Reinsurance Dispute Resolution – New Appleman on Insurance Law Library Edition, Chapter 77

By David A. Attisani and Ethan V. Torrey, Partners, Choate, Hall & Stewart LLP

Fair, efficient, and reliable dispute resolution procedures are vital to protect the rights and clarify the duties of parties arising under reinsurance contracts.  This chapter provides a broad overview of reinsurance dispute resolution practices in the United States, which enable parties to enforce their rights under reinsurance contracts.

Section 77.01 addresses disclosure obligations before reinsurance disputes arise.  Section 77.01[1] addresses the duty of utmost good faith which binds both cedents and reinsurers.  Section 77.01[2] discusses the discoverability of reinsurance information in coverage litigation between direct-side insurers and their policyholders.  (Direct-side insurers have entered into insurance agreements with their policyholders and thus have direct relationships with their policyholders.)  Courts disagree about whether reinsurance information is discoverable.  Several courts have permitted direct-side policyholders to obtain their insurers' reinsurance agreements and files, especially when reinsurance information furnished evidence relating to bad faith, late notice, lost policies, policy interpretation, reasonableness of the settlement, or rescission.  By contrast, other courts have held that reinsurance agreements and files are not discoverable, because they are irrelevant or protected by confidentiality, attorney-client privilege, work product, or the common interest doctrine.  Section 73.01[3] covers a reinsurer's right to access records of a cedent, under an access to records clause in the reinsurance contract.  (A cedent is an insurer who transfers a portion of its risk to a reinsurer.)  Several courts have concluded that access to records clauses require cedents to provide factual information relevant to the underlying claim or its handling, but do not entitle a reinsurer to discover a cedent's privileged documents.

Section 77.02 addresses a party's choice of forum in reinsurance disputes.  The reinsurance industry has historically favored arbitration over litigation because it has provided more expert, expeditious, cost-effective, and confidential proceedings.  Litigation, however, offers other advantages, including greater power to obtain provisional relief, more extensive discovery, ability to join related parties, precedential value, and uniformity of result.  Section 77.02 addresses the issues parties may wish to consider in deciding whether litigation or arbitration offers a more attractive forum for the resolution of particular disputes.

Section 77.03 describes reinsurance litigation.  Section 77.03[1] notes that litigation is more common with respect to facultative reinsurance certificates than with reinsurance treaties.  Section 77.03[2] discusses jurisdiction and venue, including forum selection and service of suit clauses.  U.S. courts generally enforce forum selection clauses.  Courts have generally concluded that service of suit clauses require parties to submit to a court's jurisdiction to compel arbitration or to enforce arbitration awards.  Accordingly, these courts have concluded that arbitration clauses are enforceable notwithstanding the presence of a service of suit clause, and several states have enacted laws or regulations to that effect.  A few courts have nonetheless held that service of suit clauses preclude arbitration.  Section 77.03[3] addresses the doctrine of forum non conveniens.  Some U.S. courts have exercised their discretion to dismiss reinsurance disputes under the doctrine of forum non conveniens in appropriate cases, while others have declined to do so.  Section 77.03[4] focuses on choice of law issues in reinsurance litigation.  Jurisdictions in the U.S. use various choice-of-law rules to select the applicable law when the parties fail to do so, including the "most significant relationship" test under the Restatement (Second) Conflicts of Law, the "lex loci contractus" test under the Restatement (First) Conflicts of Law, or the "governmental interests" test.

Section 77.03[5] describes the broad powers of U.S. courts to order provisional relief.  In general, a court can issue a preliminary injunction, if the moving party demonstrates: (a) irreparable harm; and (b) either (1) likelihood of success on the merits, or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting preliminary relief.  In addition, several jurisdictions require unauthorized reinsurers to post collateral prior to filing pleadings in court.  Section 77.03[6] focuses on U.S. courts' authority to consolidate and join claims and parties.  In general, courts have broad authority to consolidate actions, and they have exercised it to consolidate reinsurance disputes and join related parties such as brokers.  A court's ability to consolidate and join additional parties is, however, subject to its own limited ability to exercise personal jurisdiction over related parties.

Section 77.03[7] addresses direct claims by policyholders against reinsurers.  In general, non-parties to reinsurance agreements cannot assert claims directly against reinsurers, because reinsurers are not in contractual privity with direct-side policyholders.  However, some reinsurance agreements contain "cut-through" clauses that expressly grant third parties the right to assert claims directly against a reinsurer under certain conditions, such as when the cedent is insolvent.  In addition, some courts have permitted third parties (e.g. policyholders) to assert claims directly against reinsurers -- in the absence of an express contract provision -- if the relationships among the policyholder, cedent, and reinsurer demonstrate that the parties intended that result.

