The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2011 / 2012

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Divided by a common language we may be, but let's not forget that the American and English legal systems also share common origins.

Not surprisingly, then, there are many similarities, but they are certainly not the same. And just as transatlantic linguistic variations cause confusion, so do the legal differences - and they can be very costly.

Having worked as an insurance lawyer on both sides of the Atlantic, it is striking just how many highly skilled insurance professionals come unstuck because they have not fully understood the implications of this divergence. Although the problem can apply in either direction, this article will concentrate on UK-based insurers that find themselves litigating in the US - a topic that is especially relevant now with storm-related and other claims entering the London market from North America.

The golden rule is to retain clear oversight over every step of the process and be proactive in making sure your American lawyers act in your best interests. That statement is not to suggest that US legal practitioners may knowingly do otherwise; in my experience they are normally highly professional and guided by what they think is right for the client.

They will, however, see the legal picture rather more clearly than the overall commercial picture and how the litigation may or may not benefit your business. The American legal scene can be incredibly competitive, especially in New York, both in terms of acquiring accounts and winning cases. As a result, disputes can drag on for years as opposing law firms slug it out. Winning can become a matter of professional pride as much as anything else.

A not insignificant amount of money later you may achieve a "successful" outcome. Just in case anyone forgets, however, the "winner" can only recoup their costs from the other side in certain specific and rare circumstances, which is a key difference between the English and American systems. Pyrrhic victories are all too common.

Ultimate power

By way of illustration, let's consider the US legal framework. The vast majority of people appreciate that there are two systems of government - the federal and state systems, each with its own jurisdiction and law - but they are often caught by surprise at the complexity of it all.

Each state has its own civil court structure - take New York for example. Most commercial litigation begins in the New York Supreme Court, which is the trial level court of general jurisdiction.

Appeals from New York Supreme Court decisions go to the New York Supreme Court, Appellate Division, which is divided into four departments. New York's highest appellate court is the New York Court of Appeals, whose decisions are binding throughout the state. Only certain state court decisions are eligible for review by the United States Supreme Court, whose rulings are the "supreme law of the land" for both the federal and state systems.

Although the United States Supreme Court may have the ultimate say, the power in the federal court system normally resides at the next level down, in the shape of the United States Federal Courts of Appeals. These, in turn, are divided into circuits - which hear appeals from the district courts within their circuit. Their decisions are ultimately final as the United States Supreme Court only hears about 1 percent of the 10,000 cases referred to it every year.

Confused? It is enough to make you yearn for the relative simplicity of the English legal set-up. Add to this the frequent necessity of having "local counsel" in the state where you are litigating, as well as your primary law firm, and it requires little imagination to appreciate that it can be a lengthy and very costly process navigating litigation through the US courts.

Bad faith

If you are considering such a course you would be well advised to understand how the system works before embarking on the journey and maybe to seek alternative means of resolution. I know of occasions where insurers have spent years following, unquestioningly, their US lawyers through the lengthy and expensive litigation process, before finally taking control and engineering much more economical and commercially practical resolutions away from the courts. It is a solution that does not always come naturally to lawyers.

Above all, clients need to understand the key pitfalls (see box-out) and their implications. Rather than discuss them all here, as each deserves an article of its own, let's consider bad faith as an example. When I speak with insurance professionals I am frequently asked about "bad faith" - there is a tangible fear in the air when the words are used.

Yes, this type of claim can lead to large verdicts. Although you cannot avoid such claims being made, you can lessen their impact by demonstrating that there were genuine reasons to contest or delay paying the claim. This in turn requires evidence of a well thought out claims procedure and a proper investigation; it is essential to have a good audit trail.

The main message, however, is not to be afraid of litigation in the US but to be aware of what can go wrong and how to avoid it. Do not assume you are a special client just because you are paying millions of dollars in legal fees. Once the process is underway, monitor your legal team closely, take a proactive role in determining strategy, and do not be afraid to question what you are being told. Always bear in mind that it is not as simple as winning and losing the case - you need to find the resolution strategy that makes the most commercial and economic sense.

One might offer similar advice to our American friends before they brave the English legal system, but that is another story.

Andrea Lloyd is a solicitor in the Insurance, Energy, Reinsurance and Professional Indemnity group at Elborne Mitchell in London