court to ignore choice of law where there is a conflict.

REINSURANCE CONSIDERATIONS

As noted above there could be disputes over which law applies in respect of any reinsurance contested claims. In the absence of a choice of law clause, could this be the law of the original contract or the law of the reinsurer?

The landmark case is Wasa v Lexington. In this case, concerning liability over many years for pollution, the House of Lords held that in the absence of an explicit choice of law clause, the US Service of Suit Clause was not conclusive. Thus, reinsurers were able to apply English law to give a narrow interpretation over the period of risk, whereas in the underlying insurance litigation, the US Supreme court gave a much wider interpretation over the period of cover and held the defendant insurer was liable for many years exposure.

To avoid any uncertainty an express Choice of Law clause is always a paramount consideration for facultative reinsurance contracts and should ideally be the same as the reinsurance.

However, reinsurers may be unwilling to accept the law and jurisdiction of the reinsured. If so, the reinsurance is not ‘back to back’ with the original contract. More typically, reinsurers might accept local law but insist on English jurisdiction.

Moreover, given the judgement in Wasa v Lexington back to back cover might not be possible where underlying US insurance is subject to LMA Rules Clause or similar where no specific choice of law within the US is stipulated.

LAYERED OR INTERLOCKING PROGRAMMES

In an ideal world the choice of law and jurisdiction should be consistent in each policy which forms part of a layered or interlocking programme. However, this may not always be possible, especially when specialist insurers are unwilling to deviate from their chosen law and jurisdiction.

This opens up the risk that different views over the same facts will result in unexpected judgements and the way each policy layer stacks up becomes distorted.

CONTRACT FORMATION

London insurers might be able to bring proceedings in an English court against an overseas policyholder regarding alleged breach of the duty of disclosure when the court agrees the obligation had to be ‘performed’ in England.

EMBEDDED LAW AND JURISDICTION CLAUSES IN MARKET CLAUSES

Many market clauses incorporate a choice of law clause. Some also include a jurisdiction clause. If these are different to the law and jurisdiction clauses in the main body of MRC, they could undermine its efficacy.

Ideally, the law and jurisdiction clauses should be consistent (other than for reinsurance where the jurisdiction is likely to be where the insurers and reinsurer are domiciled - e.g. England, but the choice of law is to follow the original policy to avoid potential gaps in cover).

To avoid this, the law and jurisdiction clauses included in market wordings (e.g. English law in Institute Hull clauses) should be specifically deleted where they conflict with the chosen law and jurisdiction.

Alternatively, it might be intentional to stick with the English law for a particular set of clauses, such as Institute Cargo clauses or War Automatic Termination clauses. If so, the main law and jurisdiction clause should be drafted accordingly.

CONCLUSION

Policy/Insurance contact drafters should look to remove uncertainty by specifying a specific venue for any policy disputes to be heard in, and a specific body of law to be applied, whilst making sure to take into account the various pitfalls and issues referenced above.

In fact, the London Market Group (LMG) Market Reform Contract (MRC) guidelines state that a Choice of Law and Jurisdiction heading is mandatory in London Market ‘slips’ (contracts).

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If you require any further information, please contact John Cooper, Managing Director on +44 (0)20 810 89542 or email john_cooper@jltgroup.com.

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