Separated by a Common Language: Differences Between U.S. and British Insurance Law - ABA YLD 101 Practice Series

By Gregory Gentry

When you first come across an insurance policy governed by British insurance law, you may be surprised at some of the critical differences between how United States courts and British courts deal with some of the common insurance issues. How can two countries whose legal systems evolved from the same common law heritage end up so different? This article discusses three of those critical differences – (1) the effect of settling an underlying case and whether the insured must prove its own liability; (2) non-disclosure and the voidability of insurance policies; and (3) the introduction of extrinsic evidence to clarify policy terms. The first two of these differences are seen as tilting the playing field far in the direction of insurers while the third gives some comfort to insureds.

I.          Settling Cases and Proving Liability

The first difference between U.S. and British insurance law is the effect of settling an underlying case on liability insurance. In the United States, it is common practice to settle cases while still denying liability. When Dow Corning was defending its silicone breast implants, for example, it denied that the implants caused any injury, but still entered into a major settlement. Its insurers denied coverage for that settlement, arguing that, since the policy covered "injury" and Dow Corning had denied there was any "injury," there could be no coverage. The court rejected this argument, stating that what was at issue was not "what really happened," but "what did Dow Corning fear a judge or jury might believe happened?" 1  This conclusion represents the clear majority rule in the United States – an insured need not prove that it is actually liable, only that "given the circumstances affecting liability, defense and coverage, the settlement was reasonable." 2

United States courts have long recognized that forcing an insured to prove its own liability would put it into a strange bind. As the Tenth Circuit stated:

[There are] two important policy considerations in adopting a legal standard that requires courts to examine only the potential exposure of the settling party, rather than the actual liability of that party. First, if actual liability were the applicable standard, settling defendants would be in the ‘hopelessly untenable position of having to refute liability until the moment of settlement, then turn about face to prove liability in the insurance action’ [citation omitted]. Second, requiring an insured to prove the case brought against it in order to receive insurance coverage would dissuade the insured from settling the underlying litigation. Faced with the choice of vigorously defending the underlying tort action or settling it without the hope of insurance coverage, the insured would choose the former. 3

But British courts require exactly this about face. Since 1967, British courts have understood that a settlement must be one that, to a degree, at least, “establishes” liability. 4To what degree liability must be established, however, was in question until recently. Two cases, Lumbermen’s Mutual Casualty Co. v. Bovis Lend Lease, Ltd, 5 and Enterprise Oil v. Strand Ins., 6 clarified that an insured must prove its actual liability.

Lumbermen’s concerned a building contract. From 1996 to 1997, Bovis was the main contractor on a project to build the Braehead Retail & Leisure Centre in Glasgow. Disputes arose about the construction and Bovis sued its employer for £37 million. The employer counter-claimed for either £75 million or £103 million, alleging the project had been mismanaged and claiming that the work done was defective and non-compliant. The litigation was settled in 2002 with the employer paying Bovis £15 million. There was no indication in the settlement agreement how this number was arrived at, nor whether it included a set-off against the employer’s counter-claims. Bovis submitted a claim for indemnification to its insurers for £19 million, relying on its solicitors’ assessment of that being the amount of the employer’s valid claims. The insurer filed for a declaratory judgment that it was not liable to indemnify Bovis. The court agreed. It found that an insured must provide evidence that it was liable and that the settlement amount was reasonable. In this case, however, when the global settlement was not clear that any covered loss was included, the court could not reopen the settlement to determine liability. That part of the decision, which suggested that for insurance purposes all settlements should detail which part of the loss is attributed to each claim, was roundly criticized. The part of the decision that suggested an insured must prove its liability to the third party in court was not.

Enterprise Oil dealt a blow to Lumbermen’s, but only to the controversial section of that decision dealing with undifferentiated settlement agreements. It reinforced the requirement that insureds prove their liability. This case dealt with three oil companies, Enterprise Oil, Amoco and Amerada Hess, which entered into an agreement in 1990 to explore and develop North Sea oil fields. In 1997, Amoco agreed to lease a drilling unit, known as a “Rowan Gorilla V” (“RGV”) from British American Offshore (“BAO”) and its US-parent, Rowan Companies, for at least one year at a rate of $175,000 per day. When the RGV was delivered in 1999, Amoco attempted to terminate the lease, claiming the machine was delivered late and was defective. This led to parallel proceedings in the United States and England. In England, Amoco sought a declaration that its termination was valid, and BAO sought the value of its lease, $65 million. BAO won, and was awarded damages and interest of over $73 million plus costs in excess of £9.7 million. Enterprise Oil was obliged to contribute $17.9 million to the damages and £2.57 million to the costs.

