The Danger of Inconsistent Choice of Law, Jurisdiction and Arbitration Clauses in Insurance Policies

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By Patricia H. Thompson and K. Renee Schimkat  

Patricia H. Thompson is a shareholder in the Miami office of Carlton Fields Jorden Burt, P.A. She is a trial lawyer with a wide-ranging insurance and complex commercial litigation practice in courts and in arbitrations. She also devotes much of her time to counseling clients concerning dispute avoidance and resolution, insurance claim investigation and coverage analysis. K. Renee Schimkat is Of Counsel in the Miami office of Carlton Fields Jorden Burt, P.A. Her practice focuses on insurance coverage analysis, claim investigation and coverage litigation in federal and state courts.  

Unforeseen problems might result when the dispute resolution provisions in an insurance policy are inconsistent regarding choice of law, jurisdiction, the use of arbitration, and arbitral rules and procedures. Specifically, when parties fail to clearly and consistently designate the law, jurisdiction and procedure that should govern the resolution of coverage disputes, they might be surprised to learn that coverage issues can then be decided in countries, under laws, and by courts or arbitration tribunals to which they had not agreed.

Recent cases shed light on how courts in the U.S. and elsewhere might resolve issues raised by such inconsistent policy language.

English Case

In British-American Insurance (Kenya) Ltd. v. Matelec Sal and Thika Power Ltd., [2013] EWHC 3278 (Comm), 2013 WL 5826183 (Oct. 29, 2013), an English court ruled that an arbitration panel sitting in London would hear the parties' dispute arising out of an insurance policy, notwithstanding a provision where the parties agreed to “submit to the exclusive jurisdiction of the Courts of Kenya” and that “all disputes arising hereunder shall be submitted to a competent court in Kenya.”

At the heart of the dispute was a single document containing (a) an insurance contract issued by British-American Insurance (Kenya) Ltd. (BAIC) to two contractors, a Lebanese company and a Kenyan company, on a project for the construction of a power plant in Kenya, and (b) a reinsurance contract in which BAIC was the reinsured and 95 percent of BAIC's liabilities as insurer were reinsured by Swiss Re, Munich Re and Africa Re.

BAIC and its insureds agreed that some terms set out in that document applied to their insurance contract only, some terms applied to the reinsurance contract only and some terms applied to both contracts. The parties did not agree, however, as to which terms fell within each category.

The fact that a single document constituted both an insurance and reinsurance policy was problematic in itself. Further problems arose, however, when the policy, endorsements and various other attachments contained inconsistent choice of law and jurisdiction language. At issue were the policy's law and jurisdiction provisions, amended by endorsement to state:

This reinsurance shall be governed by and construed in accordance with the law of England and Wales and each party agrees to submit to the exclusive jurisdiction of the Courts of Kenya. All disputes arising hereunder shall be submitted to a competent court in Kenya.

Seat of Arbitration: London

Appointor: Appointing officers of ARIAS (UK)

Despite the use of the word “reinsurance” in the endorsement, both BAIC and the insureds agreed that the amended governing law provision and the amended jurisdiction provision applied to the insurance contract between them. BAIC further argued, however, that the arbitration provision also applied to the insurance contract. The insureds disagreed, arguing that part of the endorsement applied only to the reinsurance contract.

The court wrestled with those arguments and the clear inconsistency of an arbitration provision where the parties had also agreed to submit “all disputes” to a court in Kenya. The court then applied what it deemed the “more commercial sense” application of construction, stating:

Provision for London arbitration in both the insurance and reinsurance contracts will enable disputes under the two contracts to be decided by the same tribunal. I cannot see that in the present case there would be any good reason for wanting to have a different regime for deciding disputes as between insurer and insured on the one hand and reinsurers and reinsured on the other.1


The court briefly considered that the insureds, one of whom was a Kenyan company, might want a dispute resolved by Kenyan courts as opposed to an arbitrator in London. Nevertheless, the court found “no compelling reason overall for the insureds to want disputes to be resolved in the Kenyan courts rather than by London arbitration.” Instead, a “London arbitration would have commercial advantages, in particular an expert tribunal and a substantial degree of privacy.” 2  

One can only wonder whether the Kenyan company, on a Kenyan construction project, which had stipulated that all disputes would be submitted to a Kenyan court, found the court's reasoning persuasive,(continued on page 134)(continued from back page) given that it might never have anticipated appearing before a London arbitration panel to resolve disputes under its insurance policy.

