Reinsurance is a natural breeding ground for problems relating to conflict of laws, even where disputes go to arbitration, as John Butler explains.

Basically reinsurance, like insurance, consists of a legally binding promise to make payments at some time in the future if certain eventualities occur. This promise is incorporated in a legally binding agreement or contract, whether it be called a policy, treaty or something else. The law of contract is, therefore, important where reinsurers are concerned, and as reinsurance is carried on to a considerable extent across national frontiers, it also means that problems relating to the conflict of laws are more likely to arise in practice than with many other activities.

To take a common enough situation, a ceding company in one country may reinsure with a reinsurer in another county. Two possible systems of law might be involved if it becomes necessary to decide what the contract means or if it is valid: that of the ceding company and that of the reinsurer. The process of choosing which of two or more competing systems should apply forms a large part of the conflict of laws.

This example is fairly straightforward, although in practice the situation may be rendered more complicated by a number of factors, such as the involvement of a federal system like the United States, where the law can vary considerably from one state to another. In these cases, it may be necessary to start by trying to determine which state's law is to apply before considering if the law of the reinsurer's domicile should apply. Where contracts covering American cedants are concerned, they will almost always contain a jurisdiction clause which provides where any disputes are to be arbitrated, but they do not usually specify expressly what law should apply.

Arbitration clauses
Difficulties such as these may well be part of the explanation of why arbitration clauses are included in reinsurance contracts as standard practice, why those arbitration clauses so often contained provisions to the effect that the contracts in which they were found were to be interpreted as honourable engagements rather than legal obligations, and why they also usually provided that arbitrators did not have to comply with legal formalities or slavishly follow the strict rules of law.

The intent may well have been that such provisions, coupled with a requirement that the arbitral tribunal should consist of current or past officials of insurance or reinsurance companies, would short circuit all the legal complexities arising out of carrying on business in different countries and result in an equitable resolution of any dispute in accordance with reinsurance practice, unclouded by differences in the applicable local laws.

As a theory this may have many attractions. Indeed, it may well have worked in this way in the early days of reinsurance when business was transacted directly between insurers and reinsurers, particularly where, as was often the case, the parties were domiciled in neighbouring European countries with codes of law not significantly different in concept and detail. However, in some jurisdictions, particularly the United Kingdom, such clauses were rendered largely ineffective by the extensive powers to review arbitration awards retained by the courts, who had to be able to apply a consistent criteria against which to evaluate the award. The criteria universally adopted was the court's own commercial law and practice, which is hardly surprising, as that is what they were most familiar with.

The other factor mitigating against the “honourable engagements” approach, if it may be called that, was the increasing use of lawyers to conduct arbitration proceedings. There are many good reasons why this was largely inevitable, but one result was that as a general rule, the law and legal procedure came to be applied in reinsurance arbitrations, so they became more and more like trials as time passed.

Again, this may well have occurred for no better reason than that, like the courts, lawyers were for the most part not familiar with any other way of tackling the resolution of disputes. In all fairness, they cannot really be blamed for adopting this approach. After all, if you have a system for resolving disputes which has stood the test of time and is familiar both to you and, perhaps more importantly, to your opponent, why try to change it? Particularly, it may be added, on an ad hoc basis. The difficulties involved in trying to agree a different procedure after a dispute has broken out are readily apparent. In all likelihood, a natural suspicion that any change will work to the advantage of the party who suggested it will incline to make such a process long and tortuous, to say the least.

New procedures
In circumstances such as these, any impetus for change clearly had to come from those who employed the lawyers and many trade associations did, in fact, draw up their own rules for arbitration proceedings. However, insurers and reinsurers generally tend to be conservative in the conduct of their affairs, if not always in the business they write, and it is only comparatively recently that an attempt was made to tackle the problem, with the setting up of the AIDA reinsurance and insurance arbitration societies (ARIAS) first in the United Kingdom, then in the US and in the shape of CEFAREA, in France. Still very much on a national basis, although the membership of ARIAS in the UK contains many members from the continent, particularly Germany and Scandinavia, a co-ordinated international approach to the problem has yet to assert itself to any great extent.

Conflicts remain
However, even if an internationally accepted procedure and rules for arbitration were ever to emerge, this would still not of itself resolve all the problems arising from the conflict of laws. After all, the expression “conflict of laws” is a reference to the conflicting claims of two or more sets of law to govern a contract. As has already been suggested, the “honourable engagement” and similar provisions may well have been intended to overcome this particular problem by substituting a third law, that of the arbitrators who were to be men experienced in the ways of the insurance and reinsurance world.

One problem with this in practice, it may be recalled, was the power to review arbitration awards retained by the courts. However, now that legislation has largely whittled away this obstacle in the UK, following this route again becomes a possibility. Whether it would be wise to do so is another matter, as there are obvious drawbacks to adopting such an approach. If arbitrators are free to apply their own subjective law, then there is a risk that decisions reached by different combinations of arbitrators and umpires with respect to largely identical circumstances might differ markedly from one another. Which means, at one extreme, there might be something to be said for arbitrating everything in the hope of finding the right combination of arbitrators and umpire, and it becomes all that more difficult for parties and their advisers to evaluate the strength of their cases in a vacuum.

Of course, this not what happens in practice, because even in those jurisdictions were arbitrators have been left largely to their own devices for many years, they still operate largely within the confines of a national legal system. The question of what the applicable reinsurance practice is may well have become the dominant issue and the process has become, if anything, even more dependent on the testimony of expert witnesses.

However, practice may well vary in different countries and often does so. Not only, it may be remarked, because of the way in which business is carried on in a given market but also because of the influence of the law in a given jurisdiction while a practice is developing. Reinsurance, of course, is not exempt from mandatory statutory provisions, and many of the basic principles involved in reinsurance are, or have been, shared with direct insurance, where arbitration has never been so common. This means that the development of the law, in common law countries at least, has to a large extent been led directly by the courts where insurance is concerned with the resultant influence in certain cases on reinsurance law already indicated.

This difference in practice in different jurisdictions means that often enough the arbitrators also have to decide which out of two reinsurance practices should be preferred. This, in turn, is generally treated as dependent on which law should be applied to the contract, so the question once more becomes one of the conflict of laws.

John Butler is an honorary president of the International Association for Insurance Law (Association Internationale de Droit des Assurances -AIDA) and a consultant to Barlow Lyde & Gilbert, London. Tel:+ 44 (0) 1628 620620 and Fax +44 (0) 1628 674848.