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Guest Post — Mediating Reinsurance Disputes: A Case Study

May 14th, 2009 Guest Posts, Mediation, Reinsurance Mediation 2 Comments » By Peter A. Scarpato

Introduction

I am very pleased that Phil Loree Jr. asked me to guest blog for the Loree Reinsurance and Arbitration Law Forum.  I have known Phil for quite some time and have worked with him on various matters over the years.  Phil suggested that I write something about my experiences mediating reinsurance disputes.  This guest post is a revised version of an article I published in the September 2006 edition of JTW News, a popular, U.K.-based reinsurance trade publication.    

As the aggravation, expense and amount of time required to arbitrate or litigate escalate, parties to reinsurance disputes are beginning to opt either by contract or ad hoc agreement to mediate reinsurance disputes. For them, depending upon the case, less is more; that is, compared to arbitration or litigation, mediation is a less aggressive, less costly, less damaging and less divisive alternative to tip the balance of power and opportunity in both parties’ favor.  A careful, experienced and patient mediator views disputes between parties, not as a battle, but as an opportunity to empower them to structure a resolution that best meets their respective short and long term needs. 

Despite this trend, many still claim mediation is unnecessary, expensive and unproductive — complaints based mostly upon its non-binding nature and prior “bad” experiences with ineffective mediators.  From my discussions with many satisfied client and lawyer participants and my own work mediating cases, I have found that parties and their counsel can and do benefit in many ways — even if no settlement immediately results — from mediating their reinsurance disputes before an effective mediator. 

To illustrate how this works in practice, I will use an example based on a reinsurance mediation I successfully conducted.  For confidentiality purposes, some details were changed and the names withheld.  I have set forth the narrative in the third person:

Retrocedent C sought to collect $5MM in life reinsurance losses ceded to Retrocessionaire D under a retro treaty. The disputed losses arose out of three reinsurance claims made against Retrocedent C by Reinsurer B. The three claims emerged from a large block of life reinsurance business Reinsurer B had originally reinsured and which it had assumed from Insurer A, the quality of which Retrocedent discussed in placing information provided to Retrocessionaire when it agreed to participate in the retro treaty.  In denying the three claims, Retrocessionaire D asserted underwriting errors, reporting delays, and other issues arising out of the underlying block of assumed business. The parties agreed to mediate rather than arbitrate the dispute.

The Essence of the Mediation Process

In its classic form, mediation enlists an impartial, trusted facilitator to help parties explore, respect and react to the narrow and broad objective, subjective and psychological factors creating conflict between them, enhancing their ability to perceive and communicate positions.  The goal of the process is an inexpensive, voluntary resolution of the dispute on the parties’ own terms.  The technical aspects of the factual and legal issues in dispute are not necessarily the most important elements of the process. 

In both joint meetings and private caucuses, parties (a) work with an experienced, professional mediator with no formal power to issue rulings (unless otherwise agreed by the parties), and (b) use an informal, confidential process (no rules of evidence or transcript) designed to suspend judgment and promote candor.  This enables them to (c) identify and understand each side’s interests and goals underlying the dispute, which (d) ultimately empowers them to structure  the terms of a mutually-acceptable settlement. 

In most, but not all, cases, the parties are represented by counsel.  It is critical, however, that each client sends an officer, employee or principal with authority to settle the dispute, preferably the business person with principal, day-to-day responsibility for the disputed transaction(s).  Depending upon the case and sophistication of the client, it may also help to have representatives from each party’s in-house legal department present.   

In mediation, success is measured on various levels, in carefully planned and timely executed steps:  

Step One.  Before the mediation session, the mediator (a) obtains the parties’ mediation statements which contain documents and information revealing the salient facts and specific issues in dispute and (b) most importantly, works with them individually by phone or in person to help “set” the precise problems to be addressed which may go well beyond the narrow issues noted in their mediation statements.  This step cannot be emphasized enough.  If the mediator does his or her job, the parties and counsel walk into the mediation room understanding that the real problems may involve other factors, such as each side’s as yet undisclosed, underlying needs and interests.

In our case, in addition to mediation statements, the mediator asked each party to provide to him (and only him) a Confidential Settlement Statement, designed to elicit (a) the history and end point of any prior settlement discussions; (b) the underlying interests and needs they wished the mediation to address; and (c) ideas for acceptable alternative paths to settlement. While Retrocedent C basically discussed initial, acceptable percentage discounts to the $5MM claim balance, Retrocessionaire D requested that the mediation explore its concerns with the underlying, assumed block of business (e.g., lack of underwriting, accommodation underwriting, sloppy claims handling).

