CHOICE OF LAW & JURISDICTION

In the case law HIH Casualty & General Insurance Ltd vs New Hampshire Insurance Co, it is asserted that where the policy was unlikely to have been regarded as the final record of the parties’ contract, the wording of the slip was in a position to assist in the construction of the policy. However, in the absence of a specified rectification a slip could not be used to alter or contradict the construction of a policy which has superseded a slip.

In this context, it is useful to revisit the agreement on law and jurisdiction clauses attaching to (re)insurance products.

It is part of a process. Part of a system, linked to controls and risk. Evidently bound by management information risk indicators and a myriad of sourcebooks. Such procedures and guidelines being impacted by supranational directives, regulatory changes, contract law changes, market developments.

This Law and jurisdiction clauses in contracts aide memoire outlines the issues that need to be considered when selecting or drafting choice of law, jurisdiction and associated clauses.

This bulletin can get quickly more complicated if

-       we extend our findings for an insurance case to a reinsurance contract, a retrocession placement, a

     facility agreement, an underwriting agency set up or a treaty arrangement;

-       we consider contracts pertaining to layered or multi-section placements or linked to a master policy;

-       we transact a risk meeting the criteria for large risks;

-        references are changed from a country to a territory, state or province;

-     we were to distinguish Policyholder with Insured/Assured including its ownership, head office location and main business location;

we were to distinguish Underwriters with Insurers and overseas subscribing carriers;
we were to incorporate alternative dispute resolution practice clauses;
we are to cater for case law guidance from London facilities, (re)insurance disputes and the European Court of Justice

Choice of law and choice of jurisdiction in the catch all ‘Choice of Law and Jurisdiction’ Market Reform Contract heading  under MRC V1.9?

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

Choice of law states the insurance contract law under which the contract shall be construed/governed and interpreted in accordance with in the event of a dispute between the Insured and the Insurers over the coverage afforded by the Insurers.

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

Default position for any business class where elected wording does not include any choice of law:

Where the Insured and Insurers are domiciled in the same country, it reduces the likelihood that disputes will arise over which elected law or jurisdiction will apply.
Where the Insured and Insurers are domiciled in different countries, in the absence of a clear choice of law clause, disputes will likely arise over whether the law to be applied to the policy shall be that of:

-          domicile of the Insured;

-          domicile of the Insurers;

-          domicile of where the contract was negotiated;

-          domicile where the case law is most favourable to the Insured;

-          domicile where the policy was issued;

-          domicile where the loss occurred;

-          domicile where the claim was made;

-          domicile of the producing broker

The absence of an explicit choice of law clause means there is a basic failure to provide contract certainty. High level risks include Insured will be exposed to  doubt over which law is to apply to a disputed claim; significant variations between each body of law; uncertain outcome; likely increased costs to deal with the dispute

Similarly, where the Insured and Insurers are domiciled in different countries, in the absence of a clear 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 Insured;

domicile of the Insurers;
domicile of where the contract was negotiated;
domicile where onerous provisions are construed more favourably towards the Insured
domicile where the policy was issued;
 domicile where the loss occurred;
 domicile of the producing broker

The absence of an explicit choice of jurisdiction clause means there is a basic failure to provide contract certainty. 

High level risks include Insured will be exposed to doubt over which court to engage litigation could lead to forum election disputes; uncertain outcome; increased costs to deal with the dispute; possible enforcement difficulties.

In any EXARI (COUPA) or ECLIPSE (SEQUEL, VeRisk) generated contracts the default position may be the Insured’s address detailed in the trading / marketing initial screen. It relies on the answer to the relevant interview question.

In order to consider the elected law, the class of business, the onerous provisions, the elected insurance policy wording and the country applicable to the risk transacted for premium/taxes reporting purposes may lead to restrictions on the options made available to the Insured and Insurers.

Whilst the choice can often, but not always, be freely made,

Choice of Law must be refined

Legal systems vary within geographical areas. Typically, this refers to the USA, the United Kingdom, the European Union, Canada and Australia. A more precise description should be made because there is no such thing as ‘UK law’ for example.

