Reduced dispute frequency is good news for the industry, but it doesn’t mean that industry executives should assume that reinsurance disputes are a thing of the past, ignore important developments that bear on their resolution, or become less proactive in their efforts to prevent them.  Keeping apprised of recent, pertinent reinsurance- and dispute-resolution-related legal, regulatory and economic developments is particularly important today, because there have been – and will likely continue to be – many that may bear on the nature and frequency of future reinsurance disputes.

To that end, a number of experienced industry executives and  in-house counsel, and a small group of outside counsel, have joined forces with HarrisMartin Publishing to put together a two-day conference designed to survey important, recent developments concerning reinsurance and reinsurance dispute resolution.  The conference — entitled “Reinsurance Summit:  Fresh Perspectives on the Reinsurance Front” — is scheduled to take place at the Lowes Philadelphia Hotel on September 22-23, 2011.

It promises to be an excellent opportunity to keep abreast of what’s happening in the world of reinsurance and reinsurance-dispute-resolution, network with friends and colleagues, and earn CLE credits if you need them.  Admission is $895.00, but HarrisMartin is offering a $100.00 discount to those who register by September 2, 2011.  Registration, CLE and hotel information is here (HarrisMartin has negotiated a reduced, $199.00 per night hotel rate for conference attendees).

Here’s the program as described by HarrisMartin:

Day 1, Thursday, September 22, 2011

8:15 a.m. – 8:30 a.m.

WELCOME BY CO-CHAIRS

Edward K. Lenci, Hinshaw & Culbertson LLP, NewYork

Leslie J. Davis, Vice President & Assistant General Counsel, General Re, and Senior Vice President & General Counsel, US Aviation Underwriters, Stamford, CT

Wendy R. Taylor, Vice President and Associate Counsel, Chubb & Son, a division of Federal Insurance Company, Warren, NJ

8:30 a.m. – 9:45 a.m.

STATUTORY AND REGULATORY UPDATE: DODD-FRANK, THE NON-ADMITTED AND REINSURANCE REFORM ACT,  AND THE FEDERAL INSURANCE OFFICE

• Title V of the Dodd Frank Act: A discussion of the major interests lobbying for this legislation and against it, how and when the reinsurance provisions will be implemented and enforced, and the likely practical impact on reinsurance transactions.

• The Non-admitted and Reinsurance Reform Act: A discussion of issues relating to preemption, the future role of the NAIC, the changes to the significance of an insurer’s state of domicile, and how states and ceding companies may respond.

• The Federal Insurance Office: A discussion of this new office, “covered agreements,” the influence of Solvency II and international governing bodies, and the impact on state law, including a discussion of federalism and constitutionality.

Moderator:

A. Lindsay Doering, Law Office of A. Lindsay Doering, Philadelphia

Panel:

Patrick H. Cantilo, Cantilo & Bennett LLP, Austin, TX

Kimberly M. Welsh, Vice President and Assistant General Counsel, Reinsurance Association of America, Washington, D.C.

Daniel Schelp, Managing Attorney, National Association of Insurance Commissioners

9:45 a.m. – 10:45 a.m.

THE JUDICIAL SCRUTINY OF ARBITRAL AWARDS

Over the last few years, courts, including the U.S. Supreme Court, have decided a number of controversial cases concerning the power of courts to vacate arbitral awards on the grounds of excess-of-powers, evident partiality and procedural misconduct. Several of those cases involved arbitrations concerning reinsurance disputes. This panel will discuss recent developments pertinent to judicial review of arbitral awards, including outcome-based review, arbitral authority to award attorney fees and costs, adequacy of arbitrator disclosures, arbitrator qualifications, and arbitral “due process.” Among the controversial cases the panel will discuss are:

• Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp. (U.S. Supreme Court)

• AT&T Mobility v. Concepcion (U.S. Supreme Court)

• Reliastar Life Ins. Co. v. EMC Nat’l Life Co. (2nd Circuit)

• PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd. (3rd Circuit)

• Dealer Computer Services, Inc. v. Dub Herring Ford, et al. (6th Circuit)

• Trustmark Ins. Co. v. John Hancock Life Ins. Co. (7th Circuit)

• Scandinavian Re Co. Ltd. v. St. Paul Fire & Marine Ins. Co. (S.D.N.Y.) (appeal pending)

• Amerisure Mut. Ins. Co., et al. v. GLOBAL Reins. Corp. of Am. (Ill. App. 1st Dist.)

Panel:

Philip J. Loree Jr., Loree & Loree, Manhasset, NY

John M. Nonna, Dewey & LeBoeuf LLP, NewYork

Richard Faulkner, Blume, Faulkner, Skeen & Northam, PLLC, Richardson, TX

10:45 a.m. – 11:00 a.m.

REFRESHMENT BREAK

11:00 a.m. – 12:00 p.m.

REINSURANCE CONTRACT WORDING: BE CAREFUL WHAT YOU ASK FOR!

Reinsurance contract wording is changing, due in part to the increasingly global nature of reinsurance and the competing regulatory requirements of different jurisdictions around the world. As a result, seemingly straightforward requests may have unintended consequences. Some of the complex clauses and issues that this panel will discuss include:

• Governing Law, Jurisdiction and Venue: Enforceability of choice of law; the legacy of Wasa v. Lexington; the impact on arbitrators’ power; application of procedural law; and the possible collision of governing law with the negotiated and paid for coverage for punitive damages, ECO/XPL.

• Economic and Trade Sanctions: The recent rise in demand for sanction exclusionary language and the ramifications of wordings currently circulating, including a comparison of the traditional territorial exclusion, the US/OFAC exclusionary wording and the London Market exclusionary wording; the counter forces of anti-blocking legislation; and highlights of trade sanction programs, including discussion of particular countries and jurisdictions).

• Claims Cooperation: An examination of different clauses, why they are requested, how they help or hinder the parties, and the differences between the U.S. and U.K/Europe.

• Commutations and Sunset: Loss notice provisions; Mandatory or permissive commutations; formalized contractual commutation methodologies; appraisal provisions; actuarial arbitrations.

Panel:

Wendy R. Taylor, Vice President and Associate Counsel, Chubb & Son, a division of Federal Insurance Company, Warren, NJ

Myra E. Lobel, Managing Director, Guy Carpenter & Company LLC, NewYork

David A. Silva, Mound CottonWollan & Greengrass, New York

David N. Kragseth, Senior Contract Wording Specialist, Munich Reinsurance America, Inc., Princeton, NJ

12:00 p.m. – 1:30 p.m.

LUNCH

1:30 p.m. – 2:30 p.m.

WHAT, EXACTLY, IS BAD FAITH IN REINSURANCE?

The duty of utmost good faith is a two-way street. Two in-house attorneys will explore the duties and obligations of cedents and reinsurers with respect to underwriting, presentation and acceptance of the risk, renewals, claim handling, claim presentation, and arbitration or litigation.

Panel:

Leslie J. Davis, Vice President & Assistant General Counsel, General Re, and Senior Vice President & General Counsel, US Aviation Underwriters, Stamford, CT

Susan Grondine-Dauwer, General Counsel,R&Q USA, Boston

Jeanne M. Kohler, Edwards Angell Palmer & Dodge LLP, New York

2:30 p.m. – 2:45 p.m.

REFRESHMENT BREAK

2:45 p.m. – 3:45 p.m.

DISPUTE RESOLUTION ALTERNATIVES: LITIGATION, MEDIATION, ARBITRATION

In-house counsel will share insights and address the “pros and cons” of the litigation, arbitration and mediation of reinsurance disputes as well as alternative arbitral rules and fora, such as offered by AIRROC.  Moderated by Bina T. Dagar, this panel will deliver a balanced view of cedent and assumed perspectives to ADR. The discussions will include:

• Options available to resolve reinsurance disputes

• Benfits and challenges posed by each alternative

• Ad Hoc vs. institutional arbitration/mediation

• Organizations as clearinghouses – ReMedi, AAA, AIRROC, ARIAS, CPR and JAMS

Attendees will be asked to complete a Zoomerang survey ahead of the Conference to be incorporated into the presentation.

Moderator:

Bina T. Dagar, Ameya Consulting, LLC, Livingston,NJ

Panel: Steven Agosta, General Counsel, XLRe America, Stamford, CT

Scott P. Birrell, Vice President and Associate General Counsel, Travelers Insurance Co., Hartford, CT

Anthony Vidovich, Vice President & Assistant General Counsel, Director of Reinsurance Law, The Hartford, Hartford, CT

Michael Zeller, Vice President, Reinsurance Services Division, AIG, Inc., New York

3:45 p.m. – 5:30 p.m.