Step Two.  In the opening joint session, the mediator sets the stage by convincing each party to actively listen to, understand and acknowledge the other side’s arguments.  It is not enough that the parties nod their heads.  Each party must be able to repeat the other party’s position back and believably communicate their appreciation and respect for the other party’s views (even though they may disagree with them).  This often overlooked but incredibly powerful step builds trust, breaks down barriers and makes the parties less defensive and more candid, giving the parties and the mediator valuable information to use in the mediation process — information which, as noted in Step One above, helps define the proper scope and depth of the issues the participants must address and, if possible, resolve.

Step Three.  After hearing the parties’ positions in joint session, the mediator meets separately with each side in private caucuses.  Caucuses are used to encourage parties to suspend judgment and accept an environment where they can comfortably and critically evaluate the strengths and weaknesses of their positions, creatively explore options to resolve their differences and ultimately use the mediator to develop proposals designed to get what they need — not necessarily what they want — from a mutually-acceptable settlement.

In the first caucus, Retrocessionaire D expanded the discussion beyond the three claims and expressed grave concern over deviations between the quality of claims handling and underwriting performed in the assumed block and that represented in the placing information. If Retrocedent C did not acknowledge and attempt to address these problems, Retrocessionaire D was prepared to “walk” and serve an arbitration demand seeking rescission.

Step Four.  Applying the old adage that “diplomacy is the art of letting someone else have it your way,” the mediator slowly and deftly helps parties develop, discuss and respond to successive financial and non-financial proposals and counterproposals — each supported by an articulated rationalewhich satisfy both the offering and responding party’s needs and interests.  Simply put, party X must offer party Y something that party X knows will help party Y convince his or her company that the proposal makes good business sense.  This is the heart of the process: an unscripted, evolving and changing dynamic which requires a perceptive, inventive and focused mediator; patient, calm and committed parties; and an open exchange of ever-broadening proposals that accentuate agreement and seek to eliminate disagreement.

In our case, through several caucuses and carefully timed steps, the mediator moved the parties to accept terms that addressed (a) Retrocessionaire D’s need to identify and resolve potential problems with the assumed block; (b) Retrocedent C’s need to maintain its ongoing relationship with Reinsurer B on other business and to collect balances legitimately ceded under the retro treaty; and (c) the parties’ joint need to cooperate on steps designed to implement their settlement.  The mediator was able to facilitate agreement on two key points. 

First, to provide information both parties needed to assess the legitimacy of claims ceded to the retro treaty, Retrocedent C and Retrocessionaire D agreed to work together to design, conduct and share the expenses of an audit of Reinsurer B’s questionable block of assumed business.

Second, based upon the results of the audit, Retrocessionaire D would pay any and all undisputed losses and, through Retrocedent C, challenge any allegedly illegitimate cessions made by Reinsurer B to Retrocedent C.  If Reinsurer B disagreed and commenced arbitration or legal proceedings, Retrocessionaire D would pay 50% of Retrocedent C’s legal and arbitrator fees, expenses and costs.

Having cooperated throughout this process, the parties were primed to return to productive discussions addressing the $5MM balance allegedly due on the three retro claims. While their cooperative mood allowed them to identify, discuss and produce documents to narrow the substantive issues and financial gap between them, certain process adjustments noted below were necessary to achieve a final settlement.

Bridging the Gap

Often, despite everyone’s best efforts, a financial or non-financial gap leaves parties with a choice between an agreed settlement and a disappointing walk from the table.  Here, the mediator must maintain a positive, trusting relationship with the parties and continue moving the parties to propose alternatives and reframe the problem.  He or she must keep the parties focused on re-evaluating barriers between them and brainstorming on ways to eliminate them.  Very often, new alternatives uncover new forms of “value” that lead to acceptable compromises and settlement. 

In our case, two of the three retroceded claims made up most of the $5MM. In the original joint cession, the Retrocessionaire had alleged improper, accommodation underwriting of serious medical issues. Since the parties’ prior achievements had built a spirit of cooperation and trust, Retrocedent C agreed to immediately retrieve from both its and Reinsurer B’s files additional underwriting and claims records which were shared with both the mediator and Retrocessionaire D. Through additional caucuses, the mediator helped the parties and counsel translate the substantive assessment of such records into rational, realistic and reasonable adjustments to the $5MM claim, narrowing the once “$5MM vs. rescission” gap to within $500,000.

And even if a financial gap remains, the mediator can propose final alternatives.  Here are just a few examples:

First.  If a financial gap remains, the mediator can ask the parties if they wish to give him or her privately their best, final good faith offer and further agree that (i) if the numbers overlap, the mediator can split the difference within the overlap and announce a settlement; or (ii) if the numbers do not overlap, the mediator can split the remaining gap between them and announce a settlement; or (iii) if the parties like (ii) but fear the gap might be too large, they set a smaller dollar limit on the gap within which the parties’ last, best offers must fall and agree that, if they do, the mediator may split the difference and announce a settlement. Under all scenarios, if no settlement is reached, the mediator does not disclose the offers to the parties.

In our case, the parties agreed to option (iii) and gave the mediator their last, best offers, which fell within the narrowed gap, allowing the mediator to split the difference and announce a final settlement.

Second.  The mediator can ask if the parties wish him or her to “cross the line” and, in separate caucuses, provide his or her opinion on their case.  Often, especially after hours of mediation, parties desire finality and, if they trust the mediator, welcome his or her opinion to help them mediate across the final gap.

Third.  In lieu of the second option, above, the mediator can ask if the parties wish him or her to become an arbitrator and decide the dispute based upon the briefs, exhibits and parties’ positions disclosed during the mediation.  The difference between the second option and this third option is that the second option requires the parties to mediate to a settlement or walk away, whereas the third option enables the mediator to issue a final and binding decision resolving the dispute.  If the third option is used, the parties should enter into a written arbitration agreement complying with applicable arbitration law.  

The Results of the Process        

Since this process often lasts one or two days, its benefits are obvious, even if parties fail to reach agreement. Without the aggravation, time and expense of lengthy discovery, pleadings, motion practice and legal and consulting fees, parties can work with a mediator well-versed in the complexities and nuances of the reinsurance business.   This can enable them to:

  1. Gain an informed, enlightened perspective on both their own and their opponent’s case;
  2. Acquire insights into the strengths and weaknesses of their substantive positions and the goals and interests of the other side;
  3. Test each other’s desire to settle and measure the qualitative and quantitative gaps between their “bottom lines;”
  4. Hear from, and  test the credibility of, the other side’s key witness(es); and   
  5. Set the stage to comfortably resume settlement discussions later if and when discovery enhances or diminishes the probability of a given party succeeding on the merits. 

Statistics have shown that parties who mediate, even unsuccessfully, have a greater chance of settling cases earlier, more knowledgeably and less expensively than those who do not.

Conclusion

For certain reinsurance disputes, the mediation process allows parties to maintain relationships, reduce hostilities, avoid unpredictable panel or court decisions, assert more control over the terms of their settlements and lower litigation costs. In a world dominated by what will likely be an increasing number of arbitrated disputes, mediation is certainly a viable, beneficial and cost-effective option.

[Editor’s Note:  This post is based on an article that appeared in issue 108 of JTW News – September 2006.  If you have any questions or comments concerning this post, please use the comments feature provided or e mail the author at peter@conflictresolved.com.  Copyright 2009, Peter A. Scarpato, Conflict Resolved (www.conflictresolved.com).]

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2 Responses to “Guest Post — Mediating Reinsurance Disputes: A Case Study”

  1. […] If you’d like to know how disputes are successfully resolved by mediation, Peter A. Scarpato had an interesting guest-post at the Loree Reinsurance and Arbitration Law Forum yesterday about how mediation works. The piece provides an invaluable insight into the mediation process by walking the reader through an actual mediation case. Good stuff. Check out the post here: Guest Post – Mediating Reinsurance Disputes: A Case Study. […]

  2. […] Peter Scarpato (website here), Editor-in-Chief of AIRROC Matters, wrote an interesting article on AIRROC’s new Dispute Resolution Procedure for Small Claims. The procedure is designed to provide a cost-effective alternative to a full-blown reinsurance arbitration for resolving relatively small-dollar reinsurance disputes. Peter’s article, which is highly recommended, appears on page 9 of the newsletter.   (Not too long ago, Peter submitted to the Forum an excellent guest post on mediation of reinsurance disputes, introduction to the post available here, and post available here.) […]