Role of Mediation in Reinsurance - Brad Barron (Bazil McNulty) - 2006-04-03
Introduction
Reinsurance has long been a gentlemanly business where parties are expected to meet their obligations with civility and minimal resistance when compared to other business sectors. With increasingly contentious disputes, reinsurance companies may want to look for alternative ways to amicably settle their disputes. Mediation offers a viable and valuable solution as it often allows reinsurance companies to minimize hostilities, preserve their business relationships, save money and avoid the hazards of a third party’s decision. Even though the concept of mediation in reinsurance is relatively new, that does not mean that reinsurance companies should slowly adapt to the use of mediation. Rather, reinsurance companies should seriously consider using mediation at the outset of all disputes.
Reinsurance contracts often involve companies from around the world. This globalization of the industry hinders the normal enforcement of contracts through a specific country’s judicial system because of the associated costs as well as the difficulty of ascertaining a proper jurisdiction and enforcing a judgment. In order to avoid this problem with traditional judicial enforcement, the reinsurance industry includes arbitration provisions in almost all contracts. These arbitration provisions were intended to serve multiple purposes. First, the provisions were intended to resolve disputes civilly, allowing the companies to avoid litigation which could jeopardize their business relationship. Second, the use of arbitration provisions could drastically reduce the cost of dispute resolution by avoiding high fees associated with lengthy litigation. Third, by going to arbitration, companies could reduce the amount of time spent resolving the dispute. Finally, arbitration would lend itself to speedier and more economical business results because the arbitration panel would be made up of reinsurance professionals who would better understand the industry-specific language and practices
With the increasing emphasis on profitability by reinsurance companies, the distinction between arbitration and litigation is becoming increasingly blurred. By focusing on getting the most out of every dispute, companies appear to be moving towards an increasingly adversarial relationship with the opposing party. To maximize the likelihood of prevailing, companies are spending more time and money on their representation in arbitration. Further, arbitration proceedings now involve lengthy discovery and the actual proceeding can take many days. As such, arbitration is turning into exactly what it was intended to avoid: full blown hostile litigation. This increasing hostility erodes any goodwill between the companies and they no longer focus on a mutually beneficial relationship, but rather the result of the dispute. This is particularly prevalent where the companies no longer maintain a business relationship. In addition to the loss of goodwill, companies lose increasing amounts of income on arbitrations due to expenses such as the time spent by employees preparing for and participating in the arbitration and the costs of locating and duplicating records. Finally, even with a positive arbitration award, companies often find it difficult to enforce these awards in foreign countries against a now hostile business partner. Thus, reinsurance companies may want to consider moving away from contentious and costly arbitrations and seriously consider mediation.
Mediation’s Advantages
Mediation offers many advantages over arbitration. First, mediation reduces costs for all companies involved. Currently, reinsurance companies must not only have employees present to support the company’s case, but the companies must also pay for the arbitrators as well as the cost of locating and analyzing loss and account details, which require extensive duplication and employees’ time. At the very least, mediation reduces the cost of dispute resolution by drastically cutting down the time spent by employees in arbitration due to the average duration of mediation being significantly shorter than the average duration of an arbitration hearing. While some may also consider reducing attorney’s fees by wholly or partially removing them from mediation, this is only a short term savings. While mediation itself does not involve a binding resolution, the parties may enter into a binding contract as a result of the mediation. This binding agreement not only ends any dispute, but it also carries with it long term consequences for both parties. As such, it is important during the process of dispute resolution to fully understand the legal ramifications of all agreements. Additionally, an experienced reinsurance attorney can provide invaluable advice about possible pitfalls and benefits by calling on his or her vast wealth of knowledge. By including an attorney in the process and informing them of the company’s mediation goals, a company can obtain valuable legal advice, which will positively affect the company’s long-term prospects.