Another English Case

Another English court wrestled with a policy's inconsistent arbitration, choice of law and jurisdiction clauses in Sulamérica CIA. Nacional de Seguros S.A., et al. v. Zurich Brasil Seguros S.A., et al., [2012] EWHC 42 (Comm), 2012 WL 14764 (Jan. 12, 2012). There, the policy's arbitration agreement stated: “[D]ispute[s] shall … be referred to arbitration under ARIAS Arbitration Rules … . The [arbitration] tribunal shall have the widest discretion permitted under the law governing the arbitral procedure when making such orders or directions. The seat of the arbitration shall be London, England.”

The policy also contained a law and jurisdiction clause that stated: “It is agreed that this Policy will be governed exclusively by the laws of Brazil. … Any disputes arising under, out of or in connection with this Policy shall be subject to the exclusive jurisdiction of the courts of Brazil.”

At issue in this decision was the validity of the arbitration agreement and the choice of law governing it. The insureds argued that Brazilian law applied and under that law, the arbitration agreement was only operative at the behest of the insureds and was limited so that it did not apply to the coverage issues between the parties. Consequently, the insureds filed suit in a Brazilian court seeking coverage under the policy.

The insureds argued that they did not have to arbitrate because the policy's language providing for “exclusive” choice of law and jurisdiction meant just that and therefore Brazilian law controlled the entire policy, including the arbitration agreement. They also argued that Brazilian law should apply to the arbitration agreement because all the parties were Brazilian, the subject matter of insurance was in Brazil and the events in question took place in Brazil.

The insurers disagreed and filed an action to enforce the arbitration agreement in an English court, arguing that the agreement to arbitrate was governed by English law. The insurers reasoned that the law with which the arbitration agreement had its closest and most real connection was England because the arbitration clause provided that “the seat of arbitration was to be London, England.”

The English court agreed with the insurers, ruling that English law prevailed and the arbitration agreement was therefore valid and binding. The consequence of the court's finding meant not only that English law governed the arbitration agreement—while Brazilian law governed the rest of the policy—but also that the insurers could enforce the arbitration agreement in London, despite pending legal proceedings in the courts of Brazil. The court explained:

The effect is, of course, to give priority to the arbitration clause over the exclusive jurisdiction clause but there is no other way of reconciling the two. To give full width to the exclusive jurisdiction clause would be to exclude the right to arbitrate altogether.3

Although not specifically addressed by the court when deciding the controlling law issue, the court did note elsewhere in its opinion that the insureds were substantial enterprises who had arranged the terms of reinsurance to “front” or cover their local insurers, the program was tailor-made for the Brazilian project—one of the world's largest hydroelectric facilities—and the reinsurance was subject to lengthy and detailed negotiations.

Why did the court note these facts? Perhaps because the insureds were sophisticated parties who had the opportunity to state which law applied to the arbitration agreement , but failed to do so. Absent express language as to which law governed, the court was free to apply English conflict of law rules and find that English law prevailed.

Canadian Opinion

Indeed, in an earlier opinion out of Canada, Pope & Talbot Ltd. (Re), 2009 CarswellBC 3060, 2009 BCSC 1552 (Nov. 12, 2009), the court did not hesitate to state that it would apply British Columbia law to a coverage dispute because the parties to an insurance policy failed to make their choice of law provisions clear enough. The dispute in question arose out of a directors and officers liability policy issued by Federal Insurance Company (Federal), an Indiana insurance company with its headquarters in New Jersey, to an Oregon-based company, incorporated in Delaware and traded on the New York Stock Exchange. The excess insurers were National Union Fire Insurance Company of Pittsburgh and XL Specialty Insurance Company—two insurers similarly incorporated and headquartered in the U.S.

At issue was whether the D&O policies in favor of the directors and officers of the insured and one of its Canadian subsidiaries covered certain wage claims brought by former employees of that subsidiary pursuant to the Canada Business Corporations Act.

The insurers maintained that the policies should be construed under Oregon law because that was where the insured was headquartered and where most of its head office functions for its global operations took place. Moreover, Federal had sent confirmation of coverage out of its Oregon office and three endorsements to its policy specifically referred to Oregon law.

The insured argued that the proper law was British Columbia where its subsidiary was located and where the majority of the insured's product operations took place. Further, the subsidiary was a federally incorporated Canadian company and the insured's primary operating company.