Section 77.03[8] focuses on U.S. courts' broad authority to orchestrate discovery and the application of privileges.  Section 77.03[9] discusses rules of construction applied by U.S. courts to reinsurance contracts, the influence of industry custom and practice, and evidentiary rules.  Most courts have concluded that reinsurance contracts should be interpreted neutrally -- and not construed against the drafter or the issuing reinsurer -- because reinsurance contracts are negotiated at arm's length between sophisticated commercial entities.  A few jurisdictions have taken the contrary view.  Courts commonly consider expert testimony on industry custom and practice when interpreting reinsurance contracts.  Remedies available in court are discussed in Section 77.03[10], and appellate review is addressed in Section 77.03[11].

Section 77.04 discusses reinsurance arbitration.  Section 77.04[1] discusses certain advantages of arbitration.  Section 77.04[2] addresses commencement of reinsurance arbitrations by demands for arbitration, and responses to such demands.  Section 77.04[3] addresses the enforceability of arbitration clauses.  U.S. courts -- not arbitrators -- decide whether parties are bound by an arbitration clause, and the scope of arbitrable issues.  U.S. courts also routinely enforce agreements to arbitrate.  They have held that the words "arbitration" or "arbitration clause" can constitute an enforceable arbitration agreement when supplemented by reinsurance industry custom and practice, and they have compelled arbitration against non-signatories under theories of agency, estoppel, incorporation, third-party beneficiary, and veil-piercing.  Although parties can waive their rights to arbitrate claims, courts do not readily find waiver because of the strong federal policy favoring arbitration.  If the parties' agreement contains an arbitration provision, U.S. courts  generally compel arbitration of claims that a party breached the reinsurance contract.  In addition, contract formation issues, such as claims of fraudulent inducement, rescission, and reformation, are arbitrable where the arbitration clause is broad, unless the fraud was directed at the arbitration clause itself.  Extra-contractual claims are generally arbitrable when the arbitration clause is broad and the relevant claims arise from the parties' contract.  In general, arbitration panels enforce parties' agreements relating to the substantive law governing their reinsurance contracts.

Section 77.04[4] focuses on selection and disqualification of arbitrators.  U.S. courts will enforce parties' agreements with respect to arbitrator selection.  Some courts enforce "adverse selection clauses," which provide that, if one party fails to appoint its arbitrator to a three-arbitrator panel, its adversary can appoint the second arbitrator.  Other courts enforce such provisions only if one party acted in bad faith or was unreasonably dilatory, or when time was expressly "of the essence."  U.S. courts have appointed arbitrators where the contractually agreed appointment process has broken down.  To varying degrees depending on the dispute at issue, parties and courts commonly seek the following attributes in reinsurance arbitrators:  industry experience; arbitration experience; legal experience; competence; integrity; impartiality; persuasive ability; nationality; and availability.  Arbitrators should make full disclosures at the start of an arbitration, and should continue to disclose pertinent information throughout the proceedings as necessary.  All arbitrators, whether party-appointed or neutral, must remain open-minded and participate in the arbitration process in a fair, honest, and good faith manner.  Although a neutral must be impartial, it is generally understood in the reinsurance industry that party-appointed arbitrators may be predisposed initially to the party that appointed them.  Most courts do not permit challenges to arbitrators on grounds of bias before a panel issues its award.  Nonetheless, a few courts have disqualified arbitrators pre-award -i.e., if the arbitrator's appointment breaches the contract; the arbitrator's bias is blatant; or the arbitrator committed "overt misconduct."  Parties must assert objections during arbitration proceedings to preserve their objections.

Section 77.04[5] discusses provisional relief by arbitrators and courts in aid of arbitration proceedings.  Arbitrators have the authority to order interim relief, absent contrary agreement of the parties.  U.S. courts have concurrent authority to order provisional relief in connection with arbitration proceedings, absent contrary agreement of the parties.