Choice of jurisdiction may be simplified

The reference to legal practice intends to broaden its scope to include court procedures in the absence of a conflicting jurisdiction clause.

In order to describe the elected jurisdiction, it is essential to

-          -      ascertain whether the Insured shall resort exclusively to one particular sovereign territory;

-         -   ascertain whether the Insured would like to resort to arbitration proceedings or mediation or appraisal or any other alternative dispute resolution mechanism.

-   draft the jurisdiction clause in such a way that it meets local requirements or practice.

-   draft the jurisdiction clause in such a way that clarity is given as to whether the recourse to arbitration proceedings shall be in addition or in lieu of original jurisdiction and if they are different how this will impact the dispute resolution and practice

-          -  use the relevant wordings for contractual disclosures, notices, service of suit provisions

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.

A Service of Suit clause is an agreement whereby Insurers agree to nominate a representative to accept service of litigation proceedings within a jurisdiction. It extends to a reinsurance contract. And it is not limited to Lloyd’s underwriters although appointed nominees can be pre-determined through Lloyd’s. Not all jurisdictions will require a Service of Suit clause, for example. UK domiciled insurers subject to English jurisdiction.

The Service of Suit clause must be specific to the jurisdiction to which it applies, i.e. Service of Suit Clause (USA) can only to be used for USA jurisdiction(s). The wording of the Service of Suit clause may include the agreement to the choice of venue.

USA and Canadian risks

In the USA, there is no body of law which can be described as ‘USA law’. Instead, the law is a mix of federal and state laws whereas in Canada it is a mix of provincial and contract laws. Each US state has its own unique body of statute law and judicial history.

There is no single court system. Instead, disputes can be held in, or moved to and from state or federal courts. As confirmed in the CL 355 or NMA 1998 (and to a lesser extent under LMA 5020), Insurance disputes are not subject to federal law but can be held in a federal court applying state law. Empirical evidence tends to suggest that federal courts are more favourable to risk carriers than state courts.

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

Lloyd’s Market Bulletin No. 3406 includes a requirement to specify a state law to be nominated as the choice of law has not been updated to date. 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 ‘NMA/CL/LMA Rules clause(s) are 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. But such logic is not applied in the same manner for Canada.

Brexit matters

The LMA has issued a very unorthodox summary of the Brexit legal ramifications insofar as it was tied by the negotiation status at time of issuance of such memo. It did not highlight the existing contradictions within the withdrawal agreement. It did not anticipate the prorogation by the UK government. It does not take into account the Lloyd’s Brussels requirements. It appears to go into minutious details and the reader’s attention can be lost. This is the reason why this memo does not appear to hold as much authority as the revised Insurance Act and cyber model clauses reports.

In the absence of an express choice of law clause, whilst the territories displayed in the withdrawal agreement and its addenda might no longer be subject to European law, the European Union case law is subject to the so-called Rome I Convention. The absence of an express jurisdiction clause can give rise to disputes and the European Union case law is governed by the Brussels I Regulation.

The test applied is what law is most closely connected with the contract. Thus, it is likely to favour English law where the contract has been placed in London with UK domiciled Insurers. A test of characteristic performance may be required should the producing broker territory, the risk carrier domicile, the insured’s country of origin be vastly different.

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

But, in Karios Shipping vs Aspen, the English courts held that a bank seeking to overturn English jurisdiction did not meet the weaker party test and agreed the harmful event being a misrepresentation did take place in England.

Arbitration and Alternative Dispute Resolution (ADR) Provisions

Arbitration and/or ADR provisions are frequent in contract wordings. Such clauses must not conflict with the law and jurisdiction clauses. Any inconsistency between the two sets of clauses could undermine the enforcement of said law and jurisdiction clause(s).

However, the policyholder and Insurers are free to agree to arbitration proceedings 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 as long as both parties are in irrevocable agreement. I tend to recall the IRNS IRONSHORE CHOICE OF LAW & SERVICE OF SUIT clause. I tend to remind myself of arbitration proceedings language in use, actual seat location and the number & manner in which the arbitrators are appointed, and how influential their decisions are on the respective outcomes.

