Mediation is fast developing a considerable foothold in the resolution of London market related reinsurance disputes. With the help of mediator Nicholas Pryor, David Webster and David Murphy examine the factors behind this development and discuss the important issues that arise in the context of reinsurance mediations.

Historically, the London reinsurance market has always developed its own methods of resolving internal disputes. Prior to the 1980s, very few reinsurance disputes came before the courts as they were often resolved informally. In the last 15 years, however, reinsurance disputes have proliferated both in the courts and by reference to arbitration. The sheer size of the losses arising from the deluge of long tail claims which has affected the London market (emanating particularly from the United States) has meant that the disputes have often taken on such importance that the parties concerned prefer those more formal means of resolution. These formal methods have not been without their problems. Arbitration, originally adopted by the London market as a means of simplifying and shortening the dispute resolution process, does not always achieve these ends. Indeed, where the arbitration clause provides for the appointment of a panel of three arbitrators, the task of co-ordinating the diaries of the panel members can prove extremely difficult, often with the result that a hearing date is not fixed any earlier than would have been the case in the Commercial Court. Further, the procedures have become formalised with the result that it may be difficult to identify any savings in costs or time through the use of arbitration as opposed to court proceedings.

The Commercial Court in London is highly regarded world-wide for its expertise in dealing with difficult reinsurance issues. Nevertheless, the decisions handed down by the appeal courts in recent years have, in several instances, proved disappointingly unhelpful to the market. In particular, this has been the case where attempts made to resolve difficult legal issues through the use of summary applications, originally intended to shorten the process, have, by the end of the appeal process, simply left the important issues unresolved.

In the light of these unsatisfactory features of litigation and arbitration, it is not surprising that there is more readiness now to explore an alternative which can offer greater speed, flexibility, economy and certainty - that of mediation.

Most reinsurance disputes are suitable for mediation. Many involve rights of avoidance, issues of coverage, construction matters and issues as to the conduct of intermediaries. The market is now seeing mediations involving large sums and often complex points of law or fact. The non-marine market has led the way but there has also been a recent growth in marine market mediations.

The Commercial Court in London has been an enthusiastic advocate of mediation since 1993 and has adjourned many cases to allow mediation to take place. Nicholas Pryor, a member of the Panel of Independent Mediators, observes: “The record of the Commercial Court in identifying which cases ought to be so adjourned has been astonishingly good. Very few such adjournments have failed to lead to an eventual settlement.”

In England, mediation is not compulsory in all cases, unlike some US jurisdictions. The new civil procedure rules provide that the court has the power to order mediation either at the request of the parties or of its own volition. Compelling parties to mediate is far from fatal to the outcome, says Mr Pryor. “The most notable reluctant mediatees were the parties in the multi-million De Lorean litigation, who were compelled into mediation and settled after two days. Properly conducted mediation is a very engaging process and even the most initially reluctant parties are not immune to its value.”

Principal stages
There are a number of variations in the mediation process and there are no strict requirements on procedure. However, the most common workable format that has emerged involves five principal stages.

• Each party prepares a written summary of its case, together with any essential background documentation, that it provides to the other party and to the mediator.
• An initial joint meeting takes place in the presence of the mediator at which each party presents a summary of its case in the presence of the other, followed by a brief period of questioning and discussion.
• The mediator then meets each party separately in a private meeting to discuss its case in greater detail and to consider its current position on settlement (including any options not yet considered).
• There follows a period when the mediator engages in a shuttle process back and forward between each party until either the parties' positions are brought together or the point is reached where it is appropriate to have a further joint session. This will involve direct negotiations or discussion between the parties or conclude that there is no point in proceeding further.
• If agreement is reached, the mediator will then assist the parties in drafting formal terms of settlement, including dealing with any matters necessary to ensure that these are binding and effective.

The whole process is conducted on a without prejudice basis so that neither party will be at a disadvantage if the mediation is unsuccessful. For this reason, mediation is often used as an extension of negotiations in more formal proceedings.

