Reinsurance Arbitration: The Forgotten Clause

by Robert M. DeMarco


Page 1


I have experienced some fairly animated discussions between ceder and reinsurer in negotiating various reinsurance terms in their treaties but in all my experience I have never heard a great deal of discourse over the Arbitration Clause.

However, once a dispute arises, this forgotten clause suddenly takes center stage and the question for us is whether it is up to the part.  It is probably a testament to the good will of the parties and the fact that treaty disputes historically have been infrequent that gives rise to the Arbitration Clause being overlooked at the inception of the reinsurance deal.

You may wonder if this is the case why worry about it now?  Because what was is changing and a new era of reinsurance has dawned.  In short the change that has come about is that ceder and reinsurer have become adversaries, not partners, for the first time in the 300 year history of reinsurance.  There are a lot of reasons that have led to this but primarily the first has been the evolution of the ceder demanding the lowest possible cost regardless of relationship and the final nail in the coffin was the reinsurance model act passed by the states.

Reinsurance agreements were always based on utmost good faith and the concept of a "gentlemen's agreement."  This was evident by the fact such agreement were called treaties and not contracts.  An adversarial climate was never envisioned as a viable basis for reinsurance, no less the resolution of its disputes.

It would appear that the long standing tenets of "uberrimae fides" and the treaty as a "gentlemen's agreement" are endangered.  The Arbitration Clause has always been the repository of such sentiments.  Historically, the intent of the Arbitration Clause has been that when a dispute between the parties arises they should first attempt to settle it amicably between themselves.

Only when all such efforts have failed should they turn to an arbitration panel to help them. In reinsurance this panel has always been viewed as peers who have a good understanding of reinsurance.  Their job has always been to put the toothpaste back in the tube relying heavily on the errors and omission clause for their justification.  By this I mean their role has historically been to uncover the essence of the dispute, and restore the parties to the position they would have been in if the transgression(s) never occurred and try, when possible, to institute remedies to prevent future occurrences.

Historically, this was done without regard to rules of law, evidence or lawyers.  In short reinsurance arbitration was the defining illustration of equitable versus legal remedy.  It worked darn well provided the parties remained essentially non-adversarial but once the parties become adversaries and treat reinsurance treaties as contracts and lawyers bring their tools of the trade to the floor it's time to take a hard look at the last vestige of old time reinsurance practice, the Arbitration Clause.

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