THE VERY MODEL OF A REINSURANCE ARBITRATOR: INDUSTRY EXECUTIVES SPEAK OUT

The in-house counsel on our faculty will serve on this panel, to be moderated by Fritz K. Huszagh of Hinshaw & Culbertson in Chicago. Among the issues the panelists will address, from the insurers’ and reinsurers’ perspectives, in this potentially lively session are:

• What qualifications should an ideal arbitrator and umpire have?

• What disclosures should they make?

• Is there any value to “certification” of arbitrators and umpires?

• If so, what factors should be considered in the certification process?

• Should arbitrators accept conflicting assignments?

• What is a fair fee for arbitrators and umpires?

• Which expenses are proper and which are not?

• Should arbitrators and umpires be paid non-refundable retainers?

• Should they be paid hearing cancellation fees?

Moderator:

Fritz K. Huszagh, Hinshaw & Culbertson, Chicago

Panel:

Steven Agosta, General Counsel, XL Re America, Stamford, CT

Scott P. Birrell, Vice President and Associate General Counsel, Travelers Insurance Co., Hartford, CT

Ali E. Rifai, General Counsel, Zurich Insurance CMB Division, and former Interim General Counsel, Zurich Insurance Middle East Region

Susan Grondine-Dauwer, General Counsel, R&Q USA, Boston

Leslie J. Davis, Vice President & Assistant General Counsel, General Re, and Senior Vice President & General Counsel, US Aviation Underwriters, Stamford, CT

Thomas Freudenstein, COO, GLOBAL Reinsurance Corporation of America and Director and Attorney at GLOBALE Rückversicherungs-AG, New York and Cologne, Germany

Myra E. Lobel, Managing Director, Guy Carpenter & Company LLC, NewYork

Anthony Vidovich, Vice President & Assistant General Counsel, Director of Reinsurance Law, The Hartford, Hartford, CT

Michael Zeller, Vice President, Reinsurance Services Division, AIG, Inc., NewYork

5:30 p.m. – 7:00 p.m.

NETWORKING COCKTAIL RECEPTION

Day 2, Friday, September 23, 2011

7:30 a.m. – 8:30 a.m.

CONTINENTAL BREAKFAST

8:30 a.m. – 9:30 a.m.

ETHICAL CONSIDERATIONS FOR LAWYERS SERVING AS UMPIRES AND ARBITRATORS

An interactive talk on how state rules concerning the ethical obligations of lawyers impact lawyers who are serving as umpires and arbitrators.

Daniel E. Tranen, Hinshaw & Culbertson LLP,Boston

9:30 a.m. – 12:30 p.m.

DEVELOPMENTS IN REINSURANCE AROUND THE WORLD

In an ever-increasingly globalized economy, businesspersons and lawyers need to know what’s happening around the world. Each panelist will cover a different region of the world, providing crucial information about current market trends, governmental regulations, resolution of disputes and the like. (A Refreshment break will be held during this panel from 10:30 – 10:45 a.m.)

Panel:

UK: Peter W. Ambler, Managing Director, Towers Watson (Re)Insurance Brokers Ltd., London

Europe: Thomas Freudenstein, COO, GLOBAL Reinsurance Corp. of America and Director and Attorney at GLOBALE Rückversicherungs-AG, New York & Cologne, Germany

Latin America: M. Machua Millett, Senior Vice President, Senior Advisory Specialist and Global GPL Team Leader, Marsh USA Inc., Boston

Middle East: Ali E. Rifai, General Counsel, Zurich Insurance CMB Division, and former Interim General Counsel, Zurich Insurance Middle East Region

Canada: Stuart S. Carruthers, Stikeman Elliott, Toronto

I hope to see you there!

The group actively discusses issues concerning U.S. and international ceded and assumed reinsurance claims.  It enables members to share information; discuss and debate issues; access a number of excellent reinsurance- and insurance-related blogs; and network with others in the domestic and international reinsurance community.  

The group welcomes new members, and encourages (but does not require) active participation.  The only requirement for membership is a bona fide interest in reinsurance claims.  The group is not a forum for, and does not permit, advertising or blatant self-promotion, so our members need not be concerned about being subject to sales pitches and the like. 

If you are already a member of LinkedIn, please click here to apply for membership in the group.  If you are not a LinkedIn member, please click here and you will be guided through the process of creating a profile (which does not need to be completed in one step).  Once your profile is started, and you have a user name and password, you can click here to apply for membership in the group.  Joining LinkedIn is free, as is joining the group.

We look forward to meeting you online!

[Editor's Note:  If you are also interested in reinsurance and other types of arbitration and mediation, then we invite you to join LinkedIn's Commercial and Industry Arbitration and Mediation Group, which is now over 900 members strong.  (Post here, which contains information on how to join.)]

But there is more.  Every one of these people is a great human being that is a pleasure to know and with whom it is a privilege to collaborate.  All are readily approachable and willing to share freely their impressive knowledge, skills and experience.  And that is what makes for a great Web 2.0 discussion and networking group.    

Nigel Shepherd, J.D., CPCU, ARe.  Nigel has twenty-five years of insurance and reinsurance experience, with a focus on global claims management. 

Nigel owns NCS Capital Management LLC, a boutique consulting firm that focuses on property and casualty (“P&C”) reinsurance and insurance matters.  NCS partners with New-York-City-based Lanzko Consulting, Inc. (co-manager Marc Lanzkowsky’s firm) to design and implement proactive strategies to reduce claims costs and mitigate loss exposure.   

Prior to forming NCS, Nigel was Global Head of Claims for both Aspen Specialty Insurance and the Alea Insurance Group, where he was responsible for claims strategies and operations worldwide.  He was part of Aspen’s Global Leadership Team, responsible for establishing and implementing a strategic plan for the worldwide claims operation.  Nigel integrated the diverse Group Claims business units into one team, simplified key operational risks associated with loss adjustment, and reduced redundancies, operational costs and paperwork.  He also formulated policies and procedures for legal service procurement, independent adjusters, third-party administrators and fraud control.    

Prior to his Aspen and Alea roles, Nigel was a Senior Vice President with Converium Reinsurance (f/k/a Zurich Re) and an Assistant Vice President at XL Reinsurance, leading and managing teams for a variety of reinsurance programs.  During his Converium tenure, Nigel had management responsibility for the professional liability, medical liability and special casualty liability business units.   Nigel also functioned as the Head of Claims, where he successfully managed commercial auto and general liability claims, and was instrumental in integrating into the underwriting department the claims department’s expertise in claims, actuarial matters and accounting.    

Nigel received a J.D. from Pace University School of Law in 1993, and a B.S. in Finance from Syracuse University’s Martin J. Whitman School of Management in 1984.  He is a member of the New York bar and holds the Chartered Property and Casualty Underwriting (“CPCU”) and Associate in Reinsurance (“ARe”) professional designations.   

Nigel’s insurance and reinsurance industry knowledge and experience, coupled with his legal and extensive claims management background, is a tremendous benefit to the group and its members.   

Robert Bear, FCAS, CPCU.  Robert Bear is a P&C consulting actuary and a reinsurance arbitrator and consultant.  He owns RAB Actuarial Solutions LLC, where he performs loss reserve studies and reinsurance pricing analyses requiring complex loss simulations; serves as a reinsurance arbitrator and expert witness in insurance and reinsurance arbitrations; resolves complex insurance coverage problems; researches and develops loss reserving models; and provides litigation and investor support. 

He has over 33 years of insurance and reinsurance industry experience, including 20 years managing reinsurance actuarial services.  He began his career at the Insurance Services Office (“ISO”), and served as an actuarial manager at the Prudential Reinsurance Company, Signet Star Re, L.L.C. and SCOR Reinsurance Company.  He then served as Senior Vice President and Chief Actuary of the PXRE Group, where he was responsible for actuarial loss reserving and pricing model development, as well as related corporate modeling. 

Bob is a Fellow of the Casualty Actuarial Society (“FCAS”), an ARIAS-U.S. certified insurance and reinsurance arbitrator, a Chartered Property Casualty Underwriter, a member of the American Academy of Actuaries, and a Fellow in the Conference of Consulting Actuaries.  He earned MS degrees in theoretical mathematics from New York University and in applied mathematics and economic systems from the Polytechnic Institute of New York.  He graduated summa cum laude from the University of Bridgeport, where he earned a B.A. in mathematics.   

