David Webster and Robert Kastner examine the increasingly close relationship between lawyers and re/insurers
Most readers will have seen recent surveys that place lawyers in the lower half of the table of professions held in high regard by the public. Sad as this may be, insurance and reinsurance lawyers have been doing a very good job in improving their profile in the industry. In the first part of the last decade, many parts of the international insurance market regarded the introduction of a lawyer as being a necessary evil usually associated with a messy and potentially highly expensive and time-consuming claim. But as a result of the continued increase in disputes and the increasing sophistication and complexity of new products, lawyers appear to be losing their image as insurance market pariahs.
The involvement of lawyers is increasing at all levels. Larger insurance companies do not confine their lawyers to a legal department but place them within separate operating divisions so that they can provide advice and assistance to particular product lines. The growth of the employment by insurers and brokers of lawyers over the last decade has been nothing short of dramatic.
Reinsurance contracts are often the most important and balance sheet-critical contracts into which reinsurers enter. Yet, while the commercial terms are agreed between cedant and reinsuring underwriter, often scant regard is paid to the documents which evidence this agreement. More often than not, the only evidence of the agreement is the slip scratched by the underwriters; a full wording may or may not follow. Even in circumstances where wordings are agreed, these are often circulated so long after the event that no one has any particular zeal in seeing these concluded or focussing on the issues which may arise out of a deal which was struck so long ago.
However, this is all changing. Insurers' recognition of the value of reinsurance contracts has led to the ever-increasing involvement of lawyers in the drafting and approval of reinsurance contract wordings prior to inception. Insurers acknowledge that given the fast-disappearing doctrine of utmost good faith and the ever-present spectre of litigation, involving lawyers from the outset may often prove to be a case of forewarned is forearmed. The up-front cost often represents a significant saving on the potential long-term dispute resolution costs.
It is still by no means the universal practice for both parties to a re/insurance contract to instruct a lawyer to assist in drafting the wording.
Nor does involving a lawyer guarantee avoiding litigation at the back end. However, it can certainly strengthen a party's position. A very good example of this was the development of the film finance policies for Chase Manhattan Bank. Chase viewed the insurance policy it was purchasing as a financial instrument, taking the same approach to this financial instrument as most prudent banks take to all legal documentation. Chase instructed its own attorneys to draft the wordings, but insurers did not formally instruct lawyers to act for them. Ultimately, litigation ensued. Now, it may be that as the sums of monies involved were so large, the raft of disputes that followed the claims under the policies would have happened in any event. However, as the parties' positions in the litigation ended to a large extent once the courts upheld Chase's claims that the policies prepared by Chase's lawyers did afford to Chase the protections which they had sought - an exclusion clause which prevented the insurers from avoiding the policies absent fraud by Chase or its agents - it is reasonable to postulate that some insurers may not have written the policies if they had been provided with legal advice, and others would only have done so on different terms.
Film finance litigation is just one example. Cases frequently go to litigation and arbitration where there are disputes about the meaning of particular words in the slip and/or wording.
One of the dangers of failing to make sure that the slip and/or wording says precisely what both parties intended to mean is that if there is a dispute, their understanding and intention will be replaced by that of a judge or arbitration panel. The courts in England and Wales are not allowed to take into account the intention of the parties but must construe the words used without reference to what either party intended them to mean. This can give rise to decisions that the industry finds puzzling and does not understand. This is particularly the case where issues of construction are dealt with as a preliminary issue.
Another example is the series of cases on aggregation over the last ten years. The commonly used words 'cause', 'occurrence' and 'event', and the occasionally used 'series of acts, errors and omissions', have been the subject of the objective force of judicial scrutiny producing interpretations that surprised many in the international insurance market. Despite the potential uncertainty of continuing to use these terms without qualification or explanation, it is still surprising that they and other aggregating terms are not being clearly defined at both the insurance and reinsurance levels.
