Reinsurance Arbitration: The Forgotten Clause

by Robert M. DeMarco

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To Arbitrate or Not to Arbitrate That is the Question

The first question is: whether or not to have an arbitration clause?  Even suggesting this will smack of heresy to some reinsurers reading this but the question has to be asked: In Todays and more importantly tomorrow's atmosphere can arbitration work? It is kind of ironic that at a time when other arenas of dispute are turning to binding arbitration as an alternative to the burdens of Court settled disputes we are wondering if that isn't a viable alternative.  I think the real touchstone of whether arbitration is going to remain viable is the arbitration panel.  If as an industry we can tap people who understand the process and are willing to put in the effort, perhaps it will.  But if the view of people in the industry is that arbitrators are to be judges and simply listen to the cases presented and the parties turn to outside counsel to present their case, I think reinsurance arbitration will produce very flawed results.  It is this concern that led at least one well known reinsurer to abandon arbitration in favor of a Court setting.

The basic challenge facing arbitrators today is if they are going to limit their role to a judge hearing a case from opposing counsel without the safeguards built into the judicial process over centuries of dispute settlement, are they technically competent either through talent or training to ensure a proper forum for resolution of the dispute. I am afraid such amateur judges trying to limit the excesses of attorneys as advocates is akin to the chickens inviting the foxes over for dinner.  No matter who leaves with a full belly everyone agrees it was a bloody mess.

For good or ill the Courts are the only forum for lawyers to practice their arts.  If ceder and reinsurer are going to behave as adversaries then they had better employ contracts not treaties to cede their business and let the Courts not arbitrators settle their disputes. Often when I make the distinction between a treaty and a contract the lawyer present will give me a knowing chuckle and ask: What's the difference? I rest my case.

Does this mean that we should abandon the arbitration process completely?  Maybe so, but at the very least, I do think it means revisiting the Arbitration Clauses currently contained in your reinsurance treaties.  Most arbitration clause wordings are decades old and reflect the atmosphere at that time.  These tend to be loosely worded, usually spending most of their verbiage on how the panel is to be chosen.  In the past when a collective understanding and agreement existed the few words exalting

the "gentlemen's agreement" adage was sufficient to set the tone.  Today I think such loosely worded clauses are a prescription for a disastrous arbitration.  I think it is imperative, in a treaty that it retains dispute resolution through the arbitration process, which the Arbitration Clause is specific as to what should occur.  Frankly, this could include or exclude just about anything the parties want but there are a few areas I believe should be examined:

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