Bob serves as Chairperson of the Casualty Actuarial Society (“CAS”) Dynamic Risk Modeling Committee and as co-chairperson of the CAS Loss Simulation Model Working Party.  He previously served as a Chairperson of the Reinsurance Association of America (“RAA”) Actuarial Committee and as President of Casualty Actuaries in Reinsurance (“CARe”).  He has authored several CAS discussion papers and articles on reinsurance pricing, loss reserving, and risk modeling issues.  His blog on actuarial and dynamic risk modeling issues is here. 

Bob also serves as a co-manager of LinkedIn’s Commercial and Industry Arbitration and Mediation Group, which is now over 880 members strong and is one of the premier online ADR discussion groups.   (See the latest post here)

Bob’s formidable technical and actuarial skills, combined with his industry and dispute-resolution knowledge and experience, are a great asset to the group and its members.    

Marc Lanzkowsky.    Marc is the founder and principal of Lanzko Consulting, Inc. and the Managing Editor of The Claims SPOT  blog, one of the only blogs (if not the only blog) that focuses exclusively on insurance and reinsurance claims.   Lanzko provides top notch claims consulting, auditing and management services, as well as claims-related operational management consulting services. 

Marc started his career as an insurance defense and coverage attorney in New York City, representing physicians and hospitals against malpractice claims and defending insurance companies in coverage disputes.  After practicing law for seven years, he became a Specialty Claims Adjuster at Zurich Insurance Company.  Managing physician, hospital and nursing liability claims, he was part of a black-belt team that helped improve claims-department operations.  

After being promoted to Northeast Regional Manager for Healthcare Medical Malpractice Claims, Marc was responsible for over 1,900 professional liability claims and more than $250 million in case and expense reserves.  He was subsequently promoted to Claims Director for Operational Innovation for the Specialty Claims Division.  As a direct report to the Vice President of Specialty Claims, Marc ensured operational efficiency for multiple specialty lines in a department consisting of 150 claims professionals handling 14,000 open claims.   He developed performance metrics to improve productivity and facilitate team management.  Tapped for the company’s 9-11 disaster recovery team, Marc assisted in the relocation of over 100 claims professionals within one week of that terrible tragedy. 

Following a successful career at Zurich, Marc was recruited to help build a specialty claims organization as Vice President (and, later, Senior Vice President) of Home Office Claims Management for Arch Insurance Company.  Charged with developing and implementing all internal processes and best practices for this new global P&C insurer, he created an innovative, fully accessible and paperless claims technology system, which was used by claims professionals worldwide.  Marc also assisted senior management in due diligence for potential acquisitions, and formed and managed relationships with multiple claims vendors.  As the company and department grew, Marc was put in charge of performance metrics and best-practices oversight for its 85 claims professionals and third-party administrators handling over 20,000 open claims. 

He also led the litigation management department and created a special investigation unit to help combat insurance fraud.  And by implementing a program to review legal invoices, he was able to reduce litigation expenses an average of 11% in the first year.  Outsourcing several back office functions and transferring the handling of primary casualty files to a new Midwestern claims office, he also helped reduce the company’s unallocated expense costs significantly. 

In addition to his work at Lansko, Marc serves as a member of the Board of Directors for IncentOne, a provider of integrated incentive solutions to clients ranging from small business to FORTUNE 500 companies. 

Marc received a bachelor’s degree from New York University  in 1988 and a Juris Doctorate degree from Pace University School of Law  in 1991.  He is a member of the New York bar. 

Marc’s extensive experience in direct insurance claims matters — coupled with his involvement in reinsurance-related matters, impressive contributions to the blogosphere, and energetic, entrepreneurial spirit – enables him to provide a unique perspective on the subject matter of this group.    

Theresa W. Hajost.   Theresa W. Hajost, an experienced, AV-rated reinsurance attorney, is a partner at Halloran & Sage LLP, and Senior Partner of its Washington Office.  She has over fifteen years of experience in reinsurance dispute resolution, and more than twenty-years of experience handling insurance coverage litigation.  She represents both cedents and reinsurers in arbitration and litigation; performs reinsurance claims audits and reserve sufficiency evaluations; negotiates commutations; and counsels clients on effective presentation of reinsurance claims.

In addition to reinsurance disputes, her litigation experience includes insurance-coverage cases arising from an assortment of claims and policy-types, with a concentration in complex environmental and toxic tort claims.  She has litigated professional liability, errors and omissions, directors and officers, bankers’ bonds, architects and engineers, and board of education claims.  She also has significant experience handling federal and state appeals. 

Theresa is also a lecturer for the University of Wisconsin Business School’s annual courses “Reinsurance Management and Accounting” and “Reinsurance:  Advanced Concepts,” and has authored a number of articles concerning reinsurance, insurance and arbitration practice and procedure.  Throughout her legal career, Theresa has maintained an active pro bono practice, representing clients ranging from children in abuse and neglect proceedings to persons committed to mental institutions.   

Theresa’s wide-ranging experience as an expert reinsurance and insurance litigator, instructor, author and commentator gives her a unique perspective not only on reinsurance claims, but on reinsurance dispute resolution in general, all of which she shares with the group and its members.    

Bill Hook.   Bill is a long-time friend, mentor and colleague of mine, as well as a sometimes client.  Based in London, he was Head of Technical Operations (and Group Head of Claims) for the Tawa Group.  With Tawa’s purchase of Pro Insurance Solutions Ltd. (“Pro”), which now manages the runoff of CX Re, KX Re and PX Re, Bill has assumed a senior claims management role in that firm.  Pro provides run-off management and professional services to the international insurance and reinsurance industry. 

Bill has over 30 years experience in the insurance and reinsurance industry.  He initially worked as an underwriter in 1971 for a composite insurer and moved to its reinsurance arm in 1979 where he undertook a claims supervisory role.  In 1982 he joined CIGNA and subsequently became Claims Director for their European run-off operations.  From there he joined Price Waterhouse Coopers  (U.K.) (“PwC”), where he specialized in claims management and reinsurance disputes on behalf of a number of U.K. insolvencies, including The Charter Re, The Independent and Black Sea & Baltic.  He also provided claims consultancy services for a number of active writers, including Lloyd’s syndicates, and was responsible for the business development of the claims consultancy offering of the firm. 

Bill left PwC to join the Tawa Group in 2004, where he became Head of Claims, and later, Head of Technical Operations.  Part of the Tawa senior management team, he operates extensively in the due diligence process of run-off acquisition targets, manages the Tawa/Pro claims team, and provides claims and runoff management consultancy services to a large number of  companies outside the Tawa Group.    

Bill has contributed articles on claims management and claims audits/inspections to Insurance Day, Run-off & Restructuring Magazine, and Mealey’s Reports, and periodically speaks at industry seminars.  In November 2009 he was appointed to the Board of the prestigious Association of Run-off Companies (“ARC”), where he is a member of the Marketing & Public Relations Committee as well as the Academy training facility.    

Bill brings to bear a wealth of reinsurance and run-off-management-related knowledge, skill and experience, and the unique perspective he has on the U.S., London and European markets gives the group a truly international focus.     

Philip J. Loree Jr.  You can read about my background and experience at the Loree & Loree website here. 

The other co-managers and I are thrilled about the new group and look forward to making it work for its members. 

The group, which is already more than 80 members strong, welcomes new members, and encourages (but does not require) active participation.  The only requirement for membership is a bona fide interest in reinsurance claims.  The group is not a forum for, and does not permit, advertising or blatant self-promotion, so our members need not be concerned about being subject to sales pitches and the like. 

If you are already a member of LinkedIn, please click here to apply for membership in the group.  If you are not a LinkedIn member, please click here and you will be guided through the process of creating a profile (which does not need to be completed in one step).  Once your profile is started, and you have a user name and password, you can click here to apply for membership in the group.  Joining LinkedIn is free, as is joining the group.

We look forward to meeting you online!

Over a year ago we ran a Reinsurance Nuts & Bolts feature entitled “Aggregate Extension Clauses”  (here).  To our considerable surprise, that article was, and remains, one of our more popular ones. 

At the close of the article we said (tongue in cheek):  “If you, the reader, have gotten this far, then perhaps you would like to delve into a discussion of ‘Aggregate Extraction Clauses.’  But these clauses – which conjure up some of the more frightening scenes from Marathon Man (1976) – are better left for another day.  .  .  . ”  Brace yourselves, for we fear that day has arrived.  .  .  .        

