Canadian Underwriter

Arbitration glitch sidetracks $147-million Fort Mac reinsurance dispute

March 21, 2018   by David Gambrill

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A $147-million reinsurance dispute involving Fort McMurray wildfire claims got off to a rocky start because the insurer and its reinsurers could not initially agree on the method of arbitration.

At the heart of the matter was a broad reference to the arbitration process contained in a reinsurance agreement signed between the Alberta Motor Association Insurance Company (AMA) and its seven reinsurers, Alberta Court of Queen’s Bench Justice Dawn Pentelechek wrote in her decision, Alberta Motor Association Insurance Company v Aspen Insurance UK Limited.

A wildfire moves towards the town of Anzac from Fort McMurray, Alta., on Wednesday May 4, 2016. An assessment of the total financial impact of [the] Fort McMurray wildfire is pegging the direct and indirect costs of the blaze at almost $10 billion. THE CANADIAN PRESS/Jason Franson

“These applications could have been avoided had the parties addressed their minds to the arbitration clause that governed them,” Pentelechek wrote. “The parties are all sophisticated corporations. I am advised the quantum in dispute is $147 million. I find the cavalier approach to the arbitration clause all the more surprising.”

After the May 2016 wildfire in Fort McMurray, AMA issued almost 13,000 policies covering homes, businesses and automobiles affected by the fire. As of June 2017, AMA had paid more than $293 million to its policyholders.

AMA has reinsurance coverage from seven different reinsurance companies: Aspen Insurance UK Limited, Everest Reinsurance Company, Hannover Rueck SE, SCOR Canada Reinsurance Co., Swiss Reinsurance Company, TOA Reinsurance Company, and Lloyd’s Underwriters.

The reinsurers have paid AMA their respective shares of one “loss occurrence” limit on a without prejudice basis. But AMA ultimately made a second claim asserting a total of six separate loss occurrences arising out of the wildfire. AMA and its reinsurers disagree on the interpretation of the term “loss occurrence” in their reinsurance agreement; they also disagree on AMA’s allocation of the various losses it is claiming.

So how to resolve the dispute?

The reinsurance agreement states: “If any dispute or difference shall arise between the company and the reinsurer in respect of this agreement or the validity thereof, it shall be referred to arbitration as set out below.”

The problem is, Alberta has two statutes that govern arbitrations in the province: a domestic arbitration act, and an international arbitration act. The arbitration clause in the reinsurance agreement does not state which act applies.

If the domestic act applies, the courts can decide the matter. Under the international act, however, the court has no authority to hear the matter and the dispute automatically goes to an arbitrator.

The complexities involved in figuring out the matter led to a very lengthy court decision that covered, among other things: 1) whether there was more than one reinsurance contract between AMA and its reinsurers; 2) the location of an international reinsurer’s “place of business;” and 3) what is meant by “insuring a risk in Canada.”

Ultimately, the court decided:

  • there was one overarching agreement between AMA and its reinsurers;
  • the arbitration proceedings fall under the International Act; and
  • the matters in dispute now go to arbitration instead of the courts.

The whole matter could have been cleared up with a clearer statement in the reinsurance agreement in the first place, Pentelechek concluded.

‘The parties could have expressly stated any one of the following to make it clear that the International Act applies,” Justice Pentelechek wrote:

  • “That the subject-matter of the arbitration relates to more than one country;”
  • “That the International Act applies to the arbitration proceedings;”
  • “That that the Domestic Act does not apply.”

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1 Comment » for Arbitration glitch sidetracks $147-million Fort Mac reinsurance dispute
  1. paul armstrong says:

    At first glance seeing the AMA as the doubting partner and appearing to contrive a solution to obtain as much from the reinsurers as possible, it suggests a government involved. Recognizing that all governments are poor managers and would do almost anything to be reimbursed more so dollars can be squandered elsewhere, AMA challenged the interpretation of the agreement to do just that. Glad to read someone of good sense arranged to have the agreement understood by all for a final settlement.

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