Law and Jurisdiction in Insurance Policies – Ignore at your Peril

When seeking to construct an insurance program with broad terms, limited exclusions, and a competitive price, you would be forgiven if the law and jurisdiction clause of the insurance policies is at a relatively low point on your list of priorities.  After all, what difference does it make where you fight a claim and how likely are you to get to the issue of proceedings in any event?

The reality is that the law reports include a healthy number of judgments in which law and jurisdiction take centre stage.  These satellite disputes add a significant layer of costs to proceedings, even before the real dispute begins, and also lead to longer overall time periods for resolution of claims.

The recent High Court decision in AIG Europe v John Wood [1] has underscored the importance of this issue in the insurance context.  In that case, the drafting of the jurisdiction clause prevented the policyholder from continuing an action in their preferred jurisdiction, Canada.

In this article, we explain the key takeaways of the ruling before giving tips on the crucial points to consider when choosing (1) the dispute resolution mechanism; and (2) the governing law of your policy.  Giving detailed consideration to these issues at the policy placement stage can avoid the costs of litigation down the line, and provide that disputes are resolved in the insured’s preferred forum.

AIG Europe v John Wood Group

After the policyholder in the action commenced proceedings against insurers in the Canadian courts, insurers applied for anti-suit injunctions in the English High Court by claiming that the relevant policies contained exclusive English jurisdiction clauses (or in one instance, an arbitration clause).  

The Court agreed with insurers on the exclusive English jurisdiction clause argument.  Most notably, a policy which provided for English law and jurisdiction was found to require that disputes must be resolved by the English Commercial Court, even though the clause did not mention an “exclusive” jurisdiction. As a result, the policyholder was prohibited from suing insurers in Canada.

In the rest of the article, we focus on the issues for a policyholder to consider in order to avoid the predicament faced in that case.

Dispute Resolution Clauses

At the outset, it is important to distinguish between clauses dealing with the governing law of the policy and the dispute resolution (or jurisdiction) clause.  Policies need both of these, and it is important to ensure that different clauses (e.g. contained in the policy and schedule) do not conflict.

The two options for binding dispute resolution (to be embedded in an appropriate policy clause) are as follows:

1. Arbitration – a private form of dispute resolution. The parties contractually agree to refer their dispute to an arbitral tribunal (usually one or three arbitrators), with the arbitrators’ decision binding on the parties.  
2. Litigation through the courts of a specified country and in front of a judge.

These mechanisms result in binding outcomes, and so are mutually exclusive.  A policy should not contain both a litigation/court clause and an arbitration clause (unless those are expressed as non-exclusive mechanisms at the option of one or more parties – an issue that could be subject to an article in itself).  In the absence of one of these clauses, court litigation will likely be the default (and precisely which country’s courts will take jurisdiction will depend on a number of factors).

A dispute resolution clause may also require or permit mediation.  Mediation allows parties to discuss their dispute with an impartial third party (the mediator) who assists in trying to reach a negotiated settlement. The mediator does not act as a judge (or arbitrator) or make a decision.  Mediation is non-binding (unless the parties reach agreement and enter into a binding settlement contract).  Mediation provisions can, therefore, be inserted alongside litigation/court or arbitration clauses but, importantly, cannot replace them.

Policies may also contain a “QC Clause”, which provides for certain disputes to be determined by the opinion of a QC or senior lawyer.  These clauses work well and can be used alongside arbitration or litigation clauses, so long as it is clear what disputes can be resolved by a QC opinion.

Arbitration vs Litigation

Having established the need for a dispute resolution mechanism, the next question is which one to choose?  There are a number of factors that parties consider when deciding between arbitration and court/litigation, and often it comes down to personal preference, experience of the process, and/or finding the right device for the particular contract.

Historically, arbitration was considered quicker and cheaper than litigation, but this opinion has become increasingly contested.  Anecdotally, arbitration proceedings have morphed into a form of expansive litigation at the same time that the Courts have become more active in their management of cases. Therefore, parties should consider recent trends carefully if costs is a decisive factor.

Exclusive v Non-Exclusive

As seen from AIG Europe v John Wood, even if there is a jurisdiction clause, that may not be enough to prevent disputes over jurisdiction.  The clause will need to make clear if it is exclusive (so only one Court can hear the dispute) or non-exclusive (opening up the possibility of taking the dispute to a forum not mentioned in the contract).

The key advantage to non-exclusive jurisdiction clauses is the flexibility they offer, as parties have the ability to choose the most appropriate jurisdiction once a dispute arises. Conversely, the major disadvantage is the potential uncertainty these clauses bring. Parties may be sued in a jurisdiction which may be unfamiliar, inconvenient and unpredictable and the risk of satellite litigation over the correct forum remains. For this reason, we recommend using an exclusive jurisdiction clause unless there is a good reason to the contrary.

Governing Law

Whichever dispute resolution mechanism is chosen, parties must make a clear decision with regard to the governing law of the policy. Failure to do this or ambiguity can completely change the meaning and scope of cover.  Words or phrases having one meaning under one law may mean something else under another, and there may be implied terms or (in the insurance context) a different pre-inception disclosure regime under different laws.  It is possible, although not common, to grant jurisdiction to the courts of one country with the governing law that of a different country.  That raises a number of issues and policyholders should seek advice if considering that approach.

The Three Golden Rules of Law and Jurisdiction

Our note aims to provide the outline of the points to consider when looking at law and jurisdiction clauses.  First, you need both clauses (and to ensure that multiple clauses do not conflict).  Second, mediation can be an addition but is not a substitute for a binding dispute resolution mechanism (i.e. either Court or arbitration).  Third, consider whether to make the dispute resolution clause exclusive or non-exclusive (and ensure that is clear).  Whilst there are a number of additional issues to consider on what clauses should specify, policyholders meeting those three golden rules will allow those that arrange insurance to sleep easier at night.

This article was authored by members of Howden’s Legal, Technical & Claims team. The Legal, Technical & Claims team is made up of senior insurance lawyers and experienced claims professionals, and provides support on insurance claims, policy wordings and legal and regulatory developments as they impact your business. If you have any queries on the issues raised, please feel free to contact a member of the team directly.

James Wakefield, Claims Handler:

T: +44 (0)2038 087561 E: [email protected]

Neil Warlow, Associate Director:

T: +44 (0)7923 208441 E: [email protected]

Sam Vardy, Associate Director:

T: +44 (0)7719 928600 E: [email protected]

Carey Lynn, Executive Director:

T: +44 (0)7923 229882 E: [email protected]