B.   What is an Aggregate Extraction Clause? 

To put aggregate extraction clauses in context a very brief review of aggregate cover and aggregate extension clauses is in order.  As discussed in our aggregate extension clause feature (here), policies covering on an aggregate basis are designed to insure principally against the risk that the frequency of relatively small (i.e., low severity) losses will exceed an expected level during a given period.  That’s why products liability risks are frequently written on an aggregate basis – i.e., to protect against the high-frequency, low-severity “Coca-Cola-type”  losses discussed by the English Court of Appeal in Yasuda Fire & Marine Co. of Europe Ltd v. Lloyd’s Underwriting Syndicates No. 209, 356 & Ors., [1998] Lloyd’s Rep. LR. 343 (C.A.). 

The existence and amount of aggregate coverage is determined by aggregating together all losses occurring within a specified period, irrespective of their severity.  That aggregate amount is subject to an aggregate deductible and frequently an aggregate limit.   

Reinsuring aggregate cover on an excess of loss basis presents problems because the amount of each loss or occurrence is generally not high enough to exceed the retention of the excess of loss treaty.  Over a period, however, the accumulated loss covered by the policy might well exceed the retention of the excess of loss treaty were it deemed to arise from a single occurrence.   

We explained in our prior article (here) that the aggregate extension clause effectively extends the aggregate cover of the underlying policy into the excess of loss treaty.   Instead of subjecting each individual loss or occurrence to a separate retention and limit, it allows the aggregation of losses or occurrences when the original policy is written on an aggregate basis.   

The aggregate extraction clause deals with the special problems that may arise when losses covered on an aggregate basis arise out of a single occurrence that has also caused loss under one or more policies that were not written on an aggregate basis.  If – as is sometimes the case — the loss arising out of a single occurrence is of relatively high severity, then it is not the type of loss that either the aggregate policy or the aggregate extension clause was principally designed to cover.   And when the relatively severe loss is lumped into the aggregate cover provided by the reinsurance contract, it eats up capacity that was designed principally to accommodate high frequency, low severity losses. 

At the same time, the cedent is deprived of the ability to accumulate the single-occurrence aggregate-loss with non-aggregate losses on other reinsured policies arising out of the same occurrence.   Thus, while the cedent may get the benefit of clash cover protection on single-occurrence, non-aggregate losses arising out of multiple, non-aggregate policies, it loses that benefit in situations where a portion of the loss arising out of the occurrence is covered on an aggregate basis.   (An excess of loss contract provides clash cover when a single occurrence under the treaty is subject to a single retention and limit, irrespective of the number of original policies that respond to the occurrence.  This type of cover reinsures against the accumulation of net retained liability under multiple, original policies arising from the same occurrence.)   

The aggregate extraction clause addresses both of these problems.   It allows the cedent to extract from aggregate reinsurance coverage a single-occurrence-based loss on policies written on an aggregate basis and combine it with other losses on non-aggregate policies that arise out of the same occurrence.  Brokers and Reinsurance Markets Association (“BRMA”) clause 4A is an example of an aggregate extraction clause: 

As regards liability incurred by the Company for losses on a policy or policies covering on an aggregate basis, the Company shall be permitted to extract from such aggregate policy or policies the amount of loss sustained by it arising from one loss occurrence in order that such loss can be added to the Company’s losses from the same occurrence on [an]other policy or policies, if any.

For the purposes of this Article, the amount of loss from one occurrence on an aggregate policy shall be deemed to be that percentage of the aggregate loss to the Company that the total loss from the particular occurrence bears to the total aggregate losses to the insured or company on the business protected by such aggregate policy. 

To operate the clause requires the following: 

1.  There must be liability incurred by the Company for losses under a policy covering on an aggregate basis;  

2.  Some of that loss (in 1., above) must arise out of a single occurrence for the purposes of the reinsurance contract;

3.  The cedent must have also incurred liability for loss or losses under one or more other original policies that do not provide cover on an aggregate basis; and

4.  Those losses (referred to in 3., above) must arise out of the same occurrence as the aggregate loss referred to in 2., above.  

When all these requirements are met, the cedent may remove from aggregate coverage the loss referred to in 2., above, and combine it with the losses referred to in 3., above. 

Typically, the loss extracted from aggregate reinsurance coverage will be of relatively high severity compared to the other losses falling under the reinsurance contract’s aggregate coverage.   Otherwise there would likely be little reason for the cedent to exercise the aggregate extraction option. 

The second paragraph of the clause provides a formula for determining the amount of aggregate loss deemed to arise out of the single occurrence.  To calculate that amount, our hypothetical ceded-claims person would divide the total amount of loss arising from the occurrence under all reinsured policies by the “total aggregate losses to the insured or company on the business protected by such aggregate policy,” multiply the result by 100, and multiply the resulting percentage figure by the total amount of aggregate loss on the aggregate policy.  The product would equal the amount of loss under that aggregate policy deemed to arise out of the single occurrence and therefore subject to aggregate extraction.  

And that, in a nutshell, is what an aggregate extraction clause is and does.  .  .  .

After being in existence for only two days, the group has grown to 38 members, and our good friends Marc Lanzkowsky, Theresa Hajost and George Simpson, IV have  graciously agreed to join Nigel, Robert and me on the co-management team.  We intend to publish a shortly an article discussing the backgrounds and credentials of our very talented and diverse team. 

The group is a forum for the open discussion of issues and sharing of information concerning ceded and assumed reinsurance claims in the U.S. and overseas markets.  Topics of discussion may include, but are not limited to the presentation, adjustment, processing, settlement and payment of ceded and assumed reinsurance claims; claims dispute resolution, including litigation, arbitration, mediation and other forms of ADR; commutation; handling claims for a company in run-off; handling claims for an active writer; collections, including collections from companies in run off; comparative claims practices and procedures (e.g., London versus U.S. market); claims issues pertinent to insurance insolvencies; and coordination between the claims department and other departments of the company.  The group welcomes members from both the U.S. and international community.

Persons who should consider joining the group include in-house claims professionals; in-house and outside counsel; claims consultants and experts; actuaries; reinsurance arbitrators and mediators; brokers with claims responsibilities; and anyone genuinely interested in learning more about the subject.  The purpose of the group is information sharing and professional networking.  

The group welcomes new members, and encourages (but does not require) active participation.  The only requirement for membership is a bona fide interest in reinsurance claims.  The group is not a forum for, and does not permit, advertising or blatant self-promotion, so our members need not be concerned about being subject to sales pitches and the like. 

If you are already a member of LinkedIn, please click here to apply for membership in the group.  If you are not a LinkedIn member, click here, and you will be guided through the process of creating a profile (which does not need to be completed in one step).  Once your profile is started, and you have a log-in name and password, you can click here to apply for membership in the group.  Joining LinkedIn is free, as is joining the group. 

We hope you’ll join up!

A controversial issue that Marc has been covering is whether or not insurance companies should have in place written claims guidelines and procedures.  One school of thought is fearful of their use (or abuse) by insureds in coverage actions.  For example, a company employee might mistakenly not follow written guidelines and procedures in the course of handling a claim, and a dispute might arise as a result.  The insured will legitimately be able to argue  that the company’s handling of the claim did not comply with its own guidelines and procedures, and that, accordingly, the company mishandled the claim.  Proponents of this view will say that having claims guidelines and procedures is fine as long as they are merely aspirational and not in writing. 

Others advocate the “damned if you do, damned if you don’t” view.  If a large, professional insurer has no written guidelines and procedures, then the insured’s refrain in a coverage or bad faith action will be that the company is grossly negligent because it lacks the internal or external controls necessary to regulate a very significant portion of its business operations.   But if the company has written claims guidelines and procedures, then surely they will come back to haunt it in the event of litigation.  

Others, including Marc, believe the benefits associated with well-drafted and carefully considered claims guidelines and procedures outweigh the costs associated with formulating and implementing them, and, more importantly, whatever costs might be incurred by the insured’s potential use or abuse of the procedures in the event of a dispute.  Drawing on his experience as a lawyer and a claims executive for two major insurance companies, Marc offers assistance to companies that are interested in implementing written claims guidelines and procedures or improving existing ones. 