When to mediate?
Mediation and other more formal means of dispute resolution are not mutually exclusive. Most mediations take place against a background of concurrent proceedings - whether litigation or arbitration. This is inevitable where one party would face limitation difficulties if it did not commence proceedings. While two of the principal goals are to save time and reduce costs, a fair amount of preliminary work on the issues will still be necessary in any mediation.

“A mediation is unlikely to be successful before the parties know enough about the detail and the surrounding commercial circumstances to be able to take an overall view of the matter,” says Mr Pryor. “It may therefore be necessary to spend some time developing that understanding and exploring the issues in litigation or arbitration before the dispute has reached the stage where it is capable of being mediated.”

Where the parties wish to go straight to mediation without first commencing formal proceedings, there is a procedure that can help refine the issues. This involves the parties engaging a mediator to act as a neutral “umpire” over the preliminary stages of the dispute. Typically, he will order the exchange of skeleton pleadings, setting out the principal issues, together with the mutual disclosure of relevant information and documents. This is done in a manner that enables recycling of the work for use in litigation or arbitration should that become necessary.

Following the settlements
Ensuring that outward reinsurers will follow any settlement reached in mediation is an important issue. The effect of most “follow settlements” clauses, in the light of the decision of the court of appeal in Commercial Union Assurance Co v NRG Victory Reinsurance Co Ltd (1998), is that the reinsured must demonstrate that any settlement was based on a legal liability owed by it to its cedent. A settlement based on purely commercial grounds will not be sufficient. In most cases, it should be possible to show that a settlement reached in mediation followed a legal liability.

The safest option is often for a reinsured to attempt to involve his outward reinsurers in the mediation in some way. Mr Pryor comments: “I have had cases where subsequent reinsurers have been persuaded to participate, even if initially only as observers. Initially reserving their position, they became more involved and eventually reached their own separate settlement with their reinsured, out of which the reinsured was able to settle the initial dispute.”

Mediation can, in fact, come into its own in multi-party disputes. The flexibility of the process means that the format can be adapted to suit the needs of any particular case. Mr Pryor points out: “I have acted in two reinsurance matters where original insureds, insurers, agents, reinsurers and retrocessionaires all have separate interests but where an overall solution cannot be achieved without the participation of all. I encourage parties to declare their hand and to work in good faith to give and obtain the information they separately need to be able to take an overall view. In both cases, after some months of preparation, the parties were able to reach a satisfactory settlement in the mediation.”

The mediation process is not cheap but, in the right circumstances, its speed is the key to achieving costs savings. A major mediation of a complex matter can often be concluded within two to three days.

There is some debate as to whether all cases are suitable for mediation. Where a reinsurer is motivated solely by a desire to avoid payment and is raising all manner of issues (including bad points and plainly hopeless ones), it will often seem very unlikely that there will ever be the right climate for a successful mediation. Experience shows, however, that mediation can succeed even in those cases, particularly where the process forces the “weak” party to see the reality of its position. Where the parties engage in mediation in good faith, the results are impressive. Only a very small percentage of cases do not reach settlement at, or shortly after, the mediation.

Good preparation is the key to success, stresses Mr Pryor. “Mediations work by getting the right people together at the right time to talk about the right things. The participants need to be sufficiently senior to be able to take an overview and to be able to settle on the spot. They need to be well briefed, which means a good deal of preparation by both parties in advance, considering their position in the dispute, the possible outcomes and the implications and considerations.”

In the light of the growing success of mediation, reinsureds and reinsurers alike may wish to consider whether, in addition to the usual arbitration clause, they should include a “mediation clause” in their wordings. Although this is not essential and the parties can always subsequently agree between themselves to take a dispute to mediation, including such a clause has the advantage of establishing mediation as an agreed form of dispute resolution which the parties will enter into at a much earlier stage than the proverbial court room door.

David Webster and David Murphy are specialists in reinsurance dispute resolution at Eversheds, London.