The debate about the relative advantages and disadvantages of reinsurance arbitration in the US continues. There are and always will be steadfast advocates of arbitration as opposed to litigation, while the arbitration process has and always will have its critics of varying severity. We have, over the years, handled literally scores of reinsurance disputes, most in arbitration but many in litigation, and can honestly say that there is no clear cut winner. There always will be disputes where our clients would prefer arbitration and others where our clients would prefer litigation. And even where arbitration is the preferred dispute resolution process, there will be aspects of the process which merit severe criticism and certainly could bear substantial improvement.
It is our intent here to review once again what we perceive as the most salutary benefits and singular deficiencies in the reinsurance arbitration process as it is currently pursued in the United States with acknowledgment of a quite different arbitration process in the United Kingdom. Perhaps one of the more curious ironies of this dichotomy is that many of the advantages of arbitration can also be viewed as disadvantages, depending on the observer and the particular dispute.
In favour of arbitration
Panel of experts
Among all the hallmarks of the reinsurance arbitration process, resolution of disputes by a panel of experts is probably the most often cited as the raison d'etre of the process. For decades the general consensus in the reinsurance community has been that reinsurance is a rather esoteric and obscure sub-universe of the insurance universe, and its disputes would best be decided by executives or former executives with substantial experience in insurance or reinsurance matters. The obverse of this truism is that judges and, more importantly, juries would not be as capable of understanding the customs and practices of the industry and the principles of utmost good faith and honourable engagement which still have some currency in the insurance and reinsurance world. We have several problems with these assumptions and take issue with some of the results to which these assumptions lead, which we will address in further detail below. Suffice it to say that at this juncture there has been and still is a dearth of competent, qualified, and available arbitrators and umpires. Not every insurance executive with 30 or even 40 years of experience makes a good arbitrator or umpire.
We also have found from many years of experience that the average federal district court judge, particularly in a large urban centre, is often capable of assimilating whatever expertise and custom and practice that is necessary to decide a particular dispute, aided by competent counsel and expert witness testimony. Federal district court judges every day handle matters as complex and technically daunting as insurance and reinsurance disputes and, in many instances, have done a quite competent job in resolving complex reinsurance disputes in a variety of jurisdictions.
Confidentiality of proceeding and awards
Perhaps the second most often cited benefit of reinsurance arbitration is the confidentiality of proceedings and resolution of disputes. The reinsurance industry has historically considered it desirable to resolve its disputes privately without the glare of litigation with publicly filed briefs, motion papers, testimony, and affidavits. This ideal, however, has hardly been met in recent years with the increase in reinsurance litigation where arbitration clauses are not contained in the relevant contracts, or where arbitration has simply been a prelude to litigation in connection with efforts to confirm or vacate arbitration awards. Where the stakes are high, the avoidance of publicity seems less important to most clients.
The desire for confidentiality of awards remains in some cases where many reinsurers potentially could attempt to take advantage of an award in an arbitration involving a contract on which they also participate. In such situations, the cedant may be quite anxious that an adverse award not become public knowledge.
Informality of the process
Another perceived benefit of arbitration is the informality of the process which means parties in arbitration can avoid many of the burdensome procedural technicalities of complex commercial litigation, whether it be in state court or federal court. By and large, this generally means there is no need to be concerned with state or federal rules of civil procedure as well as local court rules to which attention must otherwise be carefully given. This means, for example, that normally the parties forego such consuming and expensive discovery devices such as interrogatories, requests or notices to admit, and formal responses to requests for discovery and inspection of documents. In arbitration, one may also normally avoid troublesome and time consuming tasks such as the preparation of pre-trial orders often required in federal district court and attempts to stipulate to the admissibility of documents or deposition testimony.
While we have found that the avoidance of technical procedural matters on the whole is beneficial, we have found that document discovery in arbitration can be every bit as contentious, burdensome, time consuming, and expensive as it is in complex commercial litigation in state or federal court. Discovery disputes often consume large amounts of time with extensive letter or brief writing, legal research, and sometimes oral argument. Depositions, while not automatic in reinsurance arbitration, and certainly not the right of parties in an arbitration, have become almost as common as they are in commercial litigation and typically are sought and agreed upon by both sides.
Strict rules of law do not apply
This elementary principle of reinsurance arbitration is a natural extension of the emphasis on industry experts serving as arbitrators and umpires to resolve reinsurance disputes. As those in this industry are no doubt aware, many reinsurance arbitration clauses expressly provide that the arbitrators are not required to follow strict rules of law but are instructed to decide disputes in accordance with the custom and practice of the insurance and reinsurance industry and to treat the contract as a honourable engagement rather than a strictly binding legal obligation. This type of provision has several ramifications.