Marc recently brought the discussion up to the reinsurance level in his post, “Absence of Procedures to Notify Reinsurance is a Basis for Bad Faith.”   He was kind enough to mention what inspired his thoughtful post — an interesting discussion he and I had about the subject not long ago over a delicious sushi and bento box lunch at Misaki — Manhasset, New York’s best (and only) Japanese restaurant. 

As Marc points out there has been law in the Second Circuit for some time stating that a ceding company’s failure to have in place procedures for notifying reinsurers of claims can constitute bad faith, which may relieve a reinsurer of liability for a late-noticed claim without any showing of prejudice.    That is a pretty good argument for having in place written, ceded-claims handling procedures designed to ensure timely notice to reinsurers.    

In the reinsurance-late-notice context the cost-benefit analysis is probably less challenging than it might be in the direct-insurance-bad-faith context.  If the ceding company does not have in place written guidelines and procedures, and cannot establish by credible and consistent testimony the existence of unwritten guidelines and procedures, then, at least in a case pending in court (as opposed to arbitration), the reinsurer may get a “pass” on a claim based on late notice without any showing of prejudice.  (Prejudice has been defined as “tangible economic injury.”)

On the other hand, if the ceding company has written procedures in place, but they are not followed in a given case, then that, in conjunction with other evidence, may establish that notice was late.  But the reinsurer still has to show prejudice to be relieved of liability.   

So in our hypothetical, counsel for the reinsurer may be able to make some hay at a deposition concerning the cedent’s failure to follow its own guidelines and procedures.  But points scored at depositions can be (and in this case are) ephemeral:  without evidence of prejudice, failure to comply with the guidelines is, for all practical purposes, irrelevant.  

In this day and age of internal controls and corporate responsibility, it seems to us that appropriate written claims guidelines and procedures can benefit insurers, cedents and reinsurers, provided they are carefully drafted, implemented and managed.  We offer the following, very general and non-exclusive list of things companies might consider:   

1.  If written claims procedures are to be adopted and implemented they should be carefully prepared by claims experts and reviewed by experienced counsel.   Poorly drafted and ill-conceived written claims procedures are probably worse than none at all. 

2. Careful thought should be given to privilege issues associated with in-house or outside attorney review of draft guidelines and the involvement of counsel in other aspects of the drafting and implementation process.   The process should be carefully managed and attention should be paid to the company’s document retention policies as respects the maintenance or destruction of drafts.   Remember, in a future litigation or arbitration the insured’s attorneys will likely request prior drafts and depositions of all involved in the preparation and implementation process.  While the insured may or may not be successful in obtaining all the discovery it seeks, it will likely get at least some of it.  

3.  Written claims procedures should be drafted to confer upon claims personnel an appropriate degree of discretion where such discretion is appropriate.   Locking adjusters into particular claims positions without regard to the facts, circumstances and practical realities can cause a myriad of problems. 

4.  To the extent claims procedures provide a certain period of time within which a particular action must be taken, and to the extent that the period is not an inflexible one provided by law or contract, flexibility should be built in to account for minor delays caused by special circumstances or the press of business.   

5.  If written claims guidelines and procedures are to be adopted, the company should ensure claims personnel take them very seriously and do their best to abide by them at all times.   

6.  Written claims procedures should be subject to periodic review by in-house counsel and the claims department to ensure that they comply with current legislation and recent case law developments. 

7.  Outside counsel handling coverage or other, claims-related matters for the company should keep the company’s general counsel apprised of any problems that might be caused or exacerbated by written guidelines and procedures.  

When I read John’s draft the first thing that struck me was that the rules and tips he offers are, for all intents and purposes, applicable to cedents pursuing reinsurance recoveries.  He stresses, among other things, the importance of honesty, good faith, open communication and not colluding with the claimant in an effort to obtain coverage.  These attributes are ones to which diligent, ceded claims personnel should aspire in their dealings with their company’s reinsurers, because they tend to increase the odds of achieving a successful recovery and avoiding time-consuming and expensive reinsurance disputes (all other things being equal). 

John was also kind enough to quote my comments in his article, which are reproduced below: 

As I discussed these rules with Philip J. Loree Jr. at the Loree Reinsurance and Arbitration Law Forum the other day, I learned that they don’t only apply to policyholders –  apparently insurers must live by these same rules to collect from their reinsurers:

You would be surprised how frequently reinsurers contend that the carrier colluded with the policyholder in direct insurance coverage litigation.  If the reinsurer can establish collusion concerning the fact, amount or allocation of coverage, or if the reinsurer otherwise shows that the carrier acted in bad faith, then the reinsurer will usually be relieved of liability for the claim.  Like policyholders making direct insurance claims, carriers making reinsurance claims need to avoid even the appearance of collusion or bad faith, and following rules analogous to yours helps them do that.

Whether you happen to be a corporate or individual policyholder, or a cedent wishing to increase the odds of successfully collecting from reinsurers, John’s fine article comes highly recommended.   In fact if you are at all interested in settlement and ADR, we highly recommend that you follow Settlement Perspectives.  John writes high-quality, insightful and practical  articles on a variety of pertinent topics.  Who could ask for more?

The power of arbitrators appointed to resolve a particular dispute or disputes is defined by the submission, not the arbitration agreement. The scope of the agreement to arbitrate tells us only what must be submitted to arbitration. It is the submission itself that “serves not only to define, but to circumscribe the authority of the arbitrators.” Ottley v. Schwartzberg, 819 F.2d 373, 376 (2d Cir. 1987) (here).   

As the United States Court of Appeals for the Fifth Circuit explained, a predispute arbitration agreement generally is “not self-executing” — “[b]efore arbitration can … proceed, it is necessary for the parties to supplement the agreement to arbitrate by defining the issue to be submitted to the arbitrator and by explicitly giving him the authority to act.”  Piggly Wiggly Operators’ Warehouse Inc v. Piggly Wiggly Operators’ Warehouse Independent Truck Drivers Union, 611 F2d 580 (5th Cir. 1980) (here).  The disputes presented to the panel for resolution without objection constitute the submission, which may be embodied in a formal submission agreement or determined from the arbitration demand in conjunction with the arguments and contentions made by the parties during the proceeding.

The submission is effectively a delegation of authority to one or more particular arbitrators to resolve one or more particular issues.  And once arbitrators have ruled on those issues, their authority is exhausted; they have no authority to hear any further disputes between the parties unless the parties delegate to them that further authority. See, generally, U.S. v. American Soc’y of Composers, Authors and Publishers, 32 F.3d 727, 732-33 (2d Cir. 1994) (here); Ottley, 819 F.2d at 376.

The scope of the delegated authority may be broader or narrower than the scope of the arbitration agreement, or it may be coextensive with it. The parties may, for example, agree to arbitrate all disputes between them, but if they empanel arbitrators to resolve only a subset of those disputes, then the arbitrators’ authority is limited to that subset of disputes. And parties that have agreed to arbitrate only a subset of potential disputes can nevertheless submit other disputes to the arbitrators, which will have the authority to resolve them. See, generally, Ottley, 819 F.2d at 376; see also Rocket Jewelry Box, Inc. v. Noble Gift Packaging, Inc., 157 F.3d 174, 177 (2d Cir. 1998) (here); Trade & Transport, Inc. v. Natural Petroleum Charterers Inc., 931 F.2d 191, 195 (2d Cir. 1991) (here).

For example, in the reinsurance context, a dispute may arise over a claim or series of claims, a party may demand arbitration of those claims, and a panel may be appointed to resolve the dispute.  Midstream in the proceeding disputes may arise over different claims.  The empanelled arbitrators have the authority to resolve those disputes only if the parties agree to submit them to the panel (they may be impliedly submitted if one party asserts them in the arbitration and the other party contests them without a reservation of rights).  

Those additional claims – not the subject of the original demand for arbitration – must, of course be arbitrated if they fall within the scope of the arbitration clause.  But the empanelled arbitrators cannot force the parties to submit them in the ongoing proceeding.  A new arbitration must be commenced, perhaps with new panel members. 

Issues concerning what was submitted to the arbitrators can also arise in other contexts.  One example is what happened in KX Reinsurance Co. v. General Reinsurance Corp., 08 Civ. 7807 (SAS), 2008 WL 4904882 (S.D.N.Y. Nov. 18, 2008) (Scheindlin, J.), where the Court held that the panel exceeded its authority when, after resolving all the issues the parties submitted, the panel nevertheless retained jurisdiction to hear future disputes between the parties. You can read more about that case here.