The following scenario will be familiar. The commercial decision to purchase reinsurance has been taken. The broker is instructed. Following a relatively brief instruction to the broker, the broker will prepare a slip and take it around the market. Underwriters will subscribe to the slip, the contract incepts. Eighteen months later, the contract wording is circulated. Ultimately, the first claims under the contract are made. The reinsurers wish to explore the possibilities of escaping liability. The contract is not signed.
The only written evidence of the parties' contractual relationship is the slip itself. However, the slip itself is often hopelessly inadequate as an accurate record of the terms of the parties' agreement. Where it incorporates standard London Standard Wording (LSW) or Non-Marine Association (NMA) style wordings by reference to a particular clause, it is possible to incorporate these into the contract by reference. However, more often general references will be made to general-style clauses under the 'conditions' section. In the event of dispute, these conditions will rarely be given their intended effect. The reason is simple: it will be impossible to discern what the parties' intention was with regard to these generic market clauses where multiple variance exists.
The slip as evidence of the parties' reinsurance contract worked very well while reinsurance was cloaked with the doctrine of utmost good faith.
Litigation was extremely uncommon. Where disagreements arose about the scope of the contract, these were resolved amicably.
Sadly, this appears to be all in the past. While all insurance contracts still carry with them the imprimatur of good faith, this is now used very much as a sword as opposed to a shield. The overriding concept of utmost good faith is fast evaporating. Some reinsurers will take whatever points they can to avoid their obligations under contract, provided ongoing commercial and business relationships are not adversely affected.
As a result of this transformation in reinsurers' attitude, insurers are taking proactive steps to protect their position. The first and most obvious step is to ensure that the written contract properly evidences the terms upon which the parties have agreed to buy/sell reinsurance.
This is true of both the cedant and the reinsurer. Many reinsurers now routinely involve lawyers in the negotiation and drafting of reinsurance contract wordings. This is particularly true given that an ever-increasing number of reinsurance contracts are being purchased on a bespoke basis and the fact that the international nature of the business is expanding every day. The use of the English language does not mean that there is a common understanding as to what the words mean, even between English-speaking parties from different countries. Different cultural approaches to business also need to be taken into account.
Managing the process
Of course, lawyers' roles in the reinsurance contracts do not end with the inception of the contract and the finalisation of the contract wording.
Inevitably, disputes do arise. At this stage, again, insurers reach for their lawyers in their disputes with the reinsurers.
In times gone by, where litigation was rarer, lawyers were engaged but acted very much at the behest of their clients. Inevitably, after a period of sabre rattling, an amicable resolution was achieved. Times are tougher today. Despite the cost, parties to litigation are ever more willing to take harder stances in order to jockey for a better negotiating position.
Lawyers are now integrally involved in the commercial decision-making process regarding strategy and tactics, managing disputes in partnership with their clients, as opposed to merely taking clients' instructions and behaving in a reactive manner. Proactive dispute management lawyers are seizing the initiative by identifying at the outset of the case the best practical outcome for any given dispute and driving the case forward to achieve that outcome with the minimum cost and maximum effectiveness, using several sophisticated products to help clients identify the most cost-effective way to resolve a dispute. Mediation, as a dispute resolution tool, is being actively advocated by lawyers working with their clients in tandem to try and preserve ongoing business relationships.
Here to stay
The international insurance market is making better use of lawyers now than ten years ago. There is, however, still ample scope to use lawyers to reduce uncertainty and potential disputes. Some reinsurance professionals acknowledge that lawyers add considerable value in minimising the potential for disputes by being involved from the outset, and then in managing disputes, should they arise, to ensure their clients achieve the best practical outcome with a minimum of cost and business disruption. Let's hope more do in the future.
David Webster is head of insurance and reinsurance and Robert Kastner is an associate at London law firm Eversheds LLP. Eversheds acted successfully for brokers Heath and JLT in the film finance litigation.