Second, mediation offers a return to civility for the reinsurance industry. Dispute resolution in reinsurance has become more and more acrimonious, especially in the past decade. This is due to the increasing financial liability at stake from litigation involving such items as asbestos and environmental pollution, among others. With this significantly increased financial exposure, companies realize that their own solvency and survivability is in the balance, and they are therefore often willing to do whatever it takes to “win” a dispute. Mediation encourages companies to become more focused on maintaining good diplomacy rather than ensuring the company is victorious on every possible issue. In reinsurance, goodwill is extremely important because of the small size of the industry which virtually ensures that the companies will meet again whether it is to conduct new business or windup old business. Thus, by focusing on maintaining and cultivating a good relationship, the parties are more likely to leave the dispute with increased bonds of goodwill rather than a frayed relationship.
Third, mediation places control back into the hands of the parties. Court adjudications and arbitrations only allow the parties to present their case and the final result is in the control of the third party decision maker whether that is a judge or an arbitration panel. In reinsurance, this is problematic because of the difficulty in calculating a proper award and the complexity of the business. Long term solvency is important for all companies in the reinsurance field, even the party initiating the action, because it is likely that the parties will have contracted additional business with each other through indirect channels which will likely require a future payment. Thus, while a third party neutral may come up with an arbitral award, it may not take into account the payor’s long term solvency and could force the company into insolvency. Mediation would address this problem by allowing the payee company to come up with a solution that not only satisfies its adversary, but also that allows it some form of long term security and solvency. The size of the award is not the only concern involving third party neutrals as they may never fully understand all the aspects of a reinsurance dispute. Even a third party neutral who has experience in the reinsurance field may have difficulty fully digesting all the claims detail because of their constraint on time and the complex nature of many reinsurance claims. Mediation allows the individuals with the most intimate knowledge of the claim to craft a resolution, rather than trying to fully inform a third party neutral on a complex and time consuming issue. While an arbitration panel may attempt to fully understand all the issues, documents and arguments, it will be very difficult for the panel to understand the issues as clearly and with as much precision as the parties themselves. By using mediation, the parties increase the likelihood that all nuances are fully explored, understood and taken into account when a resolution is reached.
Fourth, mediation increases the approval and participation of the agreed upon resolution. In reinsurance, an arbitral or court award is no guarantee of success when it comes time to collect on the award. In reinsurance, companies are spread out throughout the world and some are protected by inconvenient, expensive and time consuming legal systems which often discourage and sometimes prohibit the enforcement of awards by foreign companies. Rather than risk the expense of gaining an award that is difficult to enforce, mediation fosters cooperation and participation in the settlement. By giving all parties a chance to shape the result and getting the approval of all parties, mediation increases the likelihood that a company will stand by its agreement and not merely retreat behind its domestic legal system.
Finally, mediation offers the parties a chance to address all issues. In arbitration and especially within the judicial system, the only issue that is addressed and resolved is the underlying legal dispute. Any outlying issues are left for another day. In reinsurance, this approach can be problematic because of the complex nature of the industry. However, in mediation, the parties can address not only the legally based dispute, but also any other issues they desire. This not only prevents spending time and money in the future on addressing a problem, but it also promotes good relationships as both parties discuss their concerns and hopefully find an acceptable solution.
Conclusion
In reinsurance, mediation is a viable and valuable alternative to traditional third party neutral resolutions, such as arbitration and judicial proceedings. While mediation may not involve formal legal proceedings, reinsurance companies would be well served to include experienced reinsurance lawyers in all their mediation sessions. Even with counsel, mediation provides not only economic advantages, but also maintains goodwill and preserves relationships in an industry in which parties will encounter each other frequently. While mediation may not always lead to an amicable result, it should be seriously considered as a starting point.
About the AuthorAuthor: Brad Barron (Bazil McNulty)
Bradford Barron is an Attorney with US Law Firm Bazil which represents insurers and reinsurers of all sizes in the United States, the London Market and around the globe.
Mr. Barron earned his B.S. in Biology from Boston College in 2002 and his J.D. (Magna Cum Laude) from Villanova University School of Law in 2005.
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