Bermuda: The Devil Is In The Details: A Primer On Bermuda Reinsurance Law

Article by Jan Woloniecki and Rod Attride-Stirling

Bermuda is a self-governing dependent territory of the United Kingdom. Bermuda’s legal system is founded upon the English common law and a final appeal from the Court of Appeal for Bermuda lies to the Privy Council in London. It is tempting for laymen and for English lawyers practising in London to assume that Bermuda law on any point is going to be the same as English law. The short answer is that Bermuda law is the same as English law, except when it isn’t. The devil, as they say, is in the details. For those who have neither the time nor the inclination to consult "The Law of Reinsurance in England and Bermuda"¹ (a new edition is in the course of preparation) we provide a short overview of some of the important differences.

We begin with the common law. Only decisions of the Privy Council are technically binding on Bermuda Courts. Decisions of the House of Lords are highly persuasive and generally followed in Bermuda. However, both the Privy Council and the Court of Appeal for Bermuda have recognised that there may be circumstances in which the social and economic conditions of Bermuda justify a departure from English precedent. Bermuda Courts and arbitration tribunals are not required to follow English decisions if they consider them to be wrong. An important example is an arbitration award in which the arbitrators (three eminent English QCs) held that the dicta of Potter L.J. in Commercial Union v. N.R.G. Victory that, in the absence of a "follow the settlements" clause a reinsurer is nonetheless bound by a judgment finding the reinsured liable should not be followed in Bermuda. The Supreme Court of Bermuda has held that the English decisions holding unauthorised reinsurance contracts illegal and unenforceable are contrary to Bermudian public policy. In Re Chorely the Supreme Court gave legal effect in Bermuda to reinsurance contracts governed by English law, which would have been unenforceable under English law as it then was. The Bermuda Courts have yet to pronounce authoritatively on the scope of the duty of utmost good faith under Bermuda law. It is likely that the leading decisions of the House of Lords (Pan Atlantic v. Pine Top, The "Star Sea") will be followed in Bermuda. However, it is possible that Bermuda Courts or arbitration tribunals may prefer the law on non-disclosure as stated by the Court of Appeal in C.T.I. v. Oceanus, or may be persuaded that there are good reasons of principle why damages should be awarded for a breach of the duty of good faith.

There are major differences in the statutory regime that applies to insurance and reinsurance in Bermuda. Transactions which may be unlawful and not constitute insurance in England may be permitted in Bermuda. The Bermuda Courts have yet to pronounce upon the broad definition of insurance under the Insurance Act 1978. It is presently open question whether, under Bermuda law, there is a legal requirement for an "insurable interest". The legislation permits parties to enter into "designated investment contracts" which are statutorily deemed not to be insurance (and which would otherwise be regarded as wagering contracts at common law). A number of Bermuda insurance companies have been incorporated under private acts, which provide (in effect) for a special regime of contract law under which the company can deem a transaction to be either insurance or an investment contract. Lawyers practising outside Bermuda are frequently unaware of the existence of such private legislation. A popular form of private act, adopted by many "rent-a-captives" provides for the existence of segregated cells in which the assets of one cell are not available to meet the liabilities of another cell. The Segregated Accounts Companies Act 2000 (amended in 2002) is a public act, which permits segregated cell companies to be formed by registration.

The Companies Act 1981 is modelled on the English Companies Act 1948, with some additions appropriate for an offshore jurisdiction. The insolvency provisions are virtually identical to the 1948 Act. A law reform committee is producing a new bill which will incorporate some of the provisions of the English 1986 Insolvency Act. However, important differences will remain. For example Bermudian legislation permits corporate bye-laws which relieve directors and officers (including auditors) of all liability save in cases of fraud and dishonesty. It comes as a surprise to English lawyers to discover that directors of Bermuda companies are entitled to be lazy and incompetent in carrying their duties, provided they are not dishonest.

When disputes arise it is important to understand the differences in the systems of litigation and arbitration. Bermuda has not adopted the Civil Procedure Rules. The Rules of the Supreme Court of Bermuda 1985 are modelled on the rules in force in England in 1979. This means that in Bermuda, plaintiffs (not claimants) still commence proceedings by Writ² (not a claim form) and defendants still enter an appearance (or if they are contesting the jurisdiction a conditional appearance). There are two separate statutes governing arbitration in Bermuda: The Arbitration Act 1986 (which is modelled on the English Arbitration Acts of 1950 – 1979) and the Bermuda International Conciliation and Arbitration Act (which gives effect in Bermuda to the UNCITRAL Model Law). The 1993 Act and the Model Law apply to international commercial arbitrations (which includes any dispute in which one of the parties is incorporated outside Bermuda) and the 1986 Act now only applies to domestic arbitrations (but it is possible for parties to opt out of the 1993 Act and Model Law and have the 1986 Act apply).