Reinsurance arbitration proceedings are the focus of Section 77.04[6].  Parties are free to agree to the procedures that will govern their arbitrations.  In general -- under the Federal Arbitration Act, U.S. state arbitration legislation, the English Arbitration Act, the UNCITRAL Model Law, and the rules of various trade organizations -- arbitrators have the power to decide issues relating to provisional remedies, consolidation, choice of forum, choice of law, scheduling, evidence-taking and disclosure, bifurcation, appointment of experts, and granting judgment without an evidentiary hearing.  Panels typically convene organizational meetings at the outset of arbitrations, where panels will disclose prior contacts with the participants, and will set forth rules for communication, the permissible scope of discovery, a timetable for discovery, a briefing schedule, and a hearing schedule. The panel will also decide when ex parte discussions with party-appointed arbitrators will cease.  Courts generally hold that under the Federal Arbitration Act, arbitrators, rather than courts, should decide whether to consolidate arbitrations.  By contrast, state arbitration statutes frequently permit courts to consolidate arbitrations, absent contrary agreement.  Arbitration panels have broad discretion over disclosure and evidence-taking, limited only by the requirement that they afford parties fundamental fairness.  Arbitrators have limited authority, however, to order pre-hearing discovery from non-parties.  Courts disagree on whether the FAA permits arbitrators to subpoena non-parties to give testimony or produce documents outside the presence of the arbitrators (i.e. by document subpoena).  In addition, the Federal Arbitration Act and the Federal Rules of Civil Procedure limit the territorial reach of arbitration subpoenas.  Arbitration panels and U.S. courts commonly recognize parties' rights to assert evidentiary privileges in reinsurance arbitrations.

Section  77.04[7] discusses the evidentiary hearing.  Arbitrators have broad discretion over the conduct of an evidentiary hearing, including authority with respect to the location of the hearing, bifurcation of proceedings, admissions, evidence, taking adverse inferences, granting judgment without a hearing, and deciding defenses such as waiver, estoppel, and laches.

Section 77.04[8] addresses confidentiality constraints on arbitration proceedings and awards.  Arbitration proceedings themselves are private and third parties are not admitted.  However, the confidentiality of arbitration materials may be undermined by a party's failure to adhere to confidentiality requirements, subsequent court proceedings to confirm, modify, or vacate an arbitration award, or regulatory inquiries.

Arbitration awards are discussed at Section 77.04[9].  Arbitrators have the authority to issue interim awards, absent contrary agreement of the parties.  After the arbitration proceedings have concluded, a panel will issue a final award granting or denying the relief requested.  In addition, arbitrators have the authority to rule on summary adjudication in appropriate cases, absent agreement to the contrary.  Panels generally need not issue "reasoned awards" -- awards articulating the panel's reasons for the award -- unless the parties make that request.  Remedies in reinsurance arbitrations are discussed in section 77.04[10].  Arbitrators have wide discretion to award remedies when the arbitration clause is broad, including the powers to award: declaratory relief; equitable relief such as rescission and reformation, damages, disgorgement, interest, attorneys' fees, and costs; as well as  punitive damages.

Section 77.04[11] focuses on enforcement of arbitration awards.  Parties seeking court confirmation of reinsurance awards must establish federal subject matter jurisdiction, generally through the federal diversity jurisdiction statute or, in the case of international awards, under Section 2 of the Federal Arbitration Act.  A court can enforce a panel's interim awards.

Section 77.04[12] addresses the powers of courts and arbitrators to modify or clarify awards.  U.S. courts can correct awards in limited circumstances, and some courts have remanded awards to arbitration panels to clarify errors.  Under the "functus officio" doctrine, an arbitration panel loses its authority to grant further requests for relief after its final award is issued.  The doctrine does not, however, bar arbitrators from correcting obvious mistakes, deciding issues deliberately left open by an interim award, or clarifying ambiguities.

Section 77.04[13] discusses vacatur of arbitration awards.  Under U.S. law, arbitration awards are presumptively valid.  U.S. courts will not review arbitral awards for legal and factual error.  They may vacate awards only for "egregious departures from the parties' agreed-upon arbitration," such as:  an award  procured by corruption, fraud, or undue means; evident partiality or corruption in the arbitrators; misconduct by the arbitrators; conduct by the arbitrators exceeding their powers; or, in certain jurisdictions, the arbitrators' "manifest disregard" of the law.  Judicial review of arbitration awards is extremely narrow.

Section 77.04[14] addresses confidentiality in judicial proceedings subsequent to arbitration.  In U.S. courts, there is a presumption of public access to judicial documents.  Courts will generally seal arbitration-related materials only when a party offers specific facts "demonstrating that closure is essential to preserve higher values and is narrowly tailored to serve that interest."

