Simon Kilgour and Gavin Coull assess Bermuda's legal environment.
Through the continuing influx of new capital, and the migration of yet more companies to it, Bermuda is establishing itself as an increasingly dominant force in reinsurance. This growth is in addition to Bermuda's pre-eminence as the captive capital of the reinsurance world with over 3,000 captives, representing between 44% and 50% of the captive market - some $30bn in premiums. As the volume and types of business being placed into Bermuda increase, then given the current uncertain political and economic environment internationally, the increased use of innovative alternative risk transfer solutions, the concentration of the recent spate of significant catastrophe losses and the inevitable spectre of insurer and reinsurer insolvencies, it is reasonable to speculate that large, complex multi-jurisdictional disputes linked to the Bermudian market will emerge in due course.
Indeed, Bermuda has already seen its share of debacles. Recent notable examples include MGA difficulties such as Stirling Cooke, Centaur and IRM, and the problems faced by the MRM Group as a result of the insolvency of certain of its US operations, and the insolvencies created by Fortress Re/Carolina Re. More recently, concerns have been raised about the ability of Andersen's captive to meet its HIH exposure, let alone the fall-out from Enron. It is perhaps unfortunate for Bermuda's reputation that when such disputes arise they are significant, both in value and impact. This can create an impression that there is something inherently susceptible to abuse in Bermuda's business system which gives rise to such problems.
In doing business with this expanding and changing market now it is more important than ever that the overseas counterparties are aware of the issues which may affect them in the event of disputes and conflicts with Bermudian reinsurers. In this article we therefore consider briefly two aspects, namely what safeguards exist through regulation, and if something does go wrong, what dispute resolution alternatives are available.
It is clear that Bermuda remains confident both in its ability to be a world class marketplace for insurance and reinsurance and also in its determination to counter any suggestion that it is nothing more than another offshore jurisdiction, characterised by poor regulation and unscrupulous business practices. The view of the Bermudian authorities is summed up by the Bermudian Minister of Finance, Eugene Cox, who recently stated: "Bermuda certainly is a leading insurance and reinsurance centre which is certainly appropriately regulated. The regulatory approach is very much risk-based, and there is considerable emphasis on ensuring solvency via significant capital requirements."
The level of regulation and supervision is obviously an important consideration for overseas markets. As indicated by the Minister of Finance, the central thrust of the regulatory framework of the Bermudian market lies in ensuring the financial stability of Bermudian insurance companies. Whilst Bermudian insurance and reinsurance companies are subject to the provisions of the Bermudian Companies Act, industry-specific requirements are contained in the Insurance Act 1978, which establishes stringent capital and surplus requirements which must be adhered to in order to remain entitled to operate in Bermuda.
In addition to the insurance-specific regulations, it is worth noting that Bermuda takes seriously its responsibilities to safeguard against fiscal crimes, in particular money laundering. For example, in June 2001, tax evasion (in itself a potential avenue for money laundering) became an offence in Bermuda for the first time, through the Proceeds of Crime Amendment Act 2000 and the Tax and Management Amendment Act 1999. Whilst it remains to be seen what practical impact these changes will bring, it should be noted that the Financial Action Task Force (FATF), established by the G7 countries in 1999, has audited Bermuda's anti-money laundering regime and is satisfied that it complies with FATF standards.
The Insurance Act provides strict capital and surplus requirements which are designed to ensure that minimum solvency ratios are maintained, therefore ensuring that claims are met. The safeguards provided by the regulations are only as effective as the regulators policing them, and recent changes are directed at improving efficiency in this respect. Until very recently, responsibility for the governance of insurance business fell to the Ministry of Finance itself. However, following amendments to the Insurance Act last year, a new post of Supervisor of Insurance was created, initially in effect combined with that of the Registrar of Companies. In January this year, however, what is perceived by many to be an important change took place, when the Supervisor of Insurance was transferred to the aegis of the Bermuda Monetary Authority (BMA).
This clarification of role should produce a more dedicated and focused scrutiny of insurance companies, as distinct from the Companies Registry, and the fact that the BMA is now responsible for both insurance and financial services regulation is viewed on the Island as a positive step. Indeed, the Minister of Finance himself believes that the change will enhance Bermuda's reputation as a jurisdiction with "clean regulatory authority above reproach". There are two points which perhaps still need to be borne in mind, however. Firstly, the BMA does not have significant resources when compared to the thousands of insurance and reinsurance companies domiciled in Bermuda and, secondly, regulatory focus will remain primarily upon the capital and surplus provisions of the regulations. The extent to which there will be broader scrutiny into `irregularities' remains in question, but it should be noted that the Bermudian authorities are keen to develop what is at present a small financial crimes task force.
It will be highly surprising if the expansion of the Bermudian market does not lead to an increase in disputes, in particular at the reinsurance level. As a result, it is important that overseas markets understand the litigation and dispute resolution regimes governing Bermuda. As with most sophisticated jurisdictions, there are two principal routes available to resolve contested disputes; recourse to the courts and agreement to arbitrate.
Dealing with the first, the most ostensible difference between the litigation environment in London, for example, and that in Bermuda, is the lack of any dedicated Commercial Court.