First, it is usually interpreted to mean that strict rules of civil procedure as well as strict rules of evidence need not be followed. This principle is generally considered an advantage, in particular with respect to evidentiary problems that may cause considerable anxiety and expense in commercial litigation. Of course, that is not to say that there would never be evidentiary issues in arbitration, in particular where questionable documents might be involved. Normally, however, where the documents are of fairly certain provenance, including the cedant's files, the reinsurer's files, and the broker's files, there is usually not much dispute about the authenticity of documents.
More significantly, this provision also calls into question the obligation of reinsurance arbitrators to follow the dictates of substantive case law that arguably governs the reinsurance contract at issue. We have been involved in arbitrations where there is case law directly on point involving the very same contract language and even the same parties to a contract that had previously been the subject of federal court litigation in the same jurisdiction as the pending arbitration. In one arbitration involving that very scenario, the panel completely disregarded clear case law on point in deciding the issue.
There is, under the US Federal Arbitration Act, very little basis on which to challenge an award that flatly contradicts what would be controlling law if the matter were in court. Although several cases discuss the principle of vacating an award for manifest disregard of the law, a concept not found in the Federal Arbitration Act, the principle is vague, and ill-defined, and has almost never been applied to vacate an award. Some advocates of the arbitration process feel that this is a good thing and that arbitrators should be free to disregard case law that, in their view, might be contrary to industry custom and practice. There are others who would disagree, certainly where there is clearly articulated law directly on point.
It would certainly seem anomalous that two virtually identical disputes could be decided differently because of different fora, even where the parties are the same, the contract language is the same, and the evidence is the same. Some would say that one of the purposes of stare decisis in the common law is to allow businessmen and commercial interests to order their affairs in accordance with a predictable set of rules. Hence, refusing to follow clear case law certainly might undermine this goal.
Cost effectiveness - speedy resolution
The speed and economics of arbitration are considered another advantage of the process. Nevertheless, with the magnitude of some of the disputes we have seen recently and the volume of discovery required, involving tens of thousands of documents and in some cases multiple depositions, cost savings are not terribly significant. Added to high discovery costs, must be the costs of umpires and arbitrators.
Again, the purported speed at which arbitrations can be commenced and brought to conclusion is another ideal of the system that perhaps is not often met in this current climate of reinsurance dispute resolution. The problems leading to delay are most often derived from the umpire selection process as well as discovery. While some arbitrations move swiftly to conclusion, many others take years to resolve.
Perhaps the most common lament regarding the reinsurance arbitration process is that there is a tendency to compromise in difficult disputes and that arbitrators are unwilling to make the hard decisions that state and federal district court judges make every day. The results of compromises that we have seen on a number of occasions are awards that may not be entirely consistent with the parties' submissions or have any factual support in the record submitted to the arbitrators. Some reinsurance contracts have provisions that allow arbitrators to base an award on equitable principles and, in other cases, there is no doubt that arbitrators resorted primarily to notions of equity and fairness in fashioning an award. Such awards are sometimes difficult to explain but are nearly impossible to challenge under the Federal Arbitration Act.
A related issue that has also been debated lately in US reinsurance circles is the absence of the requirement of a reasoned award. We understand that in the UK reasoned awards are more common and the scope of appellate review is much broader than it is in the US. Much of the criticism of reinsurance arbitration stems from the lack of a reasoned award requirement in most reinsurance contract arbitration clauses. The lack of a reasoned award means that an arbitration award may be a one sentence grant or denial of money damages or a declaration of coverage or lack of coverage as the case may be. The result of such an award is that it is virtually impossible to understand the rationale of the arbitrators in arriving at their award, especially where the amount of damages granted may not bear any resemblance to the amount sought by one of the parties. Beyond the obvious desire of litigants or parties to an arbitration to understand the basis of an award for or against their interests, the absence of a reasoned award makes the award virtually bullet proof against appellate review.
The narrowness of appellate review in the US under the Federal Arbitration Act naturally has both its proponents and opponents, depending upon who won and who lost a particular arbitration. Because the purpose of arbitration in the US, as it has developed generally under the Federal Arbitration Act and under many state arbitration acts, is to avoid litigation and provide finality to the parties, the statutes have evolved to provide for appellate review only under very limited circumstances involving blatant fraud, bias, corruption, partiality or the grant of relief clearly outside the submission of the parties. As this readership can readily imagine, the instances where such charges can be proven are exceedingly rare. Once again, as in many of the features of arbitration, beauty is in the eye of the beholder.
Paucity of qualified arbitrators
Another problem endemic to the reinsurance arbitration process is the rather limited pool of qualified arbitrator and umpire candidates in the US. While there are many active and even more retired individuals who have made public their interest in serving as arbitrators or umpires in reinsurance arbitration, a relative handful have substantial experience in the arbitration process and the necessary industry expertise and knowledge, and temperament to serve in a competent fashion.
