Wednesday, March 21, 2007
TO LITIGATE, ARBITRATE OR MEDIATE?
That is the question being asked by market players seeking the right solution to enable them to become disentangled from the costly disputes that arise in the complex insurance and reinsurance markets, Arbitration and mediation are similar methods of resolving a conflict because they are alternatives to litigation and employ a neutral third party. However, mediation tends to be facilitative and non-binding whereas arbitration, particularly in the world of reinsurance, is as final as a court judgment.
Arbitration is the traditional method of dispute resolution, incorporated into the majority of insurance and reinsurance contracts, but critics of this method claim that it can be - and increasingly proves to be - time consuming, slow, expensive and more uncertain than litigation.
In response to this appetite in the market for an alternative solution to managing reinsurance claims, a new initiative promoting mediation called the International Reinsurance Industry Dispute Resolution Protocol was launched in October. Developed by the International Institute for Conflict Prevention and Resolution (CPR), in collaboration with Lloyd's and QBE, the protocol consists of a statement of intent to follow certain procedures in the event of disputes arising between all parties in the reinsurance chain.
This protocol is a major step forward in complementing and supporting the need for rigorous dispute management clauses to be incorporated within reinsurance agreements. There is an increasing desire for ceding companies and their reinsurers to seek ways to avoid unnecessary delays, financial burdens,animosity and uncertainties of arbitration outcomes in disputes. The costs of resolving disputes in the reinsurance market are getting ever more expensive. At times they can become totally disproportionate to the issues at stake - especially in terms of direct costs, management time, and in extreme cases, reputation issues (see figure 1).
THE RISE OF MEDIATION
A surge in interest in a dispute management protocol setting forth industry best practices arose for a number of reasons, but the impact and aftermath of Hurricane Katrina in 2005 certainly highlighted its merits. The litigation that was anticipated following Katrina did not happen because of the industry's awareness of alternative methods of dispute resolution, rather than just turning to the lawyers.
Contract certainty is another contributing factor. Nearly all contracts at present contain arbitration clauses, bur the desire for certainty and control of outcomes is ensuring that an agreed-upon procedure for exchange of information, assurance of timely and direct negotiation, and mediation if needed, is beginning to be viewed as a viable alternative.
Peter Schwartz, a partner at Mayer, Brown, Rowe & Maw, recently gave a presentation to the London market on mediating reinsurance disputes. He outlined the approach of the English Commercial Court to mediation and the potential sanctions, even to successful litigants, of unreasonably refusing to mediate. He also reported upon the increased popularity of alternative dispute resolution (ADR) strategies and techniques amongst corporate general counsel. According to a recent survey by Grant Thornton, nine out of ten external lawyers and nine out of ten corporate lawyers believe that more cases will be resolved by ADR over the next few years. Yet there is presently no consistent approach to mediation within the reinsurance industry.
Schwartz insists that mediation is a powerful, speedy and cost-effective tool in the box of dispute resolution remedies for those reinsurers involved in long running and expensive arbitration or litigation. It is potentially suitable for resolving local or international disputes but it is not a panacea; some disputes are unsuitable for mediation and in some cases, an attempt at mediation might be premature.
THE IMPORTANCE OF CARE
However, since the mediation process involves flexibility, "double" confidentiality and broad scope for a constructive party-negotiated solution, reinsurers would be well advised to consider an industry-based approach to the formulation and adoption of key mediation clauses, protocols and practices. As always, education is key. Care needs to be taken in the drafting and application of terms - particularly in relation to the potential enforcement of mediation settlements in outwards reinsurance. With greater market-wide education in mediation techniques, reinsurers are likely to enhance their professional skills, preserve and develop market relationships, and affect major cost savings to their balance sheet.
Experience in other industry sectors suggests that a market-wide approach to considering mediation as an appropriate remedy for reinsurance disputes would be beneficial- either by inclusion of the appropriate terms at inception, in accordance with contract certainty principles, or to consider at the appropriate stage when a reinsurance dispute has arisen.
Nick Bradley, partner of insurance and reinsurance at Lawrence Graham, recently witnessed first hand the market's willingness for change in this area. He said the firm had recently hosted a seminar which was attended by 130 delegates from the industry and when asked to vote for one of three dispute resolution mechanisms - litigation, arbitration or mediation - more than 100 were in favour of mediation. "This reaction clearly indicates that the market is looking for other ways to resolve disputes and although I'm not saying that mediation is the 'be-all and end-all'," said Bradley, "it does provide a great and powerful dynamic in the right circumstances, particularly where there is an ongoing relationship between the parties involved."
Kent Chaplin, head of claims at Lloyd's said: "Mediation is one of a number or essential tools for proactive claims management to be used by claims handlers in the marker. The parties lose nothing by trying mediation as a step in the process to resolve disputes; it is private, quicker and cheaper than arbitration or litigation and does not preclude moving to formal proceedings if unsuccessful. Chaplin also sees benefits to mediation being written into policy wordings where appropriate, as it also supports contract certainty. "We all know that claims are critically important, not least because claims are our largest cost and ... 80% of our costs are claims-related," he added.
THE FUTURE OF LLOYD'S
Many insurance and reinsurance contracts include arbitration clauses. Arbitration was originally intended to be quicker and more flexible than formal court proceedings, although this has not necessarily been translated into practice. Lloyd's vision is that the market will be recognised for consistent and proactive management of claims; where each business manages claims as a core customer service, as well as a key determinant of profitability. The market has set up a framework of best practice guidelines which establishes minimal standards of performance, including standards for the disciplined procurement and proactive management or third-party experts, agreeing strategy and goals and for control or costs. An individual claims strategy should include attempting to resolve the dispute without recourse to litigation and this is reinforced by the Civil Procedure Rules of the English Courts, ·which encourage the parties to consider the possibility of ADR and in particular mediation.
Paul Moss is head of claims at QBE European Operations.
To find out more about the CPR International Reinsurance Industry Dispute Resolution Protocol visit www.insurancemediation.org.
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