Elected law may differ from elected jurisdiction

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

Many courts will hear 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 an obvious conflict.

Duty of Fair Presentation, Claims’ protocols in light of Australian Insurance Act and England & Wales revised Insurance Act

Specific disclosures and clauses may be imposed by the carriers.

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.

Business logic for Insurance Act as follows 

*1- Identify where choice of law is in (re)insurance contract

- Choice of Law and Jurisdiction sub-heading

- Conditions (wording attached) sub-heading

*2- Identify and select what choice of law short description applies

-Standard short first sentence for choice of law - Refer to Master (Re)Insurance template(s)

-Alternative for applicable business product: ‘As per attached policy wording’

*3- Select the choice of law 

‘Choice of Law: please specify’

- Defaults to Country/State/Province of Insured address

- Edit manually and elect usually ‘Law of England/England and Wales’

- Additional short sentence for scope of Insurance Act application - Refer to approved Compliance short sentence in lieu of LMA5263 as set in Appendix 1

*4- Select the Insurance Act acceptance by carriers in the u/w logic

‘Has any of the carriers asked for contracting out?’

4a- Answer is No = ‘Insurance Act is accepted by all and its entirety’

4b- Answer is Yes = Drop-down options             

Contract-out            Follow                         In Part

                                                                       Lead                           Whole

Lead + Follow

Response 4bi = Contracting out of Insurance Act applies in part in scope and in part by carriers (Follow or Lead)

Response 4bii = Contracting out of Insurance Act applies in part in scope and by all carriers

Response 4biii = Contracting out of Insurance Act applies in whole contract and in part by carriers (Follow or Lead)

Response 4biv = Contracting out of Insurance Act applies in whole contract and by all carriers

*5-  Insurance / Enterprise Act Clauses process and protocols based on response(s) under 4

Sub-question paradigm	Applicable responses under previous question 4
Sub-question A) ‘Has a prop form been disclosed or requested by carrier?’	ALL being 4a + 4bi + 4bii + 4biii + 4biv
Sub-question B) ‘Has Insured/policyholder provided a definition of Insured’s organisation?’ ‘Has Insured/policyholder provided a list of Senior Management names/duties?’	4a + 4bi + 4bii
Sub-question C) ’Duty of Fair Presentation applies to U/W Info’	4a + 4bi+ 4bii
Sub-question D) ‘Has carrier included or does Contract include any Conditions Precedent/Subjectivities/Warranties?’	4a (default) + optional for 4bi + 4bii
Sub-question E) ‘In the event of late payment or fraudulent claims, has carrier and policyholder agreed to the following?’	4a + 4bi+ 4bii
Sub-question F) ‘Select the applicable contracting out options’	4bi + 4bii + 4biii + 4biv

Sub-question A) ‘Has a prop form been disclosed or requested by carrier?’ 

Insurance Act Clauses – Proposal forms

·       LMA9118 Insurance Act 2015 - Proposal Form Declaration for non-consumer contracts

Sub-question B)

‘Has Insured/policyholder provided a definition of Insured’s organisation?’

‘Has Insured/policyholder provided a list of Senior Management names/duties?’

Insurance Act Clauses – Insured/Policyholder U/W Info

·       LMA5253 Insurance Act 2015 - Critical Information

·       LMA9119 Insurance Act 2015 - Definition of “insured’s organisation”

·       LMA9120 Insurance Act 2015 - Definition of “senior management”

-        Clause styling and rating option 1 = ‘registered clause’ not amended

-        Clause styling and rating option 2 = ‘registered clause’ + reference to Risk Insured/Policyholder/Loss Payees heading under Risk Details

-        Clause styling and rating option 3 = ‘registered clause’ + ‘as may be disclosed to the carriers and held on file by the Lloyd’s broker’

-        Clause styling and rating option 4 = amended clause [bespoke]