Post-arbitration discovery is discussed in Section 77.04[15].  Post-arbitration discovery in actions challenging arbitration awards is rare.  Courts uniformly refuse to permit discovery into the rationale for the award.  The majority rule with respect to alleged arbitrator bias is that a party may be permitted to take discovery only if it presents "clear evidence of impropriety."  Nonetheless, post-arbitration discovery is rare under any standard, because "[c]ourts will not encourage parties to conduct post-arbitration investigations into the background of the arbitrators on the hope of uncovering evidence of some undisclosed fact."

Finally, arbitration awards have preclusive effect, as discussed in Section 77.04[16].

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David A. Attisani is co-chairman of Choate, Hall & Stewart LLP's Insurance & Reinsurance Group, which was ranked Number One US reinsurance practice by the 2010 Reactions Legal Survey.  Mr. Attisani was named one of Law 360's "10 Most Admired Insurance Attorneys in America" for 2010 out of 1016 nominations.  He was one of only 11 reinsurance lawyers listed in the Legal 500's elite "Leading Lawyers" category (2011), and he was named Best of the Best - Top 25 US Insurance/Reinsurance Lawyers (2009-2011).  Mr. Attisani has handled a variety of reinsurance and insurance matters implicating (among other liabilities) financial and finite issues, clergy abuse, workers' compensation, asbestos and pollution, hurricane and other storm losses, WTC (9/11) losses, and bad faith. Mr. Attisani has served on the faculty at ARIAS, ABIR (Association of Bermuda Insurers and Reinsurers), the Excess and Surplus Lines Claims Association, Mealey's Reinsurance, the ABA, the PwC/Hawksmere Reinsurance Congress (Bermuda) and other seminars.  He has written several articles, including: "Inside the Locker Room: Recent Judicial Review of Arbitrator Conduct," The International Who's Who of Insurance & Reinsurance Lawyers (2010); "The Power of Panels and Its Outer Limits," ARIAS-U.S. Quarterly (2008-2009); and "Panel Selection and Grounds for Disqualification of Arbitrators," ARIAS-U.S. Quarterly (2004).  He is the 2012 advisor of the reinsurance volume of the New Appleman on Insurance Law Library Edition treatise and joint chair of the ABA's reinsurance subcommittee. Mr. Attisani graduated magna cum laude, Phi Beta Kappa, from Williams College and cum laude from Harvard Law School.  He also studied English literature at Oxford University.  Thereafter, Mr. Attisani served as a law clerk in the US District Court for the SDNY.  In 1997-98, he was a special assistant District Attorney in Boston, MA, where he tried 19 cases to verdict.

Ethan V. Torrey is a Partner in Choate, Hall & Stewart LLP's Insurance & Reinsurance Group, which was ranked Number One US reinsurance practice by the 2010 Reactions Legal Survey.  Mr. Torrey has participated in litigating and arbitrating reinsurance and insurance disputes in the United States, the United Kingdom, and Bermuda.  He has handled a variety of reinsurance and insurance matters implicating products liability claims, medical procedures, asbestos, environmental pollution, hurricane and other storm losses, and financial issues, among other liabilities.  Mr. Torrey has served on the faculty at ARIAS-U.S.  He has written or co-authored several articles, including:  Managing Discovery in Arbitration," ARIAS-U.S. Quarterly (Spring 2011); "Sweat the Small Stuff - Nanotech Insurance Issues," Insurance Law360 (Aug. 2010); and "Inside the Locker Room: Recent Judicial Review of Arbitrator Conduct," The International Who's Who of Insurance & Reinsurance Lawyers (2010).  Mr. Torrey received a J.D. from Columbia University and was named Harlan Fiske Stone scholar.  He received an M.A. in History from Columbia University where he served as Richard A. Hofstadter Fellow, and received a B.A. from the University of Pennsylvania, cum laude.  Mr. Torrey served as a law clerk to the Honorable Leonard Garth on the U.S. Court of Appeals for the Third Circuit, and for the Honorable Mark L. Wolf, on the U.S. District Court for the District of Massachusetts.  In 2005-06, Mr. Torrey served as Special Assistant District Attorney for the District Attorney's Office in Cambridge, Massachusetts, where he tried 16 cases to verdict.

This chapter does not necessarily reflect the views of Choate Hall & Stewart LLP or its clients.  The authors wish to thank Jesse Siegel, Anita Spieth, and Eric Teasdale for their research and editorial assistance in connection with this chapter.

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