The document discusses the complexities of reinsurance dispute resolution, emphasizing the importance of understanding the unique relationships and principles such as 'utmost good faith' and 'follow the fortunes' between reinsurers and cedents. It outlines various dispute resolution processes, particularly favoring arbitration over litigation due to its perceived efficiency, cost-effectiveness, and expertise requirement. Furthermore, it emphasizes the need for effective communication and preparation to avoid disputes and achieve favorable outcomes in negotiations.

1. NAIW Annual Convention May 2009 REINSURANCE DISPUTE RESOLUTION: How You Can Have a Positive Impact For Your Company Theresa W. Hajost HALLORAN & SAGE LLP 1730 Pennsylvania Avenue, NW, Suite 800, Washington, DC 20006 202-263-4971 or [email_address] Washington, DC / Hartford / Middletown / Westport

2. Overview Reinsurance Is Different and Special Dispute Avoidance Pre-dispute Analysis & Goals Types of Dispute Resolution Processes: Mediation Arbitration Litigation Post-Dispute Evaluation

3. Legal Advice From Abraham Lincoln Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser—in fees, expenses, and waste of time. As a peacemaker the lawyer has a superior opportunity of being a good [wo]man. There will still be business enough.

4. Reinsurance is Special & Different Distinguished by Unique Concepts and a Specialized Vocabulary Reinsurer/Ceded Relationship Is Founded on Utmost Good Faith and Follow the Fortunes Utmost Good Faith applies to both parties Also affects dispute resolution

5. Reinsurance Concepts: Follow the Fortunes/Utmost Good Faith Like a magic hat, you never know what is going to come out of an insurance policy. The underwriters have made some estimates, but at the heart of each insurance contract is a risk. Reinsurance emerged so that no insurer would have to bear the entire risk of a loss alone.

6. The Nature of Reinsurance: Follow the Fortunes The origins of reinsurance have been traced to 13 th and 14 th century Europe, where businessmen who had insured merchant vessels sought to spread the risk of the vessel not arriving with its cargo. Whether the fickle goddess of fortune would smile on the vessel’s journey was always a risk, but it was a risk all the parties shared. The “follow the fortunes” doctrine has evolved to reflect that early concept of sharing the risk. Whatever the outcome of the voyage, the reinsurer shares the result with its cedent, even if the boat gets eaten by a giant squid, as depicted in my “Reinsurance Soliloquy” handout.

7. The Nature of Reinsurance: Utmost Good Faith “ Behind every custom and usage that distinguish reinsurance from insurance, a practical business reason can be found. This background implies an intimate relationship and concurrence of interests between insurer and reinsurer which is, indeed, the most distinguishing characteristic of this business. If reinsurance were done entirely at arm’s length, the resulting costs of monitoring, verifying, and otherwise supervising the substantial transactions that characterize reinsurance would effectively destroy its utility as we know it today.” Henry T. Kramer, The Nature of Reinsurance, Reinsurance , Strain ed .

8. Traditional Reasons The Industry Prefers Arbitration A reinsurance contract is a mutual agreement between professional insurers acting in “utmost good faith.” As such, the traditional intent has been that any differences of opinion or interpretation of fact be resolved amicably without resorting to courts of law. When differences arise that cannot be so resolved, the reinsurance contract can provide for arbitration as an alternate dispute mechanism. Marilyn J. Laughlin, General Clauses for Most Treaties in Reinsurance Contract Wording , Strain ed.

9. Reinsurance is Special – From Both Insider and Outsider Points of View Reinsurance is a dauntingly complex, esoteric field of business and the briefs in this case are correspondingly complex and esoteric. But the facts relevant to the appeal are actually rather simple, and the forbidding jargon of reinsurance ("ceded unearned premium," "aggregate excess of loss," "under-ceded reinsurance loss," "reinsurance treaty," and the rest) can be dispensed with. There is nothing wrong with a specialized vocabulary--for use by specialists. Federal district and circuit judges, however, with the partial exception of the judges of the court of appeals for the Federal Circuit (which is semi-specialized), are generalists. We hear very few cases involving reinsurance, and cannot possibly achieve expertise in reinsurance practices except by the happenstance of having practiced in that area before becoming a judge, as none of us has. Lawyers should understand the judges' limited knowledge of specialized fields and choose their vocabulary accordingly. Every esoteric term used by the reinsurance industry has a counterpart in ordinary English, as we hope this opinion has demonstrated. The able lawyers who briefed and argued this case could have saved us some work and presented their positions more effectively had they done the translations from reinsurancese into everyday English themselves. (Judge Posner, U.S. Court of Appeals for the Seventh Circuit)