As is true with most rules, there is an exception.  Some arbitration agreements are self-executing in that they provide that the parties are to submit all disputes to a particular arbitrator or permanent arbitration panel.  Under such a self-executing arbitration agreement, the permanent arbitrator or panel generally has the authority to resolve additional disputes arising in the course of the proceedings, or to retain jurisdiction to hear future disputes, as long as the arbitration clause requires the parties to submit those disputes.   

In view of how the submission limits the authority of the empanelled arbitrators, parties need to give careful thought to the scope of the demand for arbitration, and the relief requested.  Sometimes a proverbial ounce of prevention is worth a pound of cure.

Introduction

In Part I we discussed the controversy surrounding the House of Lords decision in Lexington Insurance Co. v. AGF Insurance Co. [2009] UKHL 40.  The House ruled that two proportional facultative reinsurers were not obligated to indemnify the cedent for their share of the entire amount of a judgment a Washington State court rendered against the cedent in an environmental coverage action.  The judgment, which was based on Pennsylvania law, rendered the cedent liable under the policy jointly and severally for property damage caused by environmental contamination that occurred before, during and after the three-year policy period.  The House ruled that the reinsurers could be held liable only for their respective shares of the loss that occurred during the three-year term of the reinsurance contract (which was concurrent with that of the cedent’s policy), not their shares of the total amount of loss for which the Washington judgment held the cedent liable under the reinsured policy. 

In this Part II we briefly summarize the pertinent background of the case, walk the reader through the House’s reasoning and offer a few parting thoughts.       

Background

The reinsurance contract, which was entered into in 1977, was “back-to-back” – i.e., materially identical to the reinsured policy – save in one respect:  the reinsurance contract was governed by English Law (because it was negotiated and entered into on the London Market) but it was unclear at the time of contracting which U.S. state’s (or states’) law would govern coverage issues in the event of litigation involving the policy.  There was no choice-of-law clause in the policy (though there was a standard, service-of-suit clause), and choice of law would accordingly depend on where the action was brought, the facts, the issues, and applicable choice-of-law rules.  As is typically the case in policies not containing choice-of-law clauses, all of these were imponderables at the time the parties entered into the contract, and would remain so until a coverage action arose concerning the policy, and a court ruled on choice of law.   

Decision of the House

The House explained that whether or not the reinsurer had to pay its proportional share of the entire judgment was informed by some established principles of English reinsurance and insurance law.  First, “a reinsurer cannot be held liable unless the loss falls within the cover of the underlying insurance contract and within the cover created by the reinsurance,” and “what falls within the cover of a contract of reinsurance is a question of construction of that contract.”  Id. at ¶ 59 (Collins, L.J.).  Second, there is a presumption that the coverage of a back-to-back  proportional facultative reinsurance contract is coextensive with that of the cedent’s policy.  Id. at ¶¶ 60-73.   Third, “where an insurance or reinsurance contract provides cover for loss or damage to property on an occurrence basis, the insurer (or reinsurer) is liable to indemnify the insured (or reinsured) in respect of loss and damage which occurs within the period of cover but will not be liable to indemnify the insured (or reinsured) in respect of loss and damage which occurs either before inception or after expiry of the risk.”  Id. at ¶ 74. 

To determine the scope of the reinsurers’ obligation the House had to construe two key contract provisions:  (a) a “Period” clause, which said that the reinsurance contract was in effect for a three-year period running concurrently with the three-year policy period; and (b) a standard “Full Reinsurance Clause,” which contained a follow-the-settlements provision.   The “Full Reinsurance Clause” stated, in pertinent part:    

Being a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Company.  .  .  .      

Id. at ¶ 21 (Mance, L.J.). 

As a threshold matter, the Court had to decide whether the general rule that the coverage of the reinsurance contract was coextensive with the insurance contract applied in this case, where each contract was governed by different bodies of law, one determinate, and one indeterminate.  That involved not the application of conflict-of-law rules, but construction of the contract.  See id. at ¶  63 (Collins, L.J.).  The question boiled down to “what law would the parties have expected would be applied by a court in the United States had [the insured] taken advantage of the Service of Suit clause, and in particular would the parties to the reinsurance contract have reasonably had in mind that what losses were recoverable under the insurance contract would be determined ultimately by the law of Pennsylvania?”  Id. at ¶ 95.  Because even though the joint and several liability allocation theory had not been devised by any court back in 1977 — let alone adopted by the Pennsylvania courts — both the insurer  and the reinsurer assumed “the risk of changes in the law.”  Id. at ¶ 110.  And if the parties reasonably expected that Pennsylvania law would apply, then the ordinary rule concerning back-to-back reinsurance would apply, and the reinsurer would be bound to pay its proportional share of the entire judgment, even though English law governed the reinsurance contract, and under English law the reinsurance contract would not ordinarily be interpreted to cover loss occurring outside the term of the contract.

But the Court found that the general rule was not applicable, because, at the time of contracting, there “was no identifiable system of law applicable to the insurance contract which could have provided a basis for construing the contract of reinsurance in a manner different from its ordinary meaning in the London insurance market:” 

I consider that it is fanciful to suppose that in 1977 the hypothetical American lawyer asked to advise on what law governed the contract of insurance, and what law would govern questions of coverage, would have concluded that Pennsylvania law would have applied.  To have reached that conclusion the lawyer would have had to advise or assume that (a) there would be claims based on damage to several sites being litigated together; (b) plaintiffs in the environmental litigation would be most likely to sue in a State which applied the principles in the Restatement Second [of Conflicts of Law]; and (c) the courts of that State would apply those principles to conclude that the law which applied to the issues would be the law of Pennsylvania. 

In my judgment, in complete contrast to Vesta v. Butcher and Groupama  v. Catatumba, [, both of which applied the ordinary, back-to-back rule in situations where another jurisdiction’s law governed the original insurance contract,] in the present case there was in 1977 no identifiable system of law applicable to the insurance contract which could have provided a basis for construing the contract of reinsurance in a manner different from its ordinary meaning in the London insurance market.  In each of those cases, the substance of the foreign law as to the consequences of a non-causitive breach of warranty could be ascertained at the outset, if necessary by recourse to a relevant Norwegian (or Venezuelan) legal source.

Id. at ¶¶ 107-08 (citation omitted).

Accordingly, the Period clause had to be given the meaning that would be ascribed to it in the London insurance market.  Pursuant to that clause, the reinsurance contract “covered ‘All Risks of Physical Loss or damage’ and provided cover in respect of loss and damage occurring between 1 July 1977 and 1 July 1980.  .  .  .,” and was therefore “on the ‘loss occurring’ basis, under which a reinsurer is obliged to pay its share of the loss suffered by the reinsured, if it occurred during the period when the reinsurance contract was in force.”  Id. at ¶ 76.

The Court found “no principled basis for treating the scope of the 3 year reinsurance as the same as the insurance, which has been interpreted under the law of Pennsylvania not to contain any limitation as to time of the physical loss or damage to property.”   Id. at ¶ 110 (citation and quotation omitted): 

If [the cedent] were right, some very uncommercial consequences would flow if the reinsurers had agreed to accept only two years of the risk, rather than the three years of the underlying risk accepted by [the cedent], leaving [the cedent] to reinsure the third year of cover elsewhere; or if the London market had elected to reinsure Lexington by way of three separate one year policies .  .  .  .The periods of cover under the insurance and reinsurances would not be back-to-back.  But [the cedent] would still be maintaining that, in light of the decision of the Washington Supreme Court, if any damage occurred within any relevant policy period, of any duration, the relevant reinsurer would be liable for all of the damage, including damage occurring before inception or after expiry.  That seems to me to be wholly uncommercial and outside any reasonable commercial expectation of either party.    

Id. at ¶ 111. 

The Court also rejected the cedent’s argument that, pursuant to the follow-the-settlements language in the Full Reinsurance Clause, the loss is deemed to fall within the scope of the original insurance policy if “so held by a court of competent jurisdiction, or if it is the subject of a settlement which cannot be impugned”: 

The case for [the cedent] is not assisted by those authorities which decide that the reinsurer cannot go behind a determination of the reinsured’s liability under the contract of insurance to the original insured, whether it is by way of settlement under a follow settlements clause or by the decision of a court of competent jurisdiction.  The reason is that a reinsurer will only be bound to follow its reinsured’s settlement and indemnify the reinsured provided that the claim recognised by them falls within the risks covered by the policy of reinsurance as a matter of law.  This is because the reinsurer cannot be held liable unless the loss falls within the cover created by the reinsurance.  Consequently the question remains the same:  what is the effect of the policy period in the reinsurance? 

