A Case Against Reinsurance Arbitration?
Private arbitration has long been the dispute resolution forum of choice in the treaty reinsurance business. Arbitration of disputes, with decisions made by experienced industry executives familiar with "custom and practice" in the industry, has itself become the "custom and practice."
Most treaties contain arbitration clauses requiring all disputes to be resolved by a panel of three arbitrators with experience in the industry. Under these provisions, reinsurance arbitrators are often relieved of the obligation to follow the strict rules of law that would apply in court, and are encouraged to view the relationship between cedent and reinsurer as an "honorable engagement," with the goal of arriving at a just result.
Treaty underwriters today routinely insert arbitration provisions into contracts without much thought. But is arbitration still the most effective mechanism for the resolution of reinsurance disputes? Should arbitration provisions still be included in contracts without carefully weighing the alternatives?
The presumption in favor of arbitration evolved in what might be called a "kinder, gentler era," before the market was flooded with pollution and asbestos claims, and at a time when the cedent/reinsurer relationship was more often ongoing and of a long-standing duration. Arbitration was then viewed as the best way for business partners to obtain fast and cost-efficient resolution of private disputes.
Arbitration before a panel of industry professionals saved the parties time that might otherwise be wasted educating generalist judges about the reinsurance businesswithout the demagoguery (and expense) of trial lawyers. Confidential proceedings avoided the problem of precedent (set either by a win or a loss). The flexibility of arbitration meant that disputes could be resolved quickly and certainly long before a court might even be willing to set a trial date.
Why arbitration now? Quite simply, arbitration is in widespread use today because it was appropriate yesterday. Once an arbitration provision is included in a treaty, absent an agreement by both sides otherwise, the parties must from then on resolve all their disputes under that treaty in arbitration.
Given the predominance of arbitration provisions, the broker who shops to the market a new submission that does not contain an arbitration provision is selling the unknowna difficult proposition. Thus, arbitration provisions continue to be inserted into treaties because it is easier than explaining to the market why, perhaps, they should not be.
There are a number of practical decisions that should be considered when evaluating the effectiveness of arbitration, including cost, privacy, case management, and implications of party-appointed arbitrators and ex parte contact:
Cost. Arbitrators, unlike judges, are paid by the hour. At one time, arbitrations were resolved more quickly than cases in court. That is no longer always the case. Arbitration proceedings now drag on for weeks, months and even years, as the arbitrators carefully consider the most tangential issues after inviting and pondering over multiple rounds of briefing. The costs associated with these proceedings can be astronomical–and, like a runaway train, once an arbitration has begun, it is often difficult to stop.
Arbitrators have been heard to say that they are duty-bound to give the proceedings their full and complete attention, particularly in light of the fact that the parties are not likely to be able to appeal the decision. Thus, arbitrators often resolve doubts in favor of expanding the proceedings, allowing additional discovery and spending more of the participants money. Judges, on the other hand, faced with heavy dockets, generally ignore whining lawyers and move cases along, skillfully exerting pressure on the parties to resolve their differences or go to trial.
Lawyers who charge by the hour have long been subject to the criticism that they have scant incentive to resolve disputes quickly. Increasingly, parties to reinsurance arbitration have been heard to question whether arbitrators who are paid by the hour have appropriate incentives to resolve cases in an efficient manner.
Privacy. Historically, arbitration results were kept confidential. Today, entire publications are devoted to ferreting out and publishing results of private reinsurance arbitration hearings. In addition, new regulatory schemes in certain jurisdictions like California–could preclude secret results in arbitrations.
Moreover, it could be argued that it is the very fact that arbitration results are kept confidential and have no precedential effect that prevents any finality in the resolution of issuesand keeps the participants coming back for more. Some participants in the arbitration game are happy to arbitrate the same issues over and over, with the philosophy that delay in payment (and winning even a few) is a victory. Such a strategy would be unlikely to succeed in court, where results are almost always public.
Case management. Reinsurance arbitrators are often highly skilled retired executives. They certainly have unparalleled understanding of the workings of the industry. They do not, however, always have the skills and resources necessary to "manage" the resolution of complex and heated disputes.
They do not have clerks or libraries or systems for the retention and organization of voluminous recordsall of which are available to the courts. They sometimes have neither the predisposition nor the legal knowledge necessary to resolve discovery disputes, particularly those involving privilege claims. Nor are they as skilled as some judges in making pre-trial rulings designed to bring both sides to the settlement table.
Organizations like ARIAS (AIDA Reinsurance & Insurance Arbitration Society) in New York are working to improve the management skills of reinsurance arbitrators. It is worth considering, however, whether parties during the treaty-drafting process should agree to a particular court known for the resolution of complex business disputes as the forum of choice, and avoid arbitration altogether.
Implications of party appointed arbitrators and ex parte contact.
In American reinsurance arbitrations (unlike in the British system), it is customary for the parties each to appoint an arbitrator with whom they continue to have substantive contact until just before the final hearing begins. A neutral third arbitrator or "umpire" does not have such contact with the parties.
One consequence of this system is that the parties to a dispute get to pay arbitrators twicethey pay the hourly fees of their own arbitrator and half the fees of the umpire. The question arises whether this system of partisan arbitrators results in "baby splitting" at the end of the day– with some party-appointed arbitrators becoming too wedded to the arguments made by the party that appointed them and with the umpire feeling compelled to "give something to each side" in order to get a friendly result. If so, it is a costly way to get a result that pleases no one.
Many of the advantages of reinsurance arbitration can sometimes be liabilities as well. These considerations should play a role in advising clients about the usefulness of arbitration as a tool for resolving reinsurance disputes.
Linda Dakin-Grimm is a partner and M. Benjamin Valerio is a senior attorney in the litigation practice of the Los Angeles office of Milbank, Tweed, Hadley & McCloy LLP. They specialize in reinsurance dispute resolution both in court and arbitration.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.