Alternative dispute resolution continues to gain ground in the London market. Michael Dobias and Graham Brown report.

Alternative dispute resolution (ADR) may be the solution the insurance and reinsurance market was looking for when it adopted arbitration on a wide scale, i.e. an attempt to avoid the much criticised time and cost of traditional Court litigation. Unfortunately, arbitration has been highjacked by the legal process to such an extent that while there may be some saving in time there is little saving in costs. Is ADR a realistic alternative method of resolving reinsurance disputes?In a true commercial dispute ADR provides what could be described as a “win-win” situation for the parties. ADR provides an opportunity to explore a commercial resolution at lower cost and risk as opposed to the high risk and high cost strategy of traditional litigation or arbitration where too often settlement is only seriously considered at the door of the Court or arbitration by which stage too much time has passed, costs been incurred and heartache been suffered. ADR can be arranged quickly (indeed we have recently been involved in a mediation which was concluded within 5 days from appointment of the Mediator to conclusion of the Settlement Agreement, albeit many of the issues had been rehearsed in correspondence between the parties beforehand) and the possibility of an early resolution means that the dispute is not hanging over the heads of the parties for far too long.Attitudes towards ADR may well be changing. It has an estimated success rate of 85%-90% and it is our experience that clients who were sceptical as to its value quickly change their attitude when exposed to ADR in practice. We do not envisage that this positive attitude will change in the foreseeable future for various reasons. Most recently the London market launched their own ADR initiative to promote the use of ADR in the insurance industry. The market ADR commitment (MAC) involves insurance organisations signing statements of intent to use ADR in insurance disputes. These statements are not legally binding but nevertheless indicate that the parties consider ADR a preferred method of resolving disputes. If the parties have not tried to resolve the dispute using ADR, the MAC ADR agency may accordingly approach a signatory to enquire why ADR is not appropriate in that particular instance and the burden will be on the unwilling party to explain. While initially led by the professional indemnity market we fully anticipate other insurers, for example, the marine and aviation markets will soon follow suit.

Furthermore, the courts will insist more and more that the parties explore opportunities to resolve disputes amicably by ADR before allowing litigation to proceed. One aspect of the new active case management being introduced by the Woolf reforms in April 1999 involves the courts encouraging the parties to use an ADR procedure if the courts consider that appropriate and, to facilitate the use of such a procedure, will stay proceedings to allow the parties time to resolve their dispute by ADR.

Is this positive attitude towards ADR justified? It certainly appears to be from our experience of reinsurance disputes. We do not envisage any disputes which could not be potentially resolved by ADR should the parties choose to do so. The only caveat to this may be where one or more parties want a legal precedent on a particular matter, for example a ruling on the meaning of particular words in a reinsurance contract, in reality, the dispute is on a “market” issue as much as a commercial difference between two parties. In situations such as this, ADR would be inherently unsuitable.

ADR certainly appears to have advantages over arbitration and/or litigation:
• It is a voluntary, private and informal process, the structure of which will vary depending on the method of ADR adopted. mediation is the most commonly used form of ADR. This usually takes place in informal surroundings with a neutral third party agreed upon by the parties, acting as mediator, who should be skilled and experienced not only in bringing parties together but also in the subject matter of the dispute. The Mediator provides a detached fresh insight into the dispute. Mediation can be used at any stage of the dispute as a pre-emptive measure and need not delay significantly the more traditional dispute resolution procedures. The fact that the procedure is private and confidential mirrors the advantage that arbitration has traditionally enjoyed in the market where one or more of the parties may not want market colleagues or competitors to become aware of the dispute or the details of the dispute. Indeed it may be the case that ADR proves more “leak proof” than arbitration.

• ADR is in many respects a client driven process rather than a process led by lawyers. That is not to say that lawyers are excluded from the process but rather that their role is more limited; they should assist in the preparation of the case and its presentation during ADR. The objective of ADR is to bring the clients together to resolve the dispute. Clients retain control of the process and have greater freedom to express themselves than they do in court or arbitration proceedings. The clients may take as participatory a role as they like. The clients do not feel therefore the loss of control which is sometimes experienced in litigation, where clients are dependent upon the understanding and presentation of the lawyers.

• Usually ADR is not binding on the parties until the final agreement is reached between the parties. While it is, of course, open to the parties to ask the mediator to express an opinion this is not common in our experience. If an agreement is reached, then it is reduced to writing and is binding. A settlement cannot be imposed on a party in the same way as a court judgment or arbitration award. If the parties cannot agree the result, then in ADR they just walk away and the litigation goes forward.

• Nothing said at the ADR will prejudice the parties position in litigation or arbitration in the event the dispute is not resolved. The parties have total control over what is disclosed or discussed with the mediator and he cannot disclose anything to the other side without their express authority.

• In many instances where the validity of a reinsurance contract is in issue the law takes a very black and white approach to the resolution of that dispute: the contract is avoided or it is not in circumstances where, in reality, both parties should take some share of the blame and the liability. ADR offers a commercial settlement where neither side necessarily wins or loses: the possibility of a middle ground, the so-called grey area. Parties can forge their own practical solution to create a viable commercial resolution rather than being limited to the strict legal remedies available via the court or arbitration tribunal. There are endless solutions e.g. involving discussion and commutation of other unconnected contracts which may be adopted to incorporate commercial factors outside the strict confines of the one contract in dispute. This very flexibility is in our opinion, one of the strongest factors in support of the ADR process.

• Because ADR is a consensual as opposed to adversarial process it may help to preserve existing business relationships and goodwill. This is particularly important in the world of insurance and reinsurance where there may be ongoing commercial relationships between the parties which may be soured by adversarial procedures such as litigation or arbitration.

• Arbitration is a contractual right available only to the signatories to the contract. While the Arbitration Act 1996 attempted to address this our experience remains that despite judicial observations to the contrary one of the most important parties to any insurance or reinsurance dispute, the broker, remains more often than not on the sidelines and not directly involved in the arbitration process. Certainly not a party against which the tribunal can make an award. It is likely that brokers would more readily co-operate with a quicker, cheaper and less adversarial process.

• ADR is a quicker and potentially cheaper method of resolving disputes. Cost savings may potentially be made both in terms of management time and resources and in lesser costs than court or arbitration. Resolution occurs within a short time frame. This is important for both insurers and reinsurers who need to quantify the financial worth of a dispute with certainty in order to run their organisations. If a dispute can be resolved and quantified within a matter of months rather than years then insurers and reinsurers can manage their business more effectively.

In summary, in our opinion, there is nothing to be lost by attempting to resolve disputes by ADR even if no agreement is reached. Indeed we consider that the parties have everything to gain by adopting this course. Even if a settlement is not reached it is not a waste of time or costs as ADR helps to focus the minds of the parties involved on the facts of their cases and the important issues in dispute. It helps an appreciation of the strengths and weaknesses of the case by analysing both parties cases and therefore enhancing the preparation for trial. The parties form a more realistic assessment of the case, with the help of the observations of the neutral mediator, appreciating, often for the first time, the strengths of the case for the other side.

It is likely that ADR is going to play an increasing role in resolving disputes. An ostrich type approach to ADR would be disadvantageous and the only losers will be those who fail to appreciate the possibilities of ADR as it is a process to be embraced rather than feared and should be borne in mind whenever a dispute arises. ADR is, as we stated at the outset of this article, a “win-win” situation, so use it and benefit.

In order for parties to better understand the mediation process Davies Arnold Cooper offers its clients the opportunity to participate in a day's workshop to experience a mock mediation.

Michael Dobias is a partner and Graham Brown is an associate at Davies Arnold Cooper.