Mediation - Making up is hard to do

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Litigation is expensive, time consuming and often unnecessary when clearing up reinsurance disputes, but so too can arbitration prove to be. Now, a new industry-led protocol is aiming to encourage companies to use mediation instead to resolve their differences. Paul Moss reports

Litigation and arbitration are traditionally the most common forms of dispute resolution in the reinsurance sector - and are widely acknowledged as being tedious, time consuming and costly exercises.

Therefore, in response to an apparent growing appetite for an alternative solution to managing reinsurance claims, the London market has taken the US's lead by increasingly turning to alternative forms of dispute resolution, with mediation emerging as a preferred option.

Supporters of this form of dispute resolution recognise important advantages, which include minimum disruption to business, preservation of commercial relationships and the prospect of saving huge financial outlay in litigation spend (see graph below).

Consequently, a new initiative promoting mediation, called the International Reinsurance Industry Dispute Resolution Protocol, was launched in October of last year. Developed by the International Institute for Conflict Prevention and Resolution - in co-operation with companies including Lloyd's and QBE - the protocol consists of a statement of intent to follow certain procedures in the event of disputes arising between insurers and their reinsurers.

The term 'protocol' is used advisedly because the document (available at www.InsuranceMediation.org) suggests a comprehensive method of identifying reinsurance claims disputes early on; agreeing upon a rigorous but rational method of exchanging adequate information concerning the claim; and engaging in structured negotiation (and, if necessary, mediation) to resolve it on a business-like basis, rather than in arbitration or litigation. And it does so without any party waiving the right to arbitrate or sue, if needed.

To put matters in perspective, the graph presented provides a simple illustration of the estimated percentages of litigation spend, relevant to key milestones in the path of a reinsurance dispute, over a two-year time span.

What is clear is that approximately 75% of legal spend, in dollars, occurs after a point when the parties should have garnered sufficient information to have put themselves in a position to attempt to settle the issues between them. Nonetheless, mediation is something that should be considered at every step along the litigation path. It enables the parties to stop, reflect and - where possible - to narrow the issues to the point of recognizing that a settlement is achievable.

Obviously, not all disputes are alike. The complexity of certain situations may necessitate having to reach milestones further down the track (such as discovery, or deposition evidence) that will put the parties in a stronger - or weaker - position from which the settlement negotiations should spring.

Therefore, it is evident that the earlier the mediation effort commences, the greater the saving in legal spend. This should be encouraged if both sides recognise a contractual or pre-arranged protocol to mediate, as being part and parcel of the reinsurance agreement.

Tools of the trade

However, the CPR's reinsurance protocol is less a dispute resolution method than an elegant management tool, permitting the efficient administration of a portfolio of reinsurance exposures that is driven by business concerns and informed by commercial realities. Chief among these is uncertainty. Litigation is, of course, to be avoided at all costs, for a variety of reasons including the uncertainty of outcome. The traditional method of dispute resolution, incorporated into the majority of reinsurance contracts, has been arbitration. But arbitration can be - and increasingly proves to be - time consuming, slow, expensive and more uncertain than litigation.

One hallmark of an effective reinsurance protocol would be to quicken the time when a company knows what to reserve, and even - in a perfect world - to minimise the period of contingency altogether. The CPR protocol calls for notice and exchange of information within 30 days, negotiation commencing a fortnight thereafter, and private confidential and non-binding mediation being brought on if the matter cannot be resolved within another 15 days.

Contract certainty is another contributing factor. Nearly all reinsurance agreements at present contain arbitration clauses, but the desire for certainty and control of outcomes is helping to ensure that an agreed-upon procedure - for exchange of information, assurance of timely and direct negotiation, and mediation if needed - is beginning to be viewed as a viable alternative. The industry is much more aware of other ways to resolve disputes, and companies are taking more control of the situation rather than leaving it to the discretion of external lawyers. The CPR protocol thus reflects a trend and provides further impetus to management efforts to preserve shareholder value.

An interesting prospect

The surge in interest in a dispute management protocol, which sets forth industry best practice has arisen for a range of reasons, but the impact and aftermath of Hurricane Katrina in 2005 served to highlight its merits. The litigation that was anticipated following Katrina simply did not happen because the industry is much more aware of alternative ways to resolve disputes and companies are taking control of the situation, rather than putting these matters in the hands of lawyers.

Despite the apparent enthusiasm for mediation from the market and the launch of the CPR protocol, the key to successful implementation will be the willingness of underwriters to incorporate alternative dispute resolution clauses - such as those found in the protocol - into contracts of reinsurance. This is the real message that has to be sent to the market - and the area from which the way we handle disputes are handled in future will change.

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