Id. at ¶ 112 (citations omitted).   

Finally, the House said that this case illustrated what it expected to be the exception, not the rule in cases involving back-to-back reinsurance:

I would also accept that it would almost invariably be the case that losses for which the insurer has indemnified the original insured would be within the reinsurance even if the losses are payable under a foreign law or a foreign judicial decision which takes a view different from English law of what losses are recoverable.  The presumption that the liability under a proportional facultative reinsurance is co-extensive with the insurance should be a strong one because (as I have said) the essence of the bargain is that the reinsurer takes a proportion of the premium in return for a share of the risk.  But this is an unusual case in which the express (and entirely usual) terms of the reinsurance are clear.  This is not a case where the reinsurers are relying on a technicality to avoid payment.  At the beginning and end of these appeals remains the question whether the provision for the policy period of the reinsurance is to be given the effect it has under English law, or whether the parties must be taken to have meant that the reinsurance was to respond to all claims irrespective of when the damage occurred and irrespective of the period to which the losses related.  There is, in my judgment, no principled basis for a conclusion in the latter sense. 

Id. at ¶ 116. 

Some Parting Thoughts

The judgments in the Lexington case contain some impressive discussions of English law on the nature of reinsurance in general, back-to-back cover, the scope of a period clause, and follow-the-settlements.  As we mentioned in Part I, it is a significant contribution to reinsurance jurisprudence.  Its dissertations on English law concepts may, to some extent,  influence the development of reinsurance law here in the U.S., where courts like the New York Court of Appeals sometimes cite and draw on the teachings of English courts.      

But we do not think the aspect of the rationale on which the case turned will gain wide, if any, acceptance by courts or arbitrators here in the U.S.  And that is the importance the Court accorded to the parties’ lack of knowledge at that time of contracting of what law would likely govern coverage issues arising under the policy.  We believe that both U.S. courts and arbitration panels will probably perceive that aspect of the decision to be overly formalistic, and not reflective of the expectations of the parties to a facultative, back-to-back reinsurance contract.  

Had the parties to the Lexington reinsurance contracts been asked in 1977 whether the reinsurance contract was “back-to-back” with the reinsured policy, we believe the answer would have been a resounding “yes.”  We doubt that the parties would have qualified their answer and pointed out that the reinsurance contract was governed by English, law while the insurance contract was governed by indeterminate U.S. law.  And even had the reinsurer and insurer said that the contract was back-to-back, save in that one respect, we doubt that the insurer and reinsurer would, in turn, conclude that, in the event a U.S. court interpreted the terms of the policy more expansively than an English court might, then the reinsurers would not be required to pay their respective shares of the entire amount of the U.S. judgment.     

The House strongly implied that, had the parties reason to know that Pennsylvania law would govern the interpretation of the policy’s scope of coverage, then the reinsurers would have been responsible for their respective shares of the Washington judgment.  The House said that it would be irrelevant that Pennsylvania had not yet adopted joint and several liability back in 1977, because changes in the governing law are a risk that both the insurer and the reinsurer accept.  So the House presumably would have ruled for the cedent had there been, say, a Pennsylvania choice-of-law clause in the contract, even though neither the reinsurer nor the cedent had, at the time of contracting, any reason to believe that the policy might one day be interpreted to cover loss occurring outside the policy period, and even though in 1977 a Pennsylvania court probably would have interpreted the insurance policy to cover only loss occurring during the policy period.    

A U.S. court or arbitration panel would probably question why the result should be any different simply because neither the insurer nor the reinsurer had knowledge at the time of contracting of what particular state’s law would govern scope of coverage in some future coverage action.  The reinsurer, by agreeing to reinsure a U.S. policy with a service-of-suit clause knew or had reason to know that:  (a) the laws of any number of U.S. jurisdictions might be applied to particular issues arising in a coverage case; (b) those laws might or might not be different than English law concerning the policy’s scope of coverage; (c) those laws might change; and (d) neither the cedent nor the insured could predict with any certainty what law might be applied to the policy, let alone what that law would ultimately provide at the time of some future coverage action.  In other words, the reinsurer’s guess as to what law might be applied to the policy in a future coverage action, and the ensuing result, was as good as the cedent’s and the insured’s. 

Given that all parties were equally in the dark about all of this, we believe many U.S. courts and arbitration panels would consider the risk that the terms of the policy might one day be subject to the laws of a U.S. jurisdiction that construed them differently than English law might to be a risk that a back-to-back, proportional facultative reinsurer accepts when it enters into a back-to-back reinsurance arrangement with a U.S. cedent. 

We also do not believe that many U.S. courts or arbitration panels would be persuaded by the House’s suggestion that a ruling contrary to that in Lexington would render the period clause of the reinsurance contract meaningless.  The House suggested that the cedent’s position would have been the same had the reinsurers entered into three, separate, one-year reinsurance contracts reinsuring the three-year term of the policy.  While that argument has at first blush a logical ring,  it doesn’t fare as well under scrutiny.  First, if there were three, separate one-year reinsurance contracts spanning the term of the policy, then the reinsurance would, by definition, not be back-to-back cover, and there would be no reason to construe the period clauses in the insurance and reinsurance as having the same meaning.  Second, consistent with the parties’ reasonable expectations, the period clause of the policy could reasonably be deemed to have the meaning that the Washington Court accorded it under Pennsylvania law (i.e., as covering loss occurring before, during and after the three-year policy period), and the period clause of each one year reinsurance contract could reasonably be interpreted to cover one-third of the total amount of loss that the Washington Supreme Court deemed covered by the policy.  Since the loss deemed to be covered by the Washington Supreme Court was of a continuous, indivisible nature, it would be reasonable to assume that, under the Washington court’s judgment, one third occurred during the period the first, one-year reinsurance contract was in effect; one third during the term of the second, one-year reinsurance contract; and one third during the term of the third, one-year reinsurance contract.  The terms of the period clause could reasonably be given further meaning by permitting the reinsurers the benefit of a retention each year (absent contract language providing otherwise).

Introduction

Effective October 1, 2009 the House of Lords will be replaced by the Supreme Court of the United Kingdom (more information here).  In what may be among its last official acts, on July 30, 2009 the House decided an important reinsurance case concerning the scope of a reinsurer’s indemnity obligation to a U.S. cedent under English law.  See Lexington Insurance Co. v. AGF Insurance Co. [2009] UKHL 40.  The reinsurance contract was back-to-back with the reinsured policy in all but one respect:  it was governed by English law, while the insurance policy was, in the event of coverage litigation, potentially subject to the laws of any number of U.S. jurisdictions, depending on venue, applicable choice of law rules and other considerations.  Relying on a long-line of English law precedent, and distinguishing other precedent, the House ruled that a proportional facultative reinsurer was not obligated to indemnify the cedent for the reinsurer’s share of the entire amount of a judgment a state court in Washington rendered against the cedent.  The judgment resulted from a Washington Supreme Court decision which, applying Pennsylvania law, ruled that the cedent was jointly and severally liable under its policy for property damage caused by environmental contamination that occurred before, during and after the cedent’s three-year policy period.  The House said that, judgment or no judgment, the reinsurer agreed to reinsure only loss or damage occurring during the coterminous, three-year period of the reinsurance contract, and the reinsurer’s obligation was limited to its share of that loss. 

The House’s decision is likely to be controversial.  In this Part I of a two-part post, we shall discuss the controversy and seek to allay it a bit.  In Part II we’ll walk the reader through that reasoning and offer some parting comments. 

The Controversy

Complex environmental-contamination and asbestos-related claims are anything if not costly.  American insurers have been fighting an expensive, multi-front war with their insureds for many years over the scope and extent of their liability for these claims.  They raise a myriad of issues and are potentially governed by the laws of at least fifty different jurisdictions (some sympathetic to insurers, some not).   These jurisdictions have adopted different approaches to resolving the issues (some favorable to insurers, some not), which means that no matter where may be the venue, complex choice-of-law questions are likely to arise.  And the coverage actions usually involve multiple insurers, sites, claimants, years of coverage, and layers of coverage.  The amount at stake and the concomitant expense can be staggering.  For the most part, these claims and coverage disputes — let alone how some courts might resolve them – could not reasonably have been anticipated at the time when most of the occurrence policies on which they arose were written (generally prior to 1980 and sometimes going back to the 1930s). 

