Cosbrella Clause

The NYT reports that Bill Cosby is funding his litigation expenses in a creative manner:

In defending himself against lawsuits from women who say he sexually assaulted and then defamed them, Bill Cosby is facing mountainous legal expenses.

Luckily for him, he has homeowners’ insurance.

That is the surprising tool Mr. Cosby is using to pay his legal fees as he battles defamation claims filed by 10 women in three states.

Mr. Cosby’s insurer, American International Group, better known as A.I.G., has gone to court to deny him coverage, arguing, among other things, that it should not have to cover claims that arose from alleged acts of sexual misconduct.

Cosby is not alone. Bill Clinton and OJ Simpson also defrayed legal expenses through their homeowners insurance. How does one get such stellar coverage? Back to the NYT:

The typical homeowner’s policy covers bodily injury, the sort of claim that arises when the mail carrier slips on your broken front stoop. But many wealthy Americans, with assets to protect, often pay for enhanced “personal injury” clauses or umbrella policies that provide coverage in a range of other circumstances, including lawsuits that accuse the policy holder of defamation. Two decades ago, the insurance industry estimated that seven million people in the United States held such umbrella policies, although the Insurance Information Institute said it does not have current estimates.

Umbrella clauses are common in a number of legal instruments. While contracts typically specify some obligations rather precisely (“Smith will deliver X amount of corn to Jones on X date”), drafters often include some vague terms that can be stretched to cover unanticipated events.

Umbrella provisions allow judges and other adjudicators to fill in gaps in the contractual canvas, and to take account formal commitments between the parties that showed up in other legal instruments.

The problem becomes when the gaps swallow the canvas. Legal scholar Raul Pereira de Souza Fleury recently examined the umbrella clause under investment treaties, and found that investment arbitrators had ruled all over the map:

For the tribunals in Joy Mining v Egypt and CMS v Argentina, the key factor that would decide whether the contract breach should be equated to a treaty breach was the nature and magnitude of the State’s interference with the contract.

On the other hand, tribunals dealing with identical umbrella clauses in similar cases reached the opposite conclusion, giving full effect to the umbrella clause. In SGS v Philippines… the tribunal held that Philippines’ obligation to pay the sums owed to SGS, arising out of a service contract, fell within the scope of the BIT’s umbrella clause. According to the tribunal, the umbrella clause ‘provide[s] assurances to foreign investors with regard to the performance of obligations assumed by the host State under its own law with regard to specific investments’….

However, the broadest and more literal applications of the umbrella clause were made in Eureko v Poland… In Eureko the tribunal … held that:”[T]he plain meaning – the “ordinary” meaning – of a provision prescribing that a State “shall observe any obligations it may have entered into” with regard to certain foreign investments is not obscure. The phrase “shall observe” is imperative and categorical. “Any” obligations is capacious; it means not only obligations of a certain type, but “any” – that is to say, all obligations entered into with regards to investments of investors of the other Contracting Party.”

There’s a certain logic to these clauses – a contractual promise is a promise. There’s just two problems. First, less formal communications like campaigning promises or prior regulatory schemes sometimes get interpreted as contractual promises – which they plainly would not be under most domestic legal systems. Second, states might make promises in different forums for strategic reasons. For example, a state might make a big promise (lock in of taxation rates) to induce a foreign investor to invest, but choose to make that under a domestic legal contract that would be interpreted by a deferential national court rather than a less deferential foreign treaty tribunal. While you could say that was a sleazy move on the state’s part, it’s also one that the investor signed up for if their initials are on the contract. Caveat emptor!

The predictably unpredictable spread in the investment treaty case law has already led some countries to dial back the language in their newer treaties. As de Souza reports:

before 2004, 34 of [the US’] 41 BITs contained an umbrella clause that read ‘[e]ach Party shall observe any obligation it may have entered into with regard to investments’. By contrast, in its 2004 and 2012 Model BITs, the US eliminated the customary umbrella clause and instead, the model BIT provides a strict limitation of investment agreements (Article 1) whose breach may be submitted to arbitration, namely: (i) natural resources; (ii) supply of utility services; or (iii) performance of infrastructure projects… the investor must waive its rights to other remedies, in order to pursue such arbitration claim.

Will this be a new era of more spelled out contracts and treaties? Bill Cosby and other beneficiaries of vague/encompassing language probably hope not!

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