Bermuda: The Bermuda Insurance and Reinsurance Market

Bermuda is a self-governing British Overseas Territory. 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 short overview of some of the important differences will be provided latter in this article.

A dozen years ago Bermuda was (as it remains today) the leading domicile in the world for captive insurance companies. However, the Island was not regarded as a serious market for reinsurance capacity. ACE and XL had been incorporated in the late 1980s, but were yet to develop into the huge corporations whose headquarters now dominate the Hamilton skyline. The first major infusion of new capital began in the early 1990s with the formation of the "big cats". In 1995, the Insurance Act 1978 was amended to create four classes of insurance company for regulatory captives, class 4 being companies with capital in excess of $100 million (a figure which now looks rather modest for a property/catastrophe reinsurer).

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 to 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.

By the year 2000 over 1500 insurance companies (including over half the world’s captives) with $150 billion in assets and writing over $40 billion annually in premium, were incorporated in Bermuda. Following the attacks of 11 September 2001, new capital poured into Bermuda. More than 100 new insurance companies have been incorporated since this time, of which 12 have capital in excess of $1 billion. Moody’s reported that the largest Bermuda start-ups "attracted in excess of $13 billion of fresh start-up capital, or about half of an estimated $27 billion of capital raised world wide post September 11." Therefore, if one takes into account the further capitalization of existing Bermuda companies, one sees that a significant part of the world's new insurance capital has come to Bermuda.

The regulatory infrastructure has kept pace with the rapid expansion of the market. In 2001 a new position, Supervisor of Insurance, was created (the functions of insurance regulator had previously been performed by the Registrar of Companies). The Supervisor’s office is part of the Bermuda Monetary Authority which regulates Bermuda’s financial services industry.

Beyond the legislative framework of Bermuda insurance law, there is also the Common Law to be taken into account. (For American readers, this includes the Common Law of the Commonwealth, but not United States law.) The trial court for insurance and reinsurance disputes is the Supreme Court of Bermuda. Appeals lie to the Court of Appeal of Bermuda. From here appeals may be made to the Privy Council in the United Kingdom. In terms of the authority of legal decisions outside of Bermuda, only decisions of the Privy Council in the United Kingdom are technically binding on Bermuda Courts. Decisions of the House of Lords and the Court of Appeal in England are highly persuasive and generally followed in Bermuda. In the absence of any other authority, Bermuda courts may take into account decisions from other Commonwealth courts and depending on the Court, may find these decisions helpful or persuasive, although not binding. It should be noted that 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.

When disputes arise it is important to understand the differences in the systems of litigation and arbitration. Bermuda has not adopted the English Civil Procedure Rules (UK). 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). One of the significant differences between the 1986 and the 1993 Act is that under the latter legislation there are very limited grounds for appeal (e.g. fraud, collusion), which helps to bring finality more quickly to the dispute resolution process.