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Publications
Staying Out of the US Courts
London and Bermuda Newsletter
Summer 2008
By:
Mark Chudleigh
Most Bermuda insurers and reinsurers wish to avoid being subject to the jurisdiction of the US courts. There are several reasons for this, including a desire to avoid what some regard as an unpredictable, expensive, and at times extreme, US legal system. Bermuda companies generally prefer to have their disputes determined in Bermuda or London, ideally through arbitration.
A recent ruling by the United States District Court for the Northern District of Illinois has emphasised the factors that US courts will consider in determining whether to retain jurisdiction over a Bermuda-based insurer or reinsurer. Central States, Southeast and Southwest Areas Pension Fund, et al. v. Phencorp Reinsurance Co. Inc., No. 04 C 5655, N.D. Ill. involved a lawsuit filed against a Barbados reinsurer but the principles applied by the Illinois court apply equally to Bermuda companies.
The Barbados reinsurer (“Phencorp”) was part of a structure that is commonly used by large US corporations to manage their insurance arrangements and was a wholly-owned subsidiary of the original, US-based insured (“PHC”). PHC purchased insurance from various US fronting insurers (including AIG, Reliance, CNA, Hartford and Kemper) providing cover for various business risks, including automobile, workers’ compensation, environmental, property and general liability risks. Phencorp, in turn, reinsured the fronting insurers in respect of their liability to PHC but delegated claims handling responsibility back to the US insurers.
The claimant (“Central States”) sued Phencorp in the Illinois federal court in an attempt to recover amounts allegedly owed to it by PHC. Phencorp sought to have the proceedings dismissed on the basis of lack of personal jurisdiction, given its status as a Barbados company. The court dismissed Phencorp’s motion and retained jurisdiction, ruling that Phencorp had maintained “continuous and systematic” contacts with the US. The following facts were considered to be relevant:
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Phencorp had reinsured US fronting companies (it is unclear from the court’s opinion whether the treaties were negotiated in the US or Barbados)
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Phencorp had delegated claims handling authority back to the US fronting companies
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Phencorp had agreed that any disputes with the US fronting companies would be determined by arbitration in New York, with the New York courts having supervisory jurisdiction
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Phencorp had designated a US Commissioner of Insurance to accept service on its behalf
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Phencorp had maintained a post box in Miami to which the fronting companies sent requests for claims payments
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Phencorp had consulted with risk managers and others at PHC (based in the US) in relation to its obligations as reinsurer
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Phencorp had elected to be treated for US tax purposes as a US corporation
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Phencorp had maintained a bank account in the US
The lessons are clear for Bermuda (re)insurers wishing to minimize their exposure to US litigation: Bermuda (re)insurers should insist that contracts are negotiated in Bermuda, ideally through Bermuda brokers; where possible, claims handling should be conducted in Bermuda or in another non-US jurisdiction; contracts should provide for Bermuda or London arbitration and should be subject to the exclusive jurisdiction of the Bermuda or English courts; service of suit should be made in Bermuda; communications with the US parent should be kept to a minimum; the Bermuda (re)insurer should not maintain US post boxes or bank accounts.
If Bermuda (re)insurers wish to reduce their exposure to US litigation, then these issues need to be addressed at the outset and clear guidelines need to be put in place - and enforced by general counsel or compliance officers - to ensure that management and underwriters do not unwittingly expose the company to US litigation.
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