The U.S. parent Rowan Companies (“Rowan”) sued all three oil companies in Texas, alleging tortious interference with the lease and claimed actual losses and also consequential losses arising out of the termination. Chief among these consequential damages was the lost value of the company’s share-price when it was required to cancel a planned buy-back of Rowan stock. Other losses included the cost of relocating the RGV and five other rigs from the North Sea to the Gulf of Mexico and the subsequent loss of earnings. The Texas suit was settled on the eve of trial for $175 million. Like the settlement agreement in Lumbermen’s, this settlement did not apportion the damages among the various claims. Thus, the insurer sought a declaratory judgment that it was not liable. While the court rejected the idea from Lumbermen’s, that a settlement agreement that did not specifically allocate damages to covered claims of liability was insufficient for recovery, it stated that absent express wording, coverage under an indemnity policy only extends to actual liability, not alleged liability. 7 Therefore, Enterprise could only recover if it could demonstrate that it was, or would have been, actually liable to Rowan in the Texas proceedings in respect of the alleged tortious interference. In addition, the question the English court should answer was not whether a judge and jury could legitimately have decided based on the facts, but what they should have decided based on its determination of what Texas law requires. The judge’s task, then, was to decide what the outcome of the case would have been, applying Texas law and procedure to the facts as he finds them and acting as both judge and jury. In this case, the judge was satisfied that Enterprise had failed to prove it had interfered with the lease, which defeated the insurance claim.

One small ray of hope for insureds, however, is that both of these cases involved insurers who were not involved in the settlement process. In both cases the insurer was informed of the settlement only after it was a fait accompli. It is, therefore, an open question how the English courts will deal with an insurer who refuses to defend or consent to settle. Other Commonwealth Countries have found an insurer who wrongfully denies their duty to defend gives up the right to contest more than the reasonableness of the settlement amount. 8

II.         Non-Disclosure and Uberrima Fides

A second way in which English insurance law tends to favor the insurer is in the concept of non-disclosure. In the United States, outside of maritime contracts, the only time an insurance contract can be voided for the insured failing to provide material information is if it can be proved that the insured acted fraudulently. Fraud is defined as either: “(1) Where insured, having actual knowledge of material facts, has intentionally failed to disclose them truthfully. (2) Where insured, though not having actual knowledge of material facts, yet has intentionally, and in bad faith, refused to become acquainted with the facts.” 9 An innocent nondisclosure – accidental or negligent – by contrast, cannot lead to the voiding of an insurance contract.

In England, however, the rule is one of uberrima fides, utmost truthfulness. The duty of utmost truthfulness is premised on the assumption that the insured has the advantage of information. “Insurance is a contract of speculation. The special facts upon which the contingent chance is to be computed lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance . . .” 10

Thus, an insurance contract is voidable if the insured fails to disclose a known material fact, which would influence the judgment of the reasonable insurer and which, if disclosed, would have induced the actual insurer either not to make the contract or make it on different terms. The burden is on the insurer to prove the elements of non-disclosure. 11

The withheld information must be of the type that would be material to a reasonable insurer. 12 What is material depends on several factors, including the branch of insurance, the general practice, context, and public policy. For withheld information to be considered misrepresentation, the risk known to the insured and unknown to the insurer must be of a type that would impact the issuance of the type of insurance involved. Not disclosing a flaw in a reinsurance arrangement might not endanger a liability insurance contract, for example. In other words, non-disclosure is only found to be material for those matters where an information imbalance would be expected. The courts next look to the general practice of what is done by insurers who work in the same line of insurance in a similar situation, 13, and to the questions those insurers generally put to the insured, but the courts will not give much weight to the questions the specific insurer put to the insured outside the context of the general industry. This is the opposite of what the majority rule is in the United States, where an unasked question is presumed to be immaterial.

In addition to the branch of insurance and the general practice of the industry, the British courts look to context and public policy. First, the time when the information is given is important. For example, the fact that a ship is chartered to a German company may be quite material during World War I, but completely immaterial at the time the contract was written if it was written in the years before the war. 14 Finally, public policy may put things out of bounds of materiality that might otherwise be material. In England, under the Rehabilitation of Offenders Act of 1974, 15 criminal convictions are “spent” and need not be disclosed after a period of time, which varies according to the sentence. So while an insurer may find it vitally material to know that a proposed insured has a conviction for drunk driving on his record, if that conviction is spent, that is deemed by law to be not material.

Of course, a company can only fail to disclose information it knows. However, the knowledge of a company in England is broader than a company in the United States. In England, the knowledge of "agents to know" and employees who can exercise some discretion or executive authority is generally imputed to a company. "Agents to know" are employees involved in making the insurance contract and those "specially employed for the purpose of communicating to him the very facts which the law requires him to divulge to his insurer." 16

In addition to actual knowledge and imputed knowledge of agents and employees, a company is presumed to know "ever[y] circumstance which, in the ordinary course of business, ought to be known to him." 17 Also, a company is assumed to have a degree of general knowledge, sometimes referred to as "street smarts" or "common sense." The test for what a company should know in the ordinary course of business is analogous to that in tort law: the knowledge held by a reasonable individual of the same characteristics. 18
           
British courts, however, have long recognized that one need not disclose that which is truly unknown; as a consequence, a company is not required to undertake extensive inquiries prior to concluding a contract for insurance.

To impose such an obligation upon the proposer is tantamount to holding that insurers only insure persons who conduct their business prudently, whereas it is commonplace that one of the purposes of insurance is to cover yourself against your own negligence or the negligence of your servant. 19

The rule can be stated that negligence after the formation of the contract is insured against, but negligence in the application for coverage is not.

