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How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

July 20th, 2010 Arbitration Practice and Procedure, Consolidation of Arbitration Proceedings, Practice and Procedure, Reinsurance Arbitration, United States Supreme Court Comments Off on How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice? By Philip J. Loree Jr.

Part V.C

A.   Introduction

As was evident from Parts V.A and V.B (here and here), Stolt-Nielsen has dramatically changed the legal landscape on consolidated arbitration.  In this Part V.C. we explore the practical and strategic implications of that change.

B.   Reinsurers Will Likely Regain the Tactical Advantage They Had Pre-Bazzle   

For the last several years since Bazzle, cedents and reinsurers have treated consolidation of arbitration proceedings largely as a given.  Courts would usually delegate the consolidation question to the arbitrators, and, in turn, arbitrators would usually order consolidation.  After a while, consolidation became something that the parties frequently agreed upon, because in most cases there was little or no point in opposing it.  (See Part III, here.) 

The advent of large, consolidated proceedings redounded mostly to the cedents’ benefit.   In the consumer-class-arbitration context, the theme is usually the many against the one — the consumers versus the company.  But in reinsurance arbitration the tables are turned, and the theme is usually the one against the many – the cedent versus the reinsurers participating in one or more treaties.   

Consolidated arbitration allowed a cedent to, among other things, aggregate its claims against several reinsurers participating in a multi-year treaty program.  Without consolidated arbitration the dollar amounts associated with each claim might be too small to warrant a serious collection effort.  But the ability to aggregate ensured that even relatively small balances could be pursued. 

Collections were fairly straightforward, and reinsurers who might otherwise have multiple chances before multiple panels to assert certain defenses were forced to make their arguments before a single arbitration panel.    The ability of cedents to compel consolidated arbitration probably contributed to reinsurers settling certain claims that they might otherwise have disputed. 

Now that courts may be the gatekeepers when a party demands consolidated arbitration, and now that the Supreme Court has imposed some fairly strict standards for establishing consent to class or consolidated arbitration, reinsurers probably have regained the tactical advantage.  And the strategy adapted may well be of the “divide and conquer” variety – reinsurers may in appropriate cases force the cedent to commence multiple proceedings and, among other things, obtain multiple bites at the apple on their defenses before multiple panels. 

Some of the tactical and strategic advantages that may inure to reinsurers’ benefit in light of Stolt-Nielsen are summarized below.  Assume for discussion purposes that there are multiple reinsurers participating in various years and layers of a multi-year treaty program, and many of the reinsurers are disputing various claims made by the cedent and allocated to various years and layers of the program.  Assume also that most of the claims have been outstanding for some time:

1.  The Disputed Amounts Per Arbitration Will Be Lower.  If the ceding company is unable to aggregate all of its claims into a single arbitration proceeding, then the arbitrators’ focus will generally be only on the amount owed for that claim under the contract that is the subject of the arbitration, even if the reinsurer owes additional amounts under other contracts that might otherwise have been the subject of a consolidated arbitration.  If the amount in arbitration is not particularly high, the arbitrators may be less inclined to award interest if the cedent wins, even if the amount has been outstanding for some time.  And it will generally be more difficult for the cedent to paint the reinsurer as recalcitrant because the cedent will not necessarily be allowed to complain about the aggregate amount the reinsurer owes for all claims under the treaty program.    

2.  The Cedent Will Have to Invest More Time and Effort into Collection.   Pursuing separate arbitration proceedings increases time and monetary costs significantly.  Depending on economic conditions, and on the odds of multiple arbitration panels imposing relatively high rates of pre-award interest, time tends to be on the side of the party holding the money, which is usually the reinsurer.  The longer it takes the cedent to collect what it is entitled to for its claims (if anything), the better off economically the reinsurer may be. 

The more time and money that must be spent on collection, the less valuable the cedent’s claim is.  While the reinsurer will also incur costs, the importance of resisting payment of the claim may transcend the dollar value of the controversy over that claim, especially when the reinsurer has good defenses.  There may also be other considerations justifying the higher cost, such as the reinsurer’s desire for a broad commutation, or the reinsurer’s belief that the tactical advantages of separate arbitration proceedings outweigh the additional cost.   

These time and money costs may increase the likelihood that reinsurers can negotiate favorable settlements and perhaps even commutations of the contract or multiple contracts (if that is what they desire). 

