ADR: More Than Arbitration

Insurers and reinsurers generally get along, but disputes do occur, and they can be costly, disruptive and time-consuming. Recent advances in alternative dispute resolution (ADR) represent an opportunity for Canadian insurers to exercise greater control in resolving reinsurance disagreements while reining in potential costs in time and expense.

Arbitration has long been the insurance industry’s method of resolving reinsurance disputes. The earliest record of reinsurance arbitration dates to 1793, and we see surprisingly little change in the procedure two centuries later.

The aggrieved party signals its intention to arbitrate by appointing a disinterested past or current industry executive as the arbitrator. The other party appoints, or has appointed for it, a second arbitrator, and these two then choose a third arbitrator who acts as tie-breaking umpire. These three individuals constitute an arbitration panel with the power to review documentary evidence, hold hearings if necessary, question witnesses, rule on contested factual issues, direct costs if appropriate and present an award that is both binding and enforceable by the courts.

Arbitration is an effective dispute resolution mechanism when disagreements arise from complex commercial transactions – particularly in industries of an international nature. For Canadian insurers, the advantages over litigation are considerable. Arbitration can operate to a much shorter timetable than the courts. With the will of both parties, the duration of a dispute can be measured in weeks rather than years.

Equally important, with this speed comes a dramatic reduction in costs. Deliberations are made by industry experts appointed because of their familiarity with the nuances of insurance. Less time is spent bringing parties up to speed and none is spent introducing judges to the arcane world of reinsurance.

The parties are able to operate with greater flexibility in venue, language, procedural formalities and contractual interpretation. The resulting arbitration award is almost always final, with little inclination on the part of the courts to appeal arbitrations. Awards are enforceable in court and, because of international convention, they are easier to enforce across borders than are court decisions.

Finally, arbitrations are conducted out of the public eye. When the parties so wish, the proceedings and award remain confidential.

However, as good as arbitration may be, ADR has moved into the 21st century. Over the last few years, insurance markets such as the United Kingdom and organizations such as construction and government have adopted a more modern approach to dispute resolution.

Instead of limiting the process solely to arbitration, newer dispute resolution agreements employ a three-stage process of negotiation, mediation and, only when necessary, arbitration. This approach draws on greater participation by key decision-makers and it has proven very effective in reducing expenditures of time and money, often while achieving more amicable resolution of differences between potentially ongoing business partners.

Canada’s Reinsurance Research Council (RRC) has introduced a Canadianized version of this new dispute resolution agreement as part of its recent review and overhaul of standard recommended treaty articles. Bulletin 9 – Dispute Resolution is available on RRC’s website, rrccanada.org. Any company seeking greater control over its own dispute resolution process should consider this agreement.

THREE STAGES OF ADR

1) Negotiation

As a precondition to arbitration, the parties agree to “attempt in good faith to resolve the dispute by negotiation between executives… who are sufficiently senior to take a dispassionate view…” Negotiation is non-binding and, realistically, this step is unlikely to resolve truly complex issues. However, it often identifies concerns that arose merely as a result of error, oversight or misunderstanding. Expensive and unnecessary arbitration may be avoided or, at the very least, reduced to fewer key issues.

2) Mediation

The parties agree to take any unresolved issues to an independent third-party mediator (who may be chosen by agreement or process). Various mediation techniques can shepherd the parties, if not toward agreement, then perhaps toward a better appreciation of how others perceive the strengths and weaknesses of their respective positions. Mediation is non-binding, but it can be successful in resolving all but the most contentious of issues.

3) Arbitration

The dispute may still conclude with binding arbitration, but the preceding steps, if taken in good faith, can eliminate many extraneous issues while clarifying key points of conflict. Experience has shown that, even when the additional stages of negotiation and mediation conclude in arbitration, the total experience is often far faster and less costly than arbitration alone. Moreover, the process is less litigious and more open to communication at the highest levels, with the disputes tending to be resolved more amicably.

Insurers should consider this three-stage approach and discuss available wordings with their reinsurers and reinsurance intermediaries. Even if something like the RRC agreement is not adopted, or is adopted after disputes arising from past contracts, involved parties who wish to retain greater control of the dispute resolution process can seek mutual consent to non-binding negotiation and mediation.