 

III.        The Matrix of Facts

One area where British insurance law appears to lean slightly in favor of the insured is in the area of parol evidence. In the United States, the common rule, learned by every 1L in their contracts class, is that parol evidence is not admissible to contradict the plain meaning of the contract unless there is some ambiguity. In Britain, the rule appears to be broader. The general rule of contract interpretation is that all facts reasonably knowable to both parties are admissible to aid in the interpretation of a contract. The only exception to this rule is that the previous negotiations of the parties and any statements of subjective intent made by the parties are generally inadmissible. As the Enterprise Oil court stated, “the interpretive exercise must not be done in a vacuum, but in the milieu of the admissible background material. That comprises anything that a reasonable man would have regarded as relevant in order to comprehend how the document should be understood, provided that the material was reasonably available to both parties at the time ( i.e., up to the time of the creation of the document) . . .” 20 This set of available data points is referred to as the “Matrix of Facts.”

Far from having to first prove an ambiguity to admit the Matrix of Facts, they are considered always admissible. Lewison on the Interpretation of Contracts, one of Britain’s premiere treatises on contract interpretation states:

It has, however, always been the case that the court must construe a written agreement . . . in the light of the circumstances (or background) surrounding its making. Although recent decisions have emphasized the importance of the background to a contract, the principle has long been part of English law…It will be noted that the principle thus formulated applies even where the words of the contract are plain and intelligible . . . Accordingly, evidence of the surrounding circumstances is admissible in all cases to place the contract in its correct setting, even where there is no ambiguity apparent on the face of the document… 21)

The only requirement is that the facts must be known, or reasonably knowable to the parties at the time the contract was entered into. They need not be subjectively known to the parties if a reasonable party should have known them. Insurers, in particular, are assumed to have a great breadth of knowledge of the industry they are insuring. For example, a British court said of a marine insurer that its underwriters could be deemed to know the course of losses affecting particular classes of ships, but not the particular circumstances affecting individual ships or ship lines. 22

The difference between the insurance law of the United States and Britain can often be subtle, but as seen above, it can also be fundamental and striking. A policy that would shock the conscience of a U.S. court, requiring the insured to prove its own liability, is seen as an implied term of any liability policy in Britain. This article gives a brief glimpse of some of the pitfalls that can present themselves to U.S. lawyers coming to terms with an insurance policy governed by British insurance law.


1 Dow Corning Corp. v. Continental Cas. Co., Nos. 200143-53, 1999 WL 33435067 at *5 (Mich. App. Oct. 12, 1999).

2 United Servs. Auto. Ass'n. v. Morris, 741 P.2d 246, 253 (Ariz. 1987).

3 Vitkus v. Beatrice Co., 127 F.3d 936, 945 (10th Cir. 1997).

4 Post Office v. Norwich Union Fire Ins. Sy. Ltd., [1967] 2 QB 363, 373.

5 [2005] 1 Lloyd’s Rep. 494,
6 [2006] 1 Lloyd’s Rep. 500.
7 Id., 516 ¶ 72.
8 See Distillers Co. Ltd. v. Ajax Ins. Co. Ltd., (1974) 48 A.L.J.R. 136 (Australia) (“The insured may make a reasonable settlement where the insurer breaches the contract by denying liability and refusing to settle.”).
9 General Reinsurance v. Southern Surety, 27 F.2d 265, 273 (8th Cir. 1928).
10 Carter v. Boehm, (1766) 3 Burr 1905, 1909.

11 Butcher v. Dowlen, [1981] 1 Lloyd’s Rep. 310.

12 Mutual Life Ins. Co. v. Ontario Metal Products, [1925] AC 344, 351, per Lord Salveson, adopted by Lord Greene MR, in Zurich General Accident & Liability Ins. Co. Ltd v. Morrison, [1942] 2 KB 53, 58.

13 Glasgow Assurance Corp Ltd. v. Symondson, (1911) 16 Com Cas 109, 120, per Scrutton J.

14 Associated Oil Carriers v. Union of Canton, [1917] 2 KB 184.

15 Mitchell [1998] LMCLQ 411, 415.

16 Blackburn v. Vigors, (1887) 12 App Cas 531, 541 per Lord Watson.

17 Marine Insurance Act of 1906, § 18(1).
18 Economides v. Commercial Assurance Co. Plc., [1998] QB 587.
19 Australia and New Zeland Bank LTD. v. Colonial and Eagle Wharves Ltd., [1960] 2 Lloyd's rep 241.
20 [2006] 1 Lloyd’s Rep. 500, 514, ¶ 60.
21 ¶ 3.14.
22 North British Fishing Insurance Co. Ltd. V. Starr, (1922) Lloyd’s LI.L.Rep. 206.

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About the Author

Gregory Gentry is an attorney specializing in insurance coverage and products liability. He also counsels clients on allegations of business crime and advises them on related governmental investigations.  He has litigation experience from the Boston firms of Foley Hoag and Morrison Mahoney.  He can be reached at greg.gentry@gmail.com.

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