Winning Reinsurance Arbitration

How do you win a reinsurance arbitration (or at least keep your self-respect)? Although the number of reinsurance arbitrations in Canada is relatively small (at least in comparison to the United States), Canadian companies – both insurers and reinsurers – do have differences of opinion that sometimes end up in arbitrations. For many, this venture into the extra-judicial process is a new experience without much guidance available. Here are a few rules that might assist in coming through the process relatively unscathed.

If asked how to win a reinsurance arbitration, I suppose a facile answer to the question would be: “Don’t get into one! You’ll save a lot of grief and expense.” This response is actually not so unreasonable. Invariably, an arbitration arises out of two or more apparently irreconcilable positions with respect to cessions or claims under a reinsurance contract, either treaty or facultative, and both parties hold strong beliefs that their view is correct. However, in my 20 years of experience as an arbitrator, umpire, expert witness and even a party to arbitration, I have seen cases that should patently never have gone to arbitration. Instead, these cases ended up going through the full process and one party lost simply because a senior official got it into his head that his view was correct, despite industry practice to the contrary. This leads me to:

Rule #1: Get an opinion of your position from someone with knowledge in the class of business and type of reinsurance.

Once you get over this hurdle, and it is confirmed you do indeed have a case, you need to come to a realistic assessment of:
• The value of the claim or disputed amount.
• The likelihood of your winning the arbitration.
• The expense you will go through in presenting your case to the panel. With respect to cost, it is not unusual for disputes in the United States to cost in excess of $1 million to each of the parties. The chance of getting out with less than $100,000 in expenses is very limited indeed (Canadian arbitrations tend to be somewhat less expensive).
• The time taken up by senior management and staff in preparation, deposition and testimony.

With this assessment completed you can then move to:

Rule #2: Compromise is not a dirty word.

Arbitrators are restricted from acting as mediators in a dispute, but there is no reason that – unless relations are so bad that civility is unlikely – parties should not try to agree to a settlement before a hearing even takes place. In fact, a panel should encourage the parties to keep talking but without being privy to the discussions. This becomes even more important as evidence, depositions and reports come in from both sides. At this point, sometimes what seemed like a strong position at the outset is now less defensible. Keep Rule #1 in mind: don’t maintain you are right even when evidence seems to contradict you. To persist in an arbitration merely to enforce a principle can be very costly indeed.

Now you have reached a point when you are convinced your case is strong and the other party won’t budge (and nor will you!). Arbitration is called for and you appoint counsel. This is the time to apply:

Rule # 3: Read, understand, and follow the arbitration clause.

Who do you choose as your arbitrator? Whoever you select should meet the necessary qualifications set out in the clause. You should also be aware of major differences in arbitration practice in different jurisdictions. In Canada, as in the United Kingdom, arbitrators are almost always strictly neutral parties, as is the umpire. In the United States, it is common for party-appointed arbitrators to be selected based on their known views on a topic or a previous successful (arbitration) relationship with a party. However, having said that, it is generally understood in the industry that although party-appointed arbitrators can be initially predisposed, they must remain open-minded and render decisions fairly. The choice of umpire can also be from among individuals with a known position on similar issues; this selection frequently comes down to a lottery-type decision, often based on the final digit (odd or even) of the Dow Jones Index level on a specific day! Arbitration clauses usually state the arbitrators select the umpire, but in practice the parties frequently take a very proactive role in the choice.

Keep within prescribed time limits. If you are being taken to arbitration and the other party has already named their arbitrator, ensure your arbitrator is named within the time limit (commonly 30 days) of your being requested to do so. Precedents exist for one party being able to name both arbitrators if the other party fails to respect the deadline. (Universal Reinsurance Corp. v. Allstate Ins. Co.,16 F.3d 125 (7th Cir. 1993)).

Now you’ve reached the point when the panel is nominally in place and it is time to move forward. This is commonly achieved through a meeting between the parties, counsel and the panel to accept the panel formally and to determine procedures for the process. Rule #4 is now vital: here, the future costs of the arbitration are going to be broadly established.

Rule# 4: Always have a representative with decision-making power attend the organizational meeting.

I have attended organizational meetings when a relatively collegial atmosphere has reigned, enabling procedures to be determined quite quickly. I have been at others when it is clear the atmosphere of the future hearings is going to be vitriolic. It is an opportunity for the panel to set its stamp on the future conduct of the arbitration.

Some of the decisions to be taken at this meeting include:

Timing and scheduling: The arbitration clauses frequently require decisions to be made within a fairly short time period – sometimes 90 days – that is unrealistic in light of the dispute. Agreement should be reached on a reasonable schedule for all pre-hearing procedures and for the hearing itself.

Witnesses: How many will be allowed? Will both fact and expert witnesses be deposed then testify at the hearing? This is customary in the United States. In Canada, generally fact experts are deposed, experts provide their reports and are then cross-examined at the hearing.

Ex-parte Communications: When do ex-parte communications – communications by the parties with just their appointed arbitrator, not the entire panel – cease?

Reasoned decision: Do the parties want just a decision, or do they also want the reasons behind it?

At some point in the meeting, the panel will also be formally accepted and given hold harmless agreements.

(An excellent and more fulsome list of matters at the organizational meeting can be found on the ARIAS-US Web
site at http://www.arias-us.org/index. cfm?a=37 )

Continue to remember Rule # 2. As long as the process continues, the legal and panel costs clocks keep ticking. I’ve seen arbitrations in which the “winning” party paid over $1 million to achieve a settlement of less than $750,000 (and they weren’t awarded costs).

Time has now passed. All the preparatory work completed, discovery has been done and the hearing date reached.

Rule #5: Always have someone from senior management with decision-taking power, not just the corporate lawyer, attend the hearing and try to assess your position dispassionately as testimony and evidence come out (Remember Rule #2).

Be sure of the competence of your witnesses and do a final analysis of the strength of your case. I arbitrated one case in the United States in which the main witness for one of the parties appeared to give evidence before the panel in a state that would have had him banned from driving! Needless to say, his evidence was also somewhat incoherent and he did little to aid the company’s case. As your witnesses testify, listen to what they ac
tually say – don’t hear what you want them to say.

Once the hearing has finished and the decision rendered, take some time to reflect on what you have learned from the process. One of the major benefits derived from arbitration is the highlighting of practices and procedures within companies that heighten the likelihood of errors or misunderstandings. (One of the most frequent is looseness in Managing General Agency contracts). You can actually improve your internal procedures as a result of taking part in an arbitration, whether you win or lose.

Move on! The only arbitration in which I was involved as one of the parties was with one of my major clients. In resolving our issue, each of us were we each of us were reasonably certain our position was correct. We agreed on an expedited arbitration in which no external counsel were involved. After the decision, we continued doing business.