The Third Man (Worldwide Reinsurance)
December 22, 2006
Friday, December 22, 2006Greg Dobie
When a UK insurer recently accused a US insurer of fraud during the placement and conduct of reinsurance contracts there seemed to be only one place the dispute was destined to be heading for - a court of law. Especially since the US insurer in turn accused the UK insurer of breaches of reinsurance contracts, and non-payment of balanced due under the contracts. However, there was one thing that both parties did agree on. Ad that was the amount disputed - approximately US$80m - would not be resolved through litigation.
Instead the parties vowed to resolve their differences through the process of mediation and the results of this decision make for impressive reading. Over the course of just four days the dispute was settled at a cost per party (including preparation) of just $22,400. The time between the decision to mediate and the final outcome was just four months. Perhaps most importantly one of the parties involved said that choosing the mediation process had helped to preserve its business relationship with the other party "because the issues we were litigating were particularly corrosive". When asked to estimate its cost savings, the same party said it was "impossible to say with any accuracy but they could have run hundreds of thousands of pounds".
Mediation has long been regarded by legal experts as being faster, cheaper and more confidential than litigation and it seems that at long last the corporate world is waking up to the fact. According to a recent survey by accountants Grant Thorton, eight out of 10 external lawyers and nine out of 10 corporates believe that more cases will be resolved by alternative dispute resolution (ADR) over the next few years. Mediation's success rate is particularly high - one lawyer puts it between 75% to 80% either on the day or shortly after.
CLAIMS FOR CHANGE
According to Paul Moss, head of claims at re/insurer QBE's European Operations, it is not surprising tht this change in attitude is now emerging, especially within the reinsurance industry.
"On the direct side, litigation has got out of control," he says. "Take the American tort system as an example. Research indicates that it spends no less that $80bn a year on direct costs of litigation and insurance premiums, and a total of $300bn a year on indirect efforts to avoid liability.
"Litigation on such a massive scale can only stifle the growth of the US economy; in recent years it has caused 47% of manufacturers to withdraw products from the market.
"Under the tort system, only 46 cents in the dollar goes to the claimant, the rest is carved up between lawyers and associated administrative costs.
"We have become a litigious society."
The Claims environment has its fair share of regulatory and compliance pressure, overlaid with the Claims Minimum Standards within Lloyd's. The claims function now falls under the microscope of regulator, the FSA, in the UK. And Sarbanes-Oxley lurks in the shadows.
"Mediation is something which must be added to the litigation management tool box," adds Mr Moss.
"Don't get me wrong, there are times when a dispute, coverage issue or other complex claim situation should be resolved through the litigation process. We need judicial guidance. We need legal precedent for future reference, but arbitration?
"The costs involved in a fairly straightforward UK arbitration are around £250,000 per party, whereas something of a more complex nature would cost multiples of that figure.
"Recently, several London Market reinsurers went before an arbitration panel in New York for a $15m claim and didn't see much change from $3.5m for legal expenses.
"The cost of arbitrating in America has almost become prohibitive."
As a comparison Mr Moss cites a recent case that went to mediation in the US. The issues arose as a result of important information being 'lost in translation' in the placing process. The relationship with the cedent and the broker was such that all parties wanted to find a solution, without recourse to litigation. In just over a day a settlement was reached whereby the broker, the cedant and the reinsurer all contributed to the loss.
"Including air fares to New York the cost came to about $10,000," notes Mr Moss. "If this had ended up in arbitration, the parties would have incurred the expense of discovery and depositions.
"They would have been pulled apart by the process without a doubt; a degree of hostility would have manifested, resulting in a complete breakdown in the relationship.
"Had that happened, both parties would have incurred at least $750,000 each in legal costs."
However, despite the obvious benefits associated with mediation, and the legal belief that hte number of cases resolved by ADR will soar in the near future, at present there is no consistent approach by the re/insurance industry to mediation.
Kent Chaplin, head of claims at Lloyd's says: "There would be benefits to mediation begin written into policy wordings where appropriate, which also supports contract certainty.
"Lloyd's brand reputation relies upon effective claims management as 80% of our costs are claims related.
"Lloyd's has set a framework of best practice guidelines and particularly relevant to the discussion is Principle 6 which sets standards for the disciplined procedure and proactive management of third party experts. This includes pro-actively agreeing strategy and goals and for control of costs. An individual claims strategy should include attempting to resolve the dispute without recourse to litigation.
"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."
However, moves to adopt an industry-based approach to the formulation and adoption of key mediation clauses, protocols and practices are now well underway.
CEDR (The Center for Effective Dispute Resolution) is the thought-leader for dispute resolution in Europe and a trainer in mediation and conflict management skills. An independent non-profit organisation supported by multinational business and leading professional bodies, CEDR's aim is to encourage and develop mediation and other cost-effective dispute resolution and prevention techniques in commercial and public-sector disputes.
Eileen Carroll, deputy chief executive, CEDR, says: "The importance of mediation in unlocking an insurance dispute deadlock cannot be underestimated.
"Mediation provides neutral project management of a dispute which can often see it safely through the different stages of resolution and also allows for a variety of settlements within the adaptable mediation 'melting pot'.
"We know the market is now mediating more frequently yet CEDR would like to encourage a more systemic and consistent use of mediation by the insurance sector by embedding contract clauses from the outset."
Meanwhile, after consultations with several leading insurance carriers in the US and Europe another non-profit organisation, the International Institute for Conflict Prevention & Resolution (CPR Institute), has established the CPR International Reinsurance Industry Dispute Resolution Protocol. This is a statement of best practices to encourage the early and efficient resolution of disputes between reinsurers and reinsureds.
"This is a major step forward to complement and support the need for mediation clauses to be incorporated within treaty wordings," says Mr Moss.
"If the reinsurance market is seen, realistically, to be giving the concept of mediation a fair hearing, this will do much to continue to expand awareness within the whole of the London Market."
With the CEDR and CPR currently working together to produce a training module for insurance and reinsurance professionals who wish to learn new skills for effective mediation, Mr Moss is optimistic about the prospect for changing the way the industry resolves dispute.
"The key to successful implementation is the willingness of underwriters to incorporate alternative dispute resolution clauses such as those int he CPR Protocol into contracts of reinsurance.
"This is the real message that we have to send tot he market - and the area from which change will really be affected.
"I am convinced that if we can get London fully engaged, with the US market ready to act; then there is absolutely no reason why we can't go global with this initiative.
"Obviously not everybody is going to sign up to the protocol," concludes Mr Moss. "That is why we are trying to get underwriters to have a clause for mediation included at the time of placement.
"At QBE we are fully supportive of initiatives that will not only save on costs but also demonstrate our commitment to conflict prevention and resolution.
"If the market buys into this, I forecast that over the next five years there is no reason why the reinsurance industry should not see its annual litigation spend reduce by 35%, or more."
Of course, mediation can end in failure; primarily through a lack of commitment, preparation, lack of realism or authority, on the part of those participating in the process. But advocates like Mr Moss maintain that with proper planning these difficulties can be eliminated. A standard clause under-pinned by a protocol for resolving disputes would at least allow this theory the chance to be put to the test.
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