In London, practitioners are well versed in and comfortable with a highly specialised Commercial Court, capable of handling the most complex of insurance and reinsurance disputes. While the commercial bar in Bermuda undoubtedly has the requisite experience to deal with such disputes, it is recognised, even in Bermuda, that lack of capacity and experience of a judiciary dealing solely with commercial matters provides a huge obstacle to managing significant volumes of commercial disputes and to the consistency of the decisions of the Bermudian courts. This is an area in which the local Bermudian market and Bar are pressing for change, but there is, as yet, no indication that the position will change for the foreseeable future. The attraction of litigation in Bermuda was further undermined last year with the infamous collapse of the litigation between Baron Hans Heinrich Thyssen and his oldest son, Georg, following the unexpected withdrawal of the judge from the case. Although the Thyssen case was not directly related to the insurance market, both the halting of the trial and the costs involved (estimated to be approximately £100m) did not cast litigation in Bermuda in a particularly positive light. Most observers are likely to agree, therefore, that unless there is a significant sea change in the structure of the Bermudian courts, any comfort which may be obtained from litigating under a familiar legal regime (Bermudian law essentially adopts and follows English law) is overridden by the lack of capacity of the judicial system.
Although litigation through the courts may not be an attractive option, Bermuda does offer - and indeed markets itself as - an attractive jurisdiction within which to arbitrate. In England, the 1996 Arbitration Act incorporated only certain elements of the United Nations Commission on International Trade Law (UNCITRAL Model Law); as a result, it means that England provides a flexible and user-friendly procedural regime for arbitrations. By contrast, the Bermudian International Conciliation and Arbitration Act 1993 incorporates and reflects fully the provisions of the model law.
The model law itself was designed to deal sensibly with disputes with an international aspect, and to ensure that minimum recourse to the court was permissible. Under the Bermudian Act, therefore, the tribunal is empowered to determine on its own every aspect relating to the arbitration. For example, under the Bermudian Act, the tribunal is itself empowered to rule on its own jurisdiction.
In fact, the only ground on which the Bermudian courts get involved with aspects of the arbitration process are:
This is in direct contrast to the 1996 Act. In particular, the English Act provides greater opportunity to challenge the award. For example, while the tribunal's decision as to facts is binding, either party can apply to the court on a question of law. Furthermore, the fundamental precept of the English Act is to empower the court to deal with `supportive' issues, such as the enforcement of peremptory orders, securing the attendance of witnesses, and the provision of evidence.
Under the Bermuda Act, any arbitration which is agreed to be seated in Bermuda (it should be noted that the Model Law provides for a much wider basis for incorporation of agreement to arbitrate within contracts, such as through an exchange of correspondence), then the Bermudian Act will, unless the parties expressly exclude it, govern the procedural aspects of the arbitration.
However, it remains the case that the substantive law of arbitration is entirely at the discretion of the parties. Whilst this is derived from the Model Law, it also reflects Bermuda's wish to be perceived as a convenient neutral venue for international arbitration disputes, offering a user-friendly procedure whilst enabling the parties to resolve the issues in accordance with their own chosen law.
Therefore, it is entirely possible for an arbitration in Bermuda to follow, for example, New York law, or indeed English law, whilst adopting the procedural framework of the Bermudian Act. To further encourage the use of Bermuda as a venue, unlike other aspects of working in Bermuda, anyone involved in an arbitration under the 1993 Act is exempt from any of the immigration restrictions currently in place.
However laudable the ethos behind the 1993 Act and the benefits it offers, the biggest difficulty for any significant dispute remains that of logistics. Bermuda is situated approximately 700 miles from the eastern coast of the US, and more than 3,000 miles from London. It is likely to remain the case that notwithstanding the expertise of the local Bar, reinsurers, both in the US and London, would still wish to also involve their own local legal teams, which would inevitably increase legal fees. Equally important are the physical logistics of dealing with document management. To conduct anything other than a relatively small-scale arbitration requires significant volumes of documentation and facilities for handling them, and it is certainly likely that to deal with effective management of an arbitration away from `home base' would lead to many practical difficulties for the parties concerned. As a sales issue, relying on Bermudian law and jurisdiction at the reinsurance level may act as a deterrent to reinsureds and cedants domiciled elsewhere. Indeed, it should be noted that a number of significant Bermudian reinsurers have chosen to incorporate into their products dispute resolution provisions which stipulate for the law and jurisdiction of the domicile of the original risk or cedant, for example New York or UK, rather than Bermuda.
Looking to the future, significant commercial disputes will continue to affect the Bermudian reinsurance market, despite the laudable attempts by the Bermudian authorities to create a suitably regulated market. Whilst arbitration in Bermuda is not to be feared, it is probable that unless there are changes in overseas market perceptions of litigating in its court, Bermuda will remain a dominant reinsurance market centre, but one whose participants may prefer to resolve their disputes elsewhere.
By Simon Kilgour and Gavin Coull
Simon Kilgour is a partner and Gavin Coull is a senior assistant in the insurance and reinsurance department of law firm Reynolds Porter Chamberlain.