Sub-question C) ’Duty of Fair Presentation applies to U/W Info’

Insurance Act Clauses - Duty of Fair Presentation Breach effects and remedies

·       LMA9117 Insurance Act 2015 - Proposal Forms for non-consumer contracts - Duty of fair presentation

·       LMA9121 Insurance Act 2015 - Remedies for breach of the duty of fair presentation

·       LMA9122 Insurance Act 2015 - Remedies for breach of the duty of fair presentation – variations to contracts concluded before 12 August 2016

·       LMA5262 Insurance Act 2015 - Effect of misrepresentations made to any leading insurer

Sub-question D) ‘Has carrier included or does Contract include any Conditions Precedent/Subjectivities/Warranties?’

Insurance Act Clauses – Setting Onerous Provisions

·       LMA5254 Insurance Act 2015 - Application of Section 10 – Breach of warranty

·       LMA5255 Insurance Act 2015 - Application of Section 11 – Terms not relevant to the actual loss

Sub-question E) ‘In the event of late payment or fraudulent claims, has carrier and policyholder agreed to the following?’

            Insurance Act / Enterprise Act Clauses -  late payment damages

Insurance and Reinsurance option

·       LMA5277 Insurance Act 2015 - no liability in damages for late payment of a claim

·       LMA5278 Insurance Act 2015 - limitation of liability for late payment of a claim

·       LMA5279 Insurance Act 2015 - non-waiver of legal privilege

·       LMA5280 Insurance Act 2015 - Reasonable time to investigate and assess claims

  Insurance only

·       LMA9127 Insurance Act 2015 - late payment of insurance claims

Reinsurance only

·       LMA5281 Insurance Act 2015 - Reinsurer not liable for late payment of a claim by the Reinsured

·       LMA5282 Insurance Act 2015 - no liability in damages for late payment of a claim by Reinsurer

·       LMA5283 Insurance Act 2015 - Reinsurer’s liability to Reinsured for late payment caused by the Reinsurer

Insurance Act Clauses – Fraud

·       LMA5256 Insurance Act 2015 - Fraudulent claims clause

’Sub-question F)         ‘Select the applicable contracting out options’

    

Insurance Act Clauses – Contracting out options

·       LMA5257 Insurance Act 2015 - Contracting out of section 8(2) and Schedule 1 - Avoidance as the sole remedy for breach of the duty of fair presentation

·       LMA5258 Insurance Act 2015 - Contracting out of Section 10 – All warranties

·       LMA5259 Insurance Act 2015 - Contracting out of Section 10 – Individual warranty

·       LMA5260 Insurance Act 2015 - Contracting out of Section 11– Whole insurance contract

·       LMA5261 Insurance Act 2015 - Contracting out of Section 11 – Individual term

 


Insurance Act Clauses – Scope of Application

·       LMA5263 Insurance Act 2015 - Application of the Act to all participating Insurers - understood to be overridden by approved Compliance words

·       LMA5264 Insurance Act 2015 - Application Clause (“Wraparound Clause”) - renewal anniversary date and actual inception date restrict use of this clause

Layered or multi-section placements

Each layer or each section of a placement may have different choice of law and jurisdiction; and the contra proferentem principle favouring the policyholder may not always apply if the umbrella wording is clear as to elected law and jurisdiction performance as evidenced in a recent case law in the USA. And if the contract law and jurisdiction provisions are subject to endorsements, it is vital to ascertain which wording sub-section(s) these amendments shall apply to.

Reinsurance and/or retrocession considerations

In the case law Wasa vs Lexington, in the absence of an explicit choice of law clause, the US Service of Suit Clause was not conclusive. Reinsurers were able to apply English law affording a narrow interpretation over the ‘on-risk’ period, whereas in the insurance litigation, the US Supreme court indicated a much wider interpretation over the period of cover and held the defendant insurer liable for many more years.

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. They might accept local law but insist on English jurisdiction or restrict cover to a so-deemed recognised London market form.

The back to back cover might not be possible to achieve for some US contracts, especially where original policy has an unspecified choice of law.