Most clients express a strong desire for umpires and arbitrators with whom we are familiar and who have a proven track record in handling arbitrations. As a result, there is a natural reluctance to recommend untried or inexperienced arbitrators who might otherwise be highly competent and experienced insurance and reinsurance professionals. The result is a recurring cycle of using the same arbitrators and umpires so that the available pool of experienced arbitrators and umpires never really grows substantially. Another side effect is the perception that reinsurance arbitration is controlled by an “old boy network” or gentlemen's club which is loathe to accept new members. While there is certainly no “club” as such and there is certainly no intention or ability by the established members of the club to exclude newcomers, relying on the “old reliables” certainly has that effect.
In the US, ARIAS and the Reinsurance Association of America have sought to identify a pool of qualified and, in the case of ARIAS, certified arbitrators and umpires, who have been trained in reinsurance arbitration procedures and practices. These concerted efforts have had a beneficial impact on the professionalism of arbitrators and the arbitration process.
Inability to disqualify inappropriate arbitrators
Another clear defect, in our view, of US arbitrations conducted under the Federal Arbitration Act is the inability of a party to an arbitration to disqualify a clearly inappropriate or unqualified party arbitrator appointed by the other side. Many arbitration clauses provide that the arbitrators and umpires be “disinterested” active or retired executives or officers of insurance or reinsurance companies or underwriters at Lloyd's. Sometimes the arbitration clauses further require that the arbitrators may not be former officers of either party to the arbitration. Where, however, one party has appointed a party arbitrator who is clearly unqualified, there is little that one can do under the Federal Arbitration Act if that arbitrator refuses to step down or the party who appointed him/her refuses to replace the offending candidate. Under the Federal Arbitration Act it is virtually impossible to remove such an arbitrator. The remedy is to proceed with the arbitration all the way through to an award and then seek to vacate the award which, as noted above, is nearly impossible to do. There is also a considerable grey area in respect of when an arbitrator might be unqualified on ethical grounds but there is little case law to assist the offended party in removing such an arbitrator.
One unfortunate example we recently encountered involved a party arbitrator who was many years earlier an underwriter for a co-reinsurer of the very same reinsurance contracts that were in dispute in the arbitration, when the same issue in arbitration previously arose. Although there was correspondence documenting the arbitrator's position as a co-reinsurer adverse to the cedant in the arbitration, the party arbitrator refused to step down and the party which appointed that arbitrator refused to provide a substitute. Over the objection of the cedant, with a full reservation of rights, the arbitration proceeded to an award against the cedant, which cedant is now challenging the award on the grounds of the bias and partiality of that party arbitrator. The ultimate result under the Federal Arbitration Act is uncertain, but the result of the court challenge may have a considerable affect on future selection procedures.
We consider it an unfortunate aspect of the US arbitration process and the Federal Arbitration Act that this type of situation can exist, which is a substantial mark against the entire arbitration process. We cannot envisage a situation where a judge in a bench trial would not excuse himself in this situation, which is roughly analogous to a judge in an automobile negligence case being a witness to the accident and having previously expressed a strong bias regarding the fault of one of the litigants. In this scenario, the arbitrator might certainly qualify as a fact/expert witness but under no circumstances should he serve as a party arbitrator with the ability to influence the allegedly neutral umpire. Notwithstanding the recognition that a party arbitrator is accepted in a US arbitration as somewhat of a quasi advocate, we believe that this type of predisposition and bias has no place in the reinsurance arbitration process.
Brokers, MGAs not parties
In many instances, arbitration presents a distinct disadvantage, where a broker, MGA, or other clearly involved party cannot be compelled to be part of an arbitration because such party was not a signatory to the reinsurance contract. Thus, litigation among all interested parties would, in such circumstances, hold a distinct advantage over arbitration.
Historically, most treaties and many facultative certificates have arbitration clauses, which are binding under US law. Naturally, parties can agree to waive arbitration, but this rarely takes place. Where one of the contracting parties is insolvent, most, but not all US jurisdictions still enforce the arbitration clause. In the case of a foreign-based insolvency, in the context of § 304 US Bankruptcy Code proceeding, the law is less clear but will soon be clarified in an appeal pending in the US Court of Appeals for the Second Circuit.
The debate over arbitration will rage on and, as seen above, each side has some good arguments. To some extent, the delays, costs, and liberal use of discovery have caused arbitration to become more like litigation. Also, court imposed procedures have, in many cases, streamlined and shortened discovery and trial, reducing costs, so litigation has, to a degree, become more like arbitration.
But, at the end of the day, ask yourself this - would you rather have your dispute decided by active or retired insurance/reinsurance executives or active or retired postal workers. We submit, with all its faults, arbitration is the way to go.