10. Avoid Creating Disputes Don’t create disputes needlessly – know your company; know your reinsurance program Support Your Part of the Reinsurance Process Purchasing/underwriting = clarity, business purpose of reinsurance contracts Follow the money Claims = notice, communications, responsiveness, anticipate questions Collections = don’t let it get stale, address any issues promptly and make decisions Know who can assist you with reinsurance questions/problems – internal and external

11. Knowledge: Who Knows Your Reinsurance Program? Broker Contract Wording Accounting Claims Legal Purchasing Underwriting You

12. How to Avoid Disputes Remember the Partnership Concept Common Interests of Parties Which Party Has the Risk; Which Party Has the Reward? Largest Problem Lack of Communication -- Which Leads to Questions from Reinsurers

13. Claims: Notice & Communication Cedents Make sure your company has procedures in place Make sure your employees know and follow the procedures Update procedures as reinsurers and contract language change Reinsurers How important timely notice is to your company will depend on what type of program it is. Whatever type of notice/information you want -- make sure your contract has a satisfactory clause – get it in writing Reinsurers often focus on consistency of cessions Both Parties Don’t be afraid to change procedures and practices; make sure the level of communication works for both parties

14. Keys to Success Knowledge Develop Your Relationships Develop Your Reputation Company Reputation – Assist in Developing and Supplementing

15. Dispute Decision Point: Where Should You Be? All attempts at Negotiation Have Failed Kick it up a notch – higher management level Did you make yourself aware of all pressure points – contract renewal, premium negotiations, global deal, commutation

16. Case Assessment Preparation, preparation, preparation Including: Get a handle on the paper trail Who will be your witnesses Assess the appeal of your arguments to industry experts

17. Assessment: Know Your Case and Consider Pressure Points Identified Through Negotiations What are Your Goals? -- Relationship goals – changes in the relationship going forward -- Have you explored any corporate goals that may have an effect on your assessment After goal assessment – choose best vehicle to achieve your goal -- Contract provisions – what can you do? -- Non-contractual approaches – what should you try? -- Financial assessment – will you need/want security?

18. Dispute Resolution Mediation Arbitration Litigation

19. Mediation Traditionally, not the dispute resolution process of choice for the reinsurance industry No mediation clauses in contracts (BRMA has 20 arbitration clauses; no mediation clauses) Certified arbitrators (350); certified mediators (30)

20. Should We Give Mediation A Closer Look? In jurisdictions where there is extensive experience with mediation, the majority of cases that go to mediation settle at the mediation itself or shortly thereafter A successful mediation requires information and attention

21. Arbitration or Litigation?

22. Traditional Reasons The Industry Prefers Arbitration Under the two-way duty of Utmost Good Faith, which governs every reinsurance relationship, a “party to a reinsurance contract is expected to go outside the literal terms of an agreement in any situation, if necessary, to enforce the original meeting of the minds. And that meeting of the minds must have been accomplished within a full and complete exercise of good faith. It is for this latter reason that arbitration in reinsurance is preferred to settling disputes in courts of law in the belief that impartial practitioners of insurance or reinsurance are likely to judge utmost good faith in reinsurance more equitably than those whose special talents lie outside reinsurance.” Henry T. Kramer, The Nature of Reinsurance, in Reinsurance , Strain ed . “ It has been the intent of such tradition that, should a difference of opinion or interpretation arise, it will be settled by a court of arbitration composed of experienced insurance and reinsurance personnel. It has been the intent of such tradition that the court of arbitration, so composed, will interpret the contract wording according to the customs and traditions of the business as an honorable engagement rather than a mere legal obligation.” Robert F. Salm, Reinsurance Contract Wording, in Reinsurance , Strain ed .