In determining what law applied, the court noted that the parties had a right to choose the law that would govern the interpretation of the policies, but did not do so. Instead, the court found a number of inconsistencies within the policies as to choice of law and, focusing on Federal's primary policy and its underwriting, based its decision to apply Canadian law on several facts that it considered inconsistent with the insurers' position that Oregon law governed.4

For example, the court noted that Federal's policy contained choice of law language in a number of places that defined law in relation to the jurisdiction that would be most favorable to the insured, without identifying any specific jurisdiction. Further, Federal provided worldwide coverage to the insured, contemplated claims against the insured in jurisdictions beyond the U.S.—including Canada and Australia—and added endorsements to its policy referring to Oregon law, yet did not include a choice of law clause to govern the entire policy.

The court opined: “The parties had ample opportunity to select one proper law, especially the law of Oregon. They chose not to do so.”5 The court thereafter applied the choice of law principle of dépeçage, determining that the parties intended different laws to apply to different parts of the policies because of the various inconsistent terms.

In the end, the court concluded that the policies had the closest and most substantial connection with British Columbia, where the underlying litigation against the subsidiary's directors and officers was pending and, therefore, British Columbia law would apply to the coverage issues raised.

One can only assume that when issuing their policies to an Oregon-based company, Federal and the other U.S.-based insurers did not anticipate that Canadian law would govern the interpretation of those policies.

U.S. Courts

U.S. courts also have tackled the challenge of reconciling inconsistent policy provisions concerning choice of law and dispute resolution. In Union Electric Co. v. AEGIS Energy Syndicate 1225, 713 F.3d 366 (8th Cir. 2013), for example, the court held that a policy's endorsement providing for resolution of coverage disputes in Missouri courts under Missouri law displaced an otherwise mandatory arbitration provision in the policy itself.

The policy's arbitration agreement stated: “Any controversy or dispute arising out of or relating to this … AEGIS POLICY … shall be settled by binding arbitration. … [The] Policy shall be governed by the laws of the state of Missouri.”

However, an endorsement to that policy stated:

Notwithstanding anything contained in this Policy to the contrary, any dispute relating to this Insurance or to a CLAIM (including but not limited thereto the interpretation of any provision of the Insurance) shall be governed by and construed in accordance with the laws of the State of Missouri and each party agree[s] to submit to the jurisdiction of the Courts of the state of Missouri.

The insured brought an action in federal court seeking to recover on this policy. It argued that the endorsement's plain language gave Missouri courts jurisdiction over all disputes related to the policy and therefore replaced the policy's mandatory arbitration provision.

The insurer, who sought to compel arbitration, claimed that the endorsement complemented the policy's mandatory arbitration provision and was meant only to give Missouri courts personal jurisdiction over both parties in order to enforce that provision.

The U.S. Court of Appeals for the Eighth Circuit affirmed the district court's denial of the insurer's motion to compel alternative dispute resolution, finding that the endorsement “entirely supplant[ed] the [policy's] mandatory arbitration provision.” In so holding, the court found it “highly revealing that the endorsement nowhere indicates an intent that the grant of jurisdiction that it contains refers only to pre- or post-arbitration enforcement.”6

Takeaway Lessons

Clearly, inconsistencies in policy language can lead to insurance coverage litigation being decided by state or foreign laws, or courts or arbitration tribunals, that one or more contracting parties might not have intended at the time the policy was issued.

Further, such inconsistencies can lead to expensive and unnecessary parallel litigation, when the parties seek declarations as to coverage before any number of courts or arbitration tribunals. As the Sulamérica court noted:

The only other option [to favoring the arbitration over the exclusive jurisdiction clause] would be to allow both the right to litigate in Brazil and the right to arbitrate [in England] to run in tandem, with the potential for a race to judgment between the two … .7

Parallel proceedings also can lead to inconsistent rulings where, as in Sulamérica, a court sitting in one country applies its own conflict of law principles and disagrees with the foreign court's findings based upon that foreign court's law.   

Although certain state and foreign jurisdictions restrict contracting parties' ability to choose the law governing their insurance policies, and even the ability to arbitrate disputes arising out of those policies,8 consistency throughout an insurance policy as to arbitration, choice of law and jurisdiction can, at the very least, give parties predictability when a dispute arises and, when not otherwise limited, certainty as to the law and procedure that will apply to that dispute.

Accordingly, insurers, reinsurers and insureds should examine their insurance policies carefully to ensure the consistency and clarity of every provision governing choice of forum, law and dispute resolution procedure.

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