Some U.S. courts, like the Washington Supreme Court in Lexington, have imposed liabilities on insurers that are far in excess of those the U.S. and U.K. insurance  industry thought they were assuming back  when the parties entered into their insurance and reinsurance contracts.  These courts have literally bent over backwards to protect policyholders (most of which are large corporations that may be as sophisticated as, if not more so than, their insurers).  One of the best examples is the one at issue in this case:  the imposition of joint and several liability, under which an insurer can be held jointly and severally liable under a single policy for its share of an environmental or asbestos-related loss that occurred over many years, which triggered many other policies issued by the same or other insurers (solvent or insolvent), and which may have spanned  periods when the policyholder had elected not to purchase insurance.

Since at least the latter part of the 1980s, U.S. cedents have also been fighting with their reinsurers – both international and domestic – over the scope and extent of their reinsurers’ liability for asbestos-related and environmental-contamination claims.  One of the key fights has been over how settlements of these claims are to be allocated.  While insurers have fought hard in the coverage actions to spread their liability among as many other insurers and policies as possible, and to advocate positions on the number of occurrences that limited their overall liability, they have fought equally hard to spread that liability over as few reinsurers and reinsurance contracts as possible, and to advocate positions on number of occurrences that tend to increase the amount of their reinsurance recoveries.  And the reinsurers, in turn, have fought hard to spread that liability over as many reinsurers and contracts as possible, and to advocate positions on the number of occurrences that tend to decrease the amount of their cedents’ reinsurance recoveries.     

These reinsurance allocation disputes must generally be resolved based on an examination of the settlement; the probable number of occurrences; the apportionment of liability to sites or claimants; the terms and conditions of the insurance and reinsurance contracts;  applicable insurance and reinsurance law, custom and practice; and a host of other considerations.  They are quite often the subject of arbitration proceedings, but are sometimes resolved in court.  While they are generally not as factually and legally complex as their coverage-litigation counterparts, they can be fairly expensive to litigate or arbitrate, and the stakes may be high.    

A good number of these reinsurance disputes are between American cedents and their London-based reinsurers, many of which have also been named in U.S. asbestos-related and environmental coverage actions here in the U.S.  Direct and reinsurance asbestos-related and environmental claims are what prompted the U.K. government and insurance industry to form Equitas in 1996 to protect Names that participated in pre-1993 contracts from insolvency, and to enable the London Market to continue writing insurance and reinsurance business.  (For a description of the Equitas restructuring and an explanation of the recent Part VII transfer designed to protect Names from contingent liabilities on pre-1993 contracts, see Re The Names at Lloyd’s for the 1992 and Prior Years of Account, Represented by Equitas Ltd.  [2009] EWHC 1595 (Ch), a copy of which is here.)

From the standpoint of an American reinsurer, a claim based on a judgment imposing joint and several liability would by no means be a happy event.  The reinsurer would no doubt have many questions,  and would need to be sure that the decision to proceed to trial was made in a good faith, business-like manner, and that the loss presented otherwise comported with the terms and conditions of the reinsurance contract.  But given American conceptions of the follow-the-settlements doctrine;  reinsurance custom and practice; the expectations of the parties; and insurance and reinsurance law in general, it is unlikely that most American courts or arbitration panels would reach the same conclusion as the House did on facts like those in Lexington.  More likely than not, the reinsurer would be required to pay its share of the entire judgment, even though that meant that the reinsurer was effectively reinsuring loss outside the period covered by the reinsurance contract (albeit because the judgment of a court of competent jurisdiction so defined the coverage of the reinsured policy).  That does not mean that the House was necessarily wrong or that our hypothetical American court or arbitration panel would necessarily be right.  It simply reflects differing institutional views of how general principles of insurance and reinsurance law, custom and practice ought to be applied; and how best to serve the needs of national and international legal systems and economies.       

Interestingly enough, the English Court of Appeal ruled for the cedent, Lexington.  And in a postscript to his judgment,  Longmore, J. wrote: 

No one can pretend that the decisions of United States courts in relation to asbestosis and pollution claims are remotely satisfactory from the point of view of insurers let alone reinsurers.  Reinsurers’ arguments in the present case had a whiff of an assertion (although they were careful not to say so expressly) that Lexington were an American corporation and had therefore to take unsatisfactory American decisions on the chin, while reinsurers were English (or doing business on the English market) and could not be expected to do so.  That, of course, will not do.  The appellant’s very name is apt to remind one of the opening shots of the War of Independence but that conflict has long since receded into history and must remain there.  The insurance and reinsurance market have been adept over many decades in coming up with solutions to apparently insuperable difficultities.  One such solution has been the evolution of the Bermuda Form in which the parties agree to English or Bermuda arbitration but agree also that the substantive law of the insurance (or reinsurance) is to be that of New York.  This sensible arrangement might avoid some, at least, of the problems thrown up by this difficult case.

Wasa Int’l Insurance. Co. v. Lexington Insurance Co. [2008] EWCA Civ 150, ¶ 42 (Longmore, J.), rev’d, [2009] UKHL 40 (citation omitted). 

Longmore, J.’s thoughtful comment suggests that the result in Lexingtonmay, in part, be a manifestation of frustration on the part of some in the U.K. with a U.S. liability system that they perceive as being out of control, and with the extent to which U.K. companies and Names have been forced to bear what they may believe is a disproportionate share of the loss imposed by those decisions.  England has a long tradition of insurance and reinsurance law and practice, and the notion of joint and several liability is completely at odds with that law and practice.  For many years, English insurers and reinsurers have suffered tremendous losses in U.S. asbestos-related and environmental coverage litigation.  And in recent (and perhaps not so recent) years, a perception appears to have developed that English reinsurers (particularly those in run-off) have not been treated that fairly by U.S. arbitration panels.  It is easy to understand why English reinsurers might perceive asbestos-related and environmental claims to be a problem created by the U.S. legal system, the consequences of which have been unfairly and disproportionately foisted on U.K. insurers and reinsurers, all to the detriment of the U.K. insurance and reinsurance business and the national economy.  The House was apparently more sympathetic than the Court of Appeal to that putative frustration. 

American cedents, of course, are not going to be thrilled by the decision, and that is certainly understandable.  Just as the U.K. has a long tradition of insurance and reinsurance law and practice, so, too, do we.   In some ways it is similar.  And I doubt that the Lexington decision will dramatically change it. 

More to the point, American cedents have certainly taken American decisions “on the chin.”  And it is understandable that they do not want to take it on the chin twice, courtesy of a judicial decision that would deny them a large portion of their expected reinsurance recoveries, especially when no one contends that their direct insurance claims handling was anything but reasonable.  Yet take it on the chin twice is precisely what the House’s decision requires them to do, at least if they must pursue their reinsurance recovery before an English court, and the facts are as they were in Lexington.

But we Americans should resist the temptation to criticize the House of Lords or the English legal system because of the result in Lexington.   It reflects English law and English policy, and frankly the judgments in the case are an an impressive contribution to reinsurance jurisprudence, of which English law decisions are a very important part. The New York Court of Appeals once said that the London Market was “the Mecca of the reinsurance world,” and for good reason.  See Sumitomo Marine & Fire Ins. Co.  v. Cologne Reinsurance Co., 75 N.Y. 2d 295, 302 (1990). 

To work, international dispute resolution requires that participants respect the laws of other nations, even where they may differ from our own.  The House went out of its way not to accord disrespect to our legal system or the judgment of the Washington Supreme Court.  We should do the same. 

Indeed, American courts and arbitration panels may learn from Lexington, and it may contribute (however modestly) to the development of our own law. It, like a lot of other English decisions, illustrates that reinsurance contracts should be treated no differently than ordinary contracts.  And while that may sound like an uncontroversial point, we trust that most readers have seen arbitration awards and court decisions that appear to take a different view.  

Finally, let us not lose sight of economic realities. Whether or not the cedent had prevailed in Lexington, it presumably had the right and obligation to seek contribution from other insurers on the risk.    That is one of the tenets of joint and several liability.  Having lost, the cedent will presumably seek contribution from solvent insurers on the risk and retain those recoveries for its own account, which will mitigate its loss.  Had it won, it would still have had to pursue those recoveries for the benefit of its reinsurers.  And while it may be that it cannot completely offset its loss, it should be able to reduce it, perhaps significantly.   

In Part II we shall take a close look at Lexington and share our parting thoughts.  Read on.  .  .  .