23. Practical Reasons to Choose Arbitration: A Panel Composed of “Experts ” “ Reinsurance is insurance between consenting adults.” New York Supreme Court “ Reinsurance is not new. It dates back to the time the first bookie… in the event he were to lose, decided to spread his risk by ‘laying-off’ some of the risks by getting other bookies to share his exposure.” U.S. Court of Appeals for the Second Circuit “ Will Rogers observed wryly that ‘Lawyers [presumably including judges] make a living out of trying to figure out what other lawyers have written.’ … The task then becomes what Winston Churchill once referred to in another connection as ‘a riddle wrapped in a mystery inside an enigma.’ Thus, again, a journey into the strange and perilous world of insurance company accounting is required.” U.S. Court of Claims The contours… as applied to specific reinsurance contracts alleged to create offsetting credits or debts depend on practical, contextual, fact-laden judgments that nestle as cozily within the competence of arbitrators experienced in the arcane practices and usages of the reinsurance industry as any other interpretive issue likely to arise in a reinsurance contract.” U.S. Court of Appeals for the Seventh Circuit

24. Do You Want This Guy Deciding Your Dispute? “ Arbitrator Tower’s award was astonishing, eye-popping and, perhaps soft-witted. But . . . his award must be confirmed.” “ An arbitrator’s improvident, even silly, fact finding does not provide a basis for a reviewing court to refuse to enforce the award.”

25. Arbitration Advantages In Addition to the Expertise Reinsurance Arbitrators Bring to the Dispute Resolution Process, What are the other Perceived benefits of Arbitration? Simpler Parties that bargain for arbitration “trade the procedures and opportunity for review of the courtroom for the simplicity, informality and expedition of arbitration.” U.S. Supreme Court More Expeditious More Cost Effective Confidential Finality – No Appeals

26. Even If You Choose Arbitration, You Can Still End Up In (or In and Out) of Court During or Before An Arbitration: Courts will enforce an agreement to arbitrate (Federal Arbitration Act “FAA” 9 USC §4) Courts will step into selection of the third arbitrator in certain situations (FAA 9 USC §5) Courts will enforce panel subpoenas for witnesses, if necessary (FAA 9 USC §7) Courts will enforce interim awards where appropriate (FAA 9 USC §9) Otherwise courts are generally not involved until the end of the arbitration process when a party moves to confirm, modify or vacate the award

27. Once An Arbitration Has Been Completed, There Are Very Few Ways To Change The Result A party must move to vacate an award within 3 months after the award is issued; bases for vacating an award (FAA §10) are: Where the award was procured by corruption, fraud or undue means Where there was evident partiality or corruption in the arbitrators, or either of them Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter was not made Manifest disregard of the law --- not in the FAA; used by some circuits, may no longer be a valid basis for vacating an award -- see the recent articles I’ve written in my handout Once the parties go into court, certain facts concerning the arbitration may no longer be confidential

28. The Arbitration Process & Issues Choosing Your Arbitrator: The Party-Appointed Arbitrator Who May Be Appointed – check your arbitration clause – often specifies active or retired executive of insurance or reinsurance company Where do you find arbitrators? Your own contacts within the industry Your counsel’s experience with various arbitrators ARIAS website – www.arias-us.org (over 350 certified arbitrators) RAA website – www.reinsurancearbitrators.com (over 200 listed)

29. Arbitration vs. Litigation Differences and Similarities Speed, cost effectiveness Discovery – are there some good ideas in the Federal Rules, such as Initial Disclosures? Then there are the new Ediscovery rules -- estimated costs $1,700 per GB of emails Decision makers – truly neutral judge or jury Compelling a recalcitrant party Public record of proceedings in court

30. Why Might You Opt For Litigation? Recalcitrant Reinsurer or Problem Cedent Problem Better Resolved in Court Arbitration Not Any Cheaper Lost Faith in the Arbitration Process

31. Special Approaches for Small Disputes Consolidate a number of small balances Use in-house staff to support arbitration Special arrangements with outside counsel Mediation Advisory Opinion Summary Judgment or Other Streamlined Approach to Decision Build a Track Record Attorneys’ Fees and/ or Punitive Damages

32. Post Dispute Evaluation Involve multiple departments Resources – were staff time estimates accurate Costs – legal, arbitrators, hearing expenses Think beyond a single result Are adjustments needed Contract wording changes Changes in reinsurance partnership arrangements

33. Positive Results Do your job (and sometimes others’ too) Evaluate any potential dispute on its own merits Creative consideration of dispute resolution alternatives Once you’ve decided to enter into formal dispute resolution, commit to following through with the process