3.  Reinsurers Get Multiple Bites at the Proverbial Apple.   All other things being equal, the outcome of a close-call dispute may be determined by the institutional predispositions of the umpire.  If a reinsurer loses its dispute over claim A in arbitration 1 because it lost the coin toss, it may prevail on claim B in arbitration 2 if it wins the toss, even if the claims involve the same or similar issues.  While the cedent might make an issue-preclusion argument in arbitration 2, such matters are generally in the discretion of the arbitration panel, and the more sympathetic panel in arbitration 2 may simply decide the issues de novo.  (Of course, the reinsurer might lose the coin toss again in arbitration 2, but it has even odds of winning each time the coin is tossed, and the more frequently the coin is tossed, the more likely the reinsurers will enjoy the benefit of those odds.)  

Multiple arbitrations thus allow reinsurers more than one chance to prevail on a given defense, and that can be an important consideration in close-call disputes.  It also effectively spreads arbitration risk by reducing the amount at stake each time the reinsurer asserts the defense.  

4.  The Reinsurer’s Odds of Prevailing May Increase if it is Able to Arbitrate Separately the Claims on Which it has Stronger Defenses.  If the reinsurer is disputing in good faith multiple claims arising out of different contracts, and — as is often the case — its defenses on some are better than on others, the reinsurer will probably benefit by arbitrating those stronger claims separately from the ones to which its defenses are weaker. 

5.  Reinsurers are Less Likely to Be Prejudiced by Taking Claims Positions Inconsistent with those of Other Reinsurers.  Reinsurers subscribing to a given treaty or group of treaties can and often do take inconsistent claims positions for various reasons.  For example, a reinsurer in runoff may take positions in good faith that are inconsistent with those of active writers, whose claims positions may be influenced by ongoing , new-business-driven relationships with cedents.  Or claims positions of both runoff and actively-writing reinsurers may be influenced by the extent to which they cede reinsurance to others, and whether they do so as direct writers. 

But when reinsurers must participate in consolidated proceedings with other reinsurers, their inconsistent positions can be used against them by the cedent, even if there is a good faith basis for those inconsistent positions.  For example, a consolidated arbitration may include several claims, and not all reinsurers may dispute each claim.  If the issue is, say, allocation, the arbitrators may conclude that a cedent may allocate a claim in any way that is reasonable and is not designed to maximize reinsurance recoveries.  So if reinsurer A disputes the allocation of claim 1, but reinsurer B does not, that may strongly suggest that the allocation is reasonable, even though reinsurer B’s motivation for paying claim 1 was not necessarily based on the allocation being reasonable.  It is usually (but not always) hard for A to establish that B’s payment of the claim was principally motivated by considerations having little or no bearing on whether the allocation was reasonable.   All other things being equal, reinsurer A has a better chance of persuading the arbitration panel that cedent’s allocation of claim 1 was unreasonable if reinsurer B  is not a party to the arbitration. 

C.   How Changed Law on Consolidation May Affect Tactical and Strategic Considerations

The above are only some examples of tactical benefits reinsurers may achieve if courts order consolidation less frequently than arbitrators did, and reinsurers do not agree to consolidation.  In view of those potential benefits, we would not be surprised to see reinsurers begin to dispute with renewed vigor cedent efforts to consolidate disputes.  If reinsurers are successful (and they probably will be) then they may gain a significant edge in arbitration.  Success on the arbitration front may cause some reinsurers to dispute claims more readily than before, which may increase the frequency of reinsurance arbitration.       

Cedents understandably may complain, but one cannot fault reinsurers from taking advantage of what the law as applied to their contracts may allow them to do.  Arbitration is, after all, a matter of contract, and contracts allocate risks.  Arbitration agreements allocate dispute-resolution risk, and, like other contracts, may do so in a way that later turns out to be more beneficial to one of the parties at the expense of the other.  Sophisticated parties that sign on to such contracts cannot complain that the deal turned out to be less advantageous than they thought it would be, even if the risks that they now must bear were not necessarily known or ascertainable at the time of contracting. 

But cedents will be able to do more than complain.  They will no doubt adjust their collection strategy and tactics to meet those of the reinsurers.  Part of that may involve savvy negotiation; picking one’s battles well; making wise business decisions about collection-related expenses; standing on principle from time-to-time; and seeking to eliminate – e.g., though interest and costs awards — the economic incentives of piecemeal arbitration. 

Cedents can also begin insisting on provisions in their contracts authorizing consolidated arbitration.  While that will not immediately increase the number of consolidated proceedings, over time, as new contracts mature and new disputes develop, it may be that consolidated arbitration once again becomes the norm.


Editor’s Note:  Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series: 

Part I, Part II, Part III, Part IV, Part V.